‘Climate Impact Auctions’ a results-driven approach to climate finance

At a glance

Climate Impact Auctions: Increasing the Effectiveness of Global Climate Finance, by Max Alexander Matthey, Aidan Hollis, Joanes Atela, Clara Brandi, Sachin Chaturvedi, Georg Kobiela, Magdalene Silberberger. Institute for Research on Public Policy (IRPP), Nov. 12, 2024.

What if climate finance could make a bigger impact with fewer resources? This report from the Institute for Research on Public Policy (IRPP), a think tank based in Montreal, proposes a new finance model as one way to do that: “Climate Impact Auctions” (CLIMA). This approach uses competitive reverse auctions, based on achieving tangible climate-related outomes such as renewable electricity generation. The authors argue this would direct subsidies to the most cost-effective projects in low- and middle-income countries (LMICs), which account for 72 per cent of global greenhouse gas emissions but face signifcant financial barriers to climate adaptation and mitigation. Wealthy countries agreed at COP29 to increase their annual contributions to climate finance to US $300 billion by 2035. The authors argue this new results-based climate financing model would help countries contribute their fair share, to greater effect. The report notes Germany’s success with results-based financing highlights how domestic strategies could align with the proposed CLIMA model. Building on successes from renewable energy auctions in India and parts of Africa, the report also explores applications in hydrogen projects, biochar, and enhanced rock weathering.

Key findings

• Competition: Reverse auctions ensure subsidies flow to projects offering the greatest impact per dollar.
• Renewable energy and hydrogen focus: CLIMA works particularly well in measurable sectors like renewable energy generation and hydrogen production, where outputs can be verified.
• Untapped potential: Only seven per cent of global climate finance leverages measurable results, leaving significant room for CLIMA to scale.
• Performance accountability: By requiring bidders to meet contractual targets, CLIMA minimizes non-performance risks.
• Potential fields of application: Beyond renewable energy, CLIMA can support carbon removal projects, such as biochar, enhanced rock weathering and adaptation initiatives with clear metrics.

Take a look

Climate subsidy types

Climate Impact Auctions process flow

Bigger picture

The CLIMA model addresses a critical inefficiency in global climate finance. LMICs are central to meeting global climate goals, but they lack the necessary financial resources. Meanwhile, HICs like Germany and Canada rely heavily on domestic tools like carbon pricing, renewable energy auctions and results-based financing, yet they do not as often use these mechanisms in international climate finance. CLIMA provides a bridge, offering a scalable model to channel funds into measurable, high-impact projects.

Germany’s experience with the Hydrogen Bank and Emissions Trading System, demonstrates how expertise in domestic policy can inform global solutions. So can Canada’s experience with carbon pricing, as well as its commitment to include gender equality among its performance-based indicators for climate financing. These mechanisms illustrate how HICs can leverage results-based systems to improve accountability and impact in climate finance. Moreover, CLIMA extends beyond mitigation into adaptation, enabling projects like climate-resilient infrastructure or nature-based solutions to benefit from competitive funding processes.  

Coming out of COP29, where the annual climate financing goal was tripled to $300 billion — but considered nowhere near enough to address the need — CLIMA offers a forward-looking solution that can help bridge the gap between donor commitments and recipient needs while maximizing climate outcomes.

Challenges and opportunities

Key barriers to implementing Climate Impact Auctions include:

• Finances for smaller players: Performance bonds, critical to ensuring delivery, can exclude smaller entities in LMICs.
• Institutional capacity gaps: Many LMICs lack the technical expertise to implement and monitor results-based projects.
• Verification: Establishing robust monitoring for diverse project types is resource-intensive.
• Market distortions: Focusing solely on cost-efficiency risks neglecting high-value adaptation projects.

To address these challenges and leverage emerging opportunities, the report recommends:

• Help with capital costs: Implement scaled performance bonds and allow partial redemption as project milestones are achieved, minimizing upfront financial strain.
• Enhance institutional capacity: Leverage established institutions like the Green Climate Fund or MDBs to administer auctions, while pairing these efforts with capacity-building grants to strengthen LMIC expertise and readiness.
• Simplify verification processes: Develop robust MRV (Monitoring, Reporting, and Verification) frameworks tailored to diverse project types and centralize oversight through auction administrators or specialized third-party entities.
• Scale renewable energy, hydrogen, and carbon removal: Building on Germany’s Hydrogen Bank model, CLIMA could incentivize clean hydrogen production and renewable energy projects in LMICs. Additionally, it can support innovative carbon removal solutions like biochar, enhanced rock weathering and bioenergy with carbon capture.
• Support adaptation and diversify markets: Incorporate social and environmental criteria into auctions to ensure high-value adaptation projects, such as climate-resilient infrastructure and nature-based solutions, can also receive funding.
• Mobilize private investment: Use transparent and competitive bidding processes to attract private investment, leveraging public funding to scale the impact of renewable energy, hydrogen, adaptation and carbon removal initiatives.
• Global alignment: Combine domestic expertise from countries like Canada (hydrogen innovation, carbon pricing) and Germany (Hydrogen Bank, Emissions Trading System) with international efforts to create a harmonized, equitable, and efficient global climate finance system.

In their own words

Results-based auctions for climate subsidies — whether for mitigation or adaptation — have the potential to achieve cost-effective, measurable climate-related goals … Because they apply a pay-for-results model, auctions would be particularly attractive for donors with a preference for competitive, market-type mechanisms. Thus, the incorporation of auctions by existing institutions could help drive additional funding support. It would also allow such institutions to demonstrate quick wins by funding smaller-scale projects. Equally important, it is possible to scale up auctions by offering them in multiple regions with multiple targets.

Climate Impact Auctions: Increasing the Effectiveness of Global Climate Finance, by Max Alexander Matthey, Aidan Hollis, Joanes Atela, Clara Brandi, Sachin Chaturvedi, Georg Kobiela, Magdalene Silberberger. IRPP, Nov. 12, 2024.

Final thoughts

The proposed CLIMA model could help to transform global climate finance, emphasizing measurable results, accountability and cost-efficiency at a pivotal time. It bridges HIC expertise in results-based financing with LMICs’ need for scalable solutions. The report could have better addressed how to manage key gaps, such as operational challenges in adapting CLIMA to projects with complex metrics, like carbon removal and nature-based solutions essential for adaptation. It also underexplores private finance’s role and the need for incentives to align multilateral development banks with CLIMA’s goals.

CLIMA’s potential lies in scaling renewable energy, hydrogen, and carbon removal methods like biochar and enhanced rock weathering. However, reliance on performance bonds risks excluding smaller players in LMICs. Alternatives such as milestone-based funding could reduce barriers without compromising accountability. Emerging from COP29, CLIMA offers a path for equitable, efficient funding. Addressing these gaps could make it a model for global collaboration and measurable progress, provided stakeholders overcome institutional inertia and operational barriers.

Download the full report originally published by the Institute for Research on Public Policy on Nov. 12, 2024.