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Abstract

Decarbonizing the global energy system requires large‐scale investment flows, with a central role for international climate finance to mobilize private funds. The willingness to provide international finance in accordance with common but differentiated responsibilities was acknowledged by the broad endorsement of the Paris Agreement, and the Green Climate Funds in particular. The international community aims to mobilize at least USD 100 billion per year for mitigation and adaption in developing countries. In this article, we argue that too little attention has been paid on the spending side of climate finance, both in the political as well as the academic debate. To this end, we review the challenges encountered in project‐based approaches of allocating climate finance in the past. In contrast to project‐based finance, we find many advantages to spending climate finance in support of price‐based national policies. First, the support for international climate cooperation is improved when efforts of successively rising domestic carbon pricing levels are compensated. Second, carbon pricing sets incentives for least‐cost mitigation. Third, investing domestic revenues from emission pricing schemes could advance a country's individual development goals and ensure the recipient's ‘ownership’ of climate policies. We conclude that by reconciling the global goal of cost‐efficient mitigation with national policy priorities, climate finance for carbon pricing could become a central pillar of sustainable development and promote international cooperation to achieve the climate targets laid down in the Paris Agreement. WIREs Clim Change 2017, 8:e437. doi: 10.1002/wcc.437