Various sources of finance are needed for developing countries to transition to a climate-neutral economy, including official development assistance (ODA) and revenues from carbon credits. However, using ODA in the context of carbon markets can pose several challenges. Under what conditions can the purchase of carbon credits be ODA eligible? What are the challenges when combining ODA and carbon credit revenues to finance mitigation projects? How does this affect additionality and could it lead to double counting of efforts or market distortion?
This working paper explores these challenges, taking into account the new context of the Paris Agreement and the different types and uses of carbon credits. It examines three possible uses of ODA in the context of carbon markets: using ODA to purchase carbon credits, using ODA to support carbon crediting readiness activities and using ODA to co-finance projects that generate carbon credits. The paper concludes with recommendations for policy makers to address the pitfalls in each of these cases.