Financing Climate Action for Transportation in Developing Countries

Overview & Synopsis

The climate change crisis makes Paris Alignment of the transport sector one of the most pressing development challenges. Transport emissions are rising at a higher rate in low- and middle-income countries (LMICs) than in high-income countries. However, the current climate finance landscape for developing economies may be insufficient to support the challenge. While more climate finance can play an important role in reducing the investment gap, the transport sector has some limitation to generate revenues from users and thus, on the capacity to mobilize finance First, transport as a sector encompasses multiple infrastructure and transportation services for passengers and freight. Second, even when some pricing is possible, often, it is not done correctly to include externalities and thus, it could lead to over investment (i.e., private cars running on poor roads) and under investment (i.e., sidewalks, bike lines, public transport) - the use of carbon taxes to correct for climate externalities is limited in developed economies. Third, transport services (and their infrastructure) can complement when they provide multimodality, or they can be substitutes when there is competition in the market or redundancy for resilience. Governments need to address the fundamental bankability issues in projects, which are reinforced even more in green transport projects. In conclusion, a paradigm shift is required in the way transport services and the built environment interact to align with the Paris Agreement.