The right incentives are the first step in driving large-scale resource flows.
Well-designed incentives not only motivate change and signal the directions for the change needed, they also enable it.
If economic incentives push counter to the energy transition efforts to transition will be fighting an uphill battle. Firms with small profit margins cannot take costly actions if their competitors don’t need to.
Emissions Pricing Instruments
Implemented well, emissions pricing could help mobilize more than 50% of the investment needed to meet global climate targets over the next decade.
Emissions pricing can help address the challenge of getting sufficient clean investment, accelerating the retirement of fossil fuel facilities and infrastructure and changing production systems in the Global South. Emissions pricing instruments include taxes or emissions trading systems, and carbon markets created under international agreements such as the Paris Agreement or CORSIA (the system for emissions from international aviation). The UNFCCC has an excellent primer on carbon pricing.
Extensive research shows that carbon taxes and emissions trading systems (ETS) have significantly reduced greenhouse gas emissions globally. As of early 2026, there were 43 carbon taxes and 37 ETSs in operation covering 28% of global greenhouse gas emissions. For a current list of jurisdictions involved in emissions pricing, refer to the World Bank’s State and Trends of Carbon Pricing Dashboard.
Emissions trading systems
An ETS is a tradable-permit system for GHG emissions and sometimes referred to as ‘cap and trade’. It sets a limit (the cap) on the GHG emissions that can be emitted. Entities covered by the ETS need to hold one emission unit (allowance) for each tonne of GHG emitted, but entities have the flexibility of selling and buying emission units. The total number of emission units reflects the size of the cap in the ETS. Under this approach, the price on emissions will depend on the balance between demand (the total emissions) and the supply (the emission units allocated and available to market participants). An emissions trading systems handbook is here.
Examples: Some emerging markets and developing economies, such as China, India, Indonesia, Kazakhstan and Mexico, have introduced domestic emissions trading systems, and an increasing number are developing or considering them. Examples as of 2026 include Brazil, Chile, Colombia, Pakistan, Türkiye and Vietnam.
Carbon tax
The “flesh” corresponds to the broader supportive economic, political, and social environment necessary to nurture the ‘seed’. This entails:
- regulatory reforms that eliminate barriers to profitable renewable electricity generation, and policies, possibly including local carbon pricing, that induce a high level of renewable energy demand and efficient dispatch.
- infrastructure investments and grid management for a more decentralised, reliable, and renewable-focused energy system.
- long-term power purchase agreements to reduce transaction costs, stable pricing mechanisms, green bonds, and risk-sharing instruments that improve revenue certainty and lower the cost of capital.
- developing the capacity of workers to provide the skilled labour needed and supporting individuals and communities affected by closure of fossil fuel plants, mines, and wells
The ‘skin’ symbolizes overarching visions and coordination of the critical institutional framework. Institutions include climate targets and monitoring, and planning and governance institutions (e.g., Climate Commissions) that coordinate different sources of finance, and technical and capacity support at the national or even global scale, and facilitate social processes to inform and shape the national or sectoral visions for a low-emissions future and provide the social license governments need to act in an ambitious and sustained way.
The proportions may vary across countries depending on specific contexts and priorities.
Examples
Kenya, which scored above the Sub-Saharan African average in government effectiveness, began receiving support from the African Development Bank in 2015 for the “Last Mile Connectivity Project”, aiming to expand electricity access (Kerr & Hu 2025). With local government involvement, Kenya was able to leverage these investments to achieve higher rates of electricity access, showcasing how a holistic national plan can amplify the benefits of climate finance (Lee 2016).