Methane Abatement in Developing Countries

9. Financing methane emissions abatement

Governments and the oil and gas industry need to take urgent steps to meet methane targets, including the agreement reached at COP28 to “accelerate and substantially reduce non-carbon-dioxide emissions globally, including in particular methane emissions by 2030”. However, the cost of rolling out methane emission reduction technology and practices across the upstream oil and gas sector is significant. The IEA estimates that USD 75 billion in cumulative capital and operating expenditure is required globally over the period to 2030 to achieve sufficient reductions in oil and gas methane emissions. Furthermore, the majority of this expenditure (USD 45 billion) will be required in low- and middle-income countries, where sources of finance are likely to be more limited (IEA, 2023[1]; IEA, 2024[2]). These financing challenges may be exacerbated where countries are heavily indebted and fiscally constrained and in jurisdictions where facilities are owned and operated by smaller independent companies and NOCs. According to the IEA, approximately USD 36 billion is required to address methane emissions from NOCs who are responsible for the majority of emissions in Eurasia and the Middle East and around USD 12 billion is required for methane abatement at facilities owned by NOCs in low- and lower middle-income countries (IEA, 2023[1]).

Although the oil and gas sector has the largest abatement potential, given the possibility to achieve quick wins with existing cost-effective abatement solutions methane abatement finance appears to be disproportionately low if compared to the needs of the oil and gas sector. For example, a recent study on methane financing across multiple sectors found that the fossil fuel sector (including oil, gas and coal) received less than 1% of total abatement finance in 2021/22. According to the Climate Policy Institute, the oil and gas sector requires USD 7.9 billion in methane abatement investment per year by 2030 (de Aragão Fernandes et al., 2023[3]). However, estimates of external sources of finance targeted at reducing methane in the fossil fuel sector (including oil, gas and coal) total less than USD 1 billion (IEA, 2024[2]). This considerable funding gap is driven by several factors, including a lack of awareness of investment opportunities, a lack of viable projects, projects not reaching an investment threshold, and a hesitancy among investors on financing projects in the fossil fuel sector (Alberti and Naran, 2023[4]).

Article 2.1c of the Paris Agreement calls for “making finance flows consistent with a pathway towards low greenhouse gas (GHG) emissions and climate-resilient development” (UNFCCC, 2015[5]). The concept of “climate alignment” of investments and financing is based on this provision. However, there is a risk for climate aligned finance to create a “climate investment trap” if access to finance is precluded to oil and gas producing countries that are most in need of support to decarbonise their economies and shift to more sustainable, climate-resilient development pathways (Marcel et al., 2023[6]). To keep the collective target of limiting the average global temperature increase to 1.5°C within reach, decarbonisation measures that can bring drastic reductions in emission intensity will need to be financed across all sectors of the economy, including oil and gas projects. This means that finance for the climate transition must take a dynamic and forward-looking approaches, while avoiding static views limited to what is already sustainable today (OECD, 2022[7]).

In this respect, it is worth emphasising that there is no agreed or unique way of downscaling the global temperature goal to economic sectors, actors, or countries, which can and will decarbonise following different pathways that are nationally determined and follow different trajectories (Noels and Jachnik, 2022[8]). In addition, the notions of climate mitigation alignment and consistency not only relate to scaling up finance for activities that are already Paris-aligned, but also to financing activities and economic sectors that need to undergo and implement changes to transition towards net-zero emissions, especially in high-emitting and hard-to-abate sectors (Noels and Jachnik, 2022[8]). Lastly, GHG emissions reduction is just one amongst complementary alignment-related metrics that need to be considered to make finance consistent with climate mitigation and resilience in the context of sustainable development and efforts to eradicate poverty in line with Article 2 of the Paris Agreement (Noels and Jachnik, 2022[8]; UNFCCC SCF, 2021[9]).

Governments and industry need to explore several sources of finance in order to mobilise the funding required to drive methane reductions at the pace and scale needed to meet the goals of the Paris Agreement. Alongside industry finance, other avenues are emerging to increase financing for methane abatement. These include direct public funding, international emissions pricing schemes and sustainability-linked financing (i.e. bonds, debt for climate swaps).

