Role of Public Development Banks in Supporting Domestic Carbon Markets

The report examines the role of public development banks (PDBs) in supporting the adoption of domestic carbon markets in emerging markets and developing economies (EMDEs). It identifies key benefits of these markets, such as directing private finance to emission reduction projects and helping countries retain carbon revenues locally to avoid paying full fees under mechanisms like the European Carbon Border Adjustment Mechanism (CBAM). However, adoption is hindered by a lack of strategic integration, technical capacity gaps, and reputational risks associated with credit integrity. PDBs are positioned to address these barriers by providing strategic guidance, technical assistance for monitoring, reporting, and verification (MRV) systems, and innovative financial tools—such as minimum price floors and carbon-linked bonds—to manage risk and frontload finance. The report recommends increased coordination between national and multilateral PDBs, the sharing of best practices, and the development of comprehensive climate strategies to ensure carbon markets are embedded within national development goals.

• Domestic carbon markets allow countries to retain carbon revenues locally and reduce the financial burden of international carbon border adjustment mechanisms (CBAMs). By using domestic offsets that meet global standards, exporters can pay only the difference between the domestic carbon price and the CBAM fee to the importing country.
• The adoption of carbon pricing in EMDEs is severely limited by income levels; as of the report's data, only one lower-middle-income country has adopted carbon pricing mechanisms, and no low-income country has done so.
• Several barriers hinder the adoption of domestic carbon markets, including a lack of long-term strategic integration with development goals, insufficient technical capacity for market design and emissions data verification, and demand-side reputational risks due to concerns over the integrity of carbon credits.
• PDBs face internal constraints that limit their support for carbon markets, such as limited staff time and technical expertise, a lack of alignment among shareholders on priorities, and rigid funding frameworks that struggle to accommodate innovative or untested carbon market projects.
• PDBs can play distinct roles based on their scale: Multilateral Development Banks (MDBs) provide global expertise, high-level capacity building for MRV systems, and regional risk-mitigation tools, while National Development Banks (NDBs) provide localized support, adapt methodologies to local conditions, and align markets with national regulatory frameworks.
• To address the gap between project financing and the eventual sale of carbon credits, PDBs can implement innovative financial mechanisms to frontload finance, such as carbon-linked bonds, performance-based guarantees, and the use of future carbon revenues as repayment sources.
• The Brazilian Development Bank (BNDES) serves as a model for NDB leadership, having signed agreements to promote environmental asset markets in 2012, contributed to the 2024 law creating the Brazilian Greenhouse Gas Emissions Trading System, and invested USD 27 million in a reforestation project in 2024.

APA

Solomon, M., & Esquinca, K. D. G. (2025). Role of Public Development Banks in Supporting Domestic Carbon Markets. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2025/03/Role-of-Public-Development-Banks-in-Supporting-Domestic-Carbon-Markets.pdf

Chicago

Solomon, Matthew, and Karla D. González Esquinca. Role of Public Development Banks in Supporting Domestic Carbon Markets. Climate Policy Initiative, 2025. https://www.climatepolicyinitiative.org/wp-content/uploads/2025/03/Role-of-Public-Development-Banks-in-Supporting-Domestic-Carbon-Markets.pdf.

Wikipedia

{{cite report |last1=Solomon |first1=Matthew |last2=Esquinca |first2=Karla D. González |title=Role of Public Development Banks in Supporting Domestic Carbon Markets |publisher=Climate Policy Initiative |date=February 2025 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2025/03/Role-of-Public-Development-Banks-in-Supporting-Domestic-Carbon-Markets.pdf |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{solomon2025role, author = {Solomon, Matthew and Esquinca, Karla D. González}, title = {{Role of Public Development Banks in Supporting Domestic Carbon Markets}}, institution = {Climate Policy Initiative}, year = {2025}, month = feb, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2025/03/Role-of-Public-Development-Banks-in-Supporting-Domestic-Carbon-Markets.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }