Abstract

Reaching the goal of the Paris Agreement of limiting global warming to well below 2 degrees Celsius above pre-industrial levels requires the redirection of financial flows. Parties to the Agreement have agreed to provide US$100 billion annually from 2020 onwards. However, there is no guidance regarding the distribution of this sum. In this paper, we develop a dynamic and incentivecompatible allocation mechanism based on two pillars of a burden sharing mechanism: emission responsibility (ER) and ability to pay (ATP). Reflecting the Paris principle to “ratchet-up” ambition, the proposed burden sharing mechanism rewards countries with ambitious mitigation targets and large investments in green technologies. We find that ten countries should bear 50% of the climate finance burden, while 40 should bear 90%. We further show that the inclusion of bunker fuels from international aviation and shipping (ca. 7% of global GHG emissions) and the consideration of future ability to pay, depending on domestic exposure to future climate damages, substantially alter the results.