In this report, we explore the experiences related to the use of financial instruments and policies to support sectoral transitions in developing countries. The report aims to address the challenges for financing transitions in energy, industry, and infrastructure sectors alongside suitable types of finance instruments to overcome these hurdles.

To be in line with the goal of the Paris Agreement, and guided by the needs and perspectives of national stakeholders to ensure domestic support and ownership, International Climate Finance (ICF) not just needs to be channelled toward low-carbon investments and climate protection measures but also needs to avoid leading to new carbon lock-ins. To finance the green transformation in developing countries, sectoral transitions require special attention.

But how does, and how can, the ICF architecture enable sectoral transitions in emerging economies?

Shortcomings of the ICF architecture seem to limit the value for advancing transition activities: Provided funding is not only lower than expected, but also mostly takes place in the form of loans and often not in local currency, which tends to exacerbate the economic strains of developing countries, especially increasing sovereign debt burden. Developed countries are criticized for rebranding some of their existing official development assistance (ODA) target as climate finance, instead of providing additional funding.

The research design of this reports focuses on four country case studies: Brazil, India, Indonesia, and South Africa. The multiple-case study design offers the opportunity to explore in detail specific sectors in different national contexts. All four countries are emerging economies with ripe opportunities for just energy transitions (India, Indonesia, and South Africa) and sectoral decarbonization (low-carbon transport infrastructure in Brazil and green steel in India). All country case studies rely on secondary data synthesizing findings of previous research in the SNAPFI project. We deliberately retained the specific perspective and framing from the national perspectives to provide an authentic picture for the reader.

We find that all countries need significant investments to transform their sectors, calling for an ever more prominent role of ICF and, relatedly, for effective ICF designs. This not only means taking sectoral characteristics into account, but also, following a system approach, the consideration of cross sectoral linkages and economy wide transition needs.