Oil and gas industry financing

Since methane emissions are a negative externality of oil and gas production, oil and gas companies should carry the primary responsibility to finance methane abatement measures, given that the amount of finance required represents less than 5% of the income the industry generated in 2023 (IEA, 2024[2]; AfriCatalyst, 2023[10]). For example, in 2022, oil and gas companies earned record profits, and the industry’s net income doubled to nearly USD 4 trillion. According to the IEA, just 2% of this amount would be sufficient to provide all the spending in methane emissions reduction measures across the supply chain in the IEA’s Net Zero Emissions by 2050 Scenario through to 2030 (IEA, 2023[1]).

At the same time, governments should recognise that investing in methane abatement technologies and compliance with methane abatement regulations comes with higher operating costs for oil and gas companies. The establishment of methane emissions regulations will be an important factor for companies to determine the allocation of capital, in particular for NOCs that may face additional constraints given competing priorities for domestic spending, especially in low- and middle-income countries, potentially limiting the amounts of available capital to invest.

Governments may consider introducing requirements to compel oil and gas industry financing for methane abatement – including through the establishment of a compliance fund or a special purpose vehicle:

• Compliance funds – oil and gas companies pay into a dedicated fund and the proceeds of that fund are then disbursed to entities to reduce methane emissions. For example, Alberta’s 2020 Technology Innovation and Emissions Reduction Regulation requires regulated facilities to either reduce their emissions or to purchase credits from facilities that have exceeded their reduction targets, purchase offsets from unregulated entities or pay into a compliance fund (TIER fund). In 2022, based on funding from the TIER fund, the government of Alberta launched the Industrial Transformation Challenge – an annual funding competition for technologies that can reduce GHG emissions and improve the economic competitiveness of Alberta’s industrial and natural resource sectors. The 2022 round of funding committed more than CAD 60 million to 14 projects worth more than CAD 225 million (Government of Alberta, 2019[11]; ERA, 2024[12]).

• Special purpose vehicles – oil and gas companies contribute to a special purpose vehicle (SPV). The SPV conducts the due diligence, measurement and repairs, and then monetises emissions reductions through direct gas sales, by generating carbon offsets, or through a fee by the operator (IEA, 2021[13]; OECD, 2022[14]).

Oil and gas industry organisations, which themselves are funded by their members, may also offer support to developing countries and their NOCs in methane emissions abatement. Ordinarily, this support is technical in nature and may include in-person training, webinars, access to data, use of satellites etc. – see Box 9.1.

Box 9.1. Oil and gas industry organisations: Support for methane abatement

Oil and Gas Climate Initiative (OGCI)

OGCI aims to support broader oil and gas industry efforts to achieve the same ambitions as its members (collective upstream methane intensity target of well below 0.2% by 2025 and near zero methane emissions by 2030). This is achieved through leadership, monitoring and mitigation efforts, and engagement and advocacy to reduce methane emissions.

For example, OGCI’s flagship satellite monitoring campaign combines the acquisition of satellite data of methane emissions over numerous countries with targeted confidential engagement with relevant operators to share the data and support mitigation of detected emissions. The campaign was previously piloted in Iraq in 2021, run in Algeria, Kazakhstan and Egypt in 2022 and has expanded to cover additional countries.

Oil & Gas Decarbonization Charter (OGDC)

OGDC provides training free of charge to OGDC signatories. This includes 1-1 training on methane emissions quantification and mitigation delivered by Carbon Limits. The training leverages material that was developed in partnership with the UNEP IMEO OGMP2.0 and includes 9 modules, ranging from less advanced (intro to methane emissions and why it matters, sources of methane emissions, etc.) to more advanced (e.g. OGMP2.0 reporting framework) and includes a module on “Financing methane emissions reduction projects”.

In addition, OGDC provides regular webinars and regional roundtables for OGDC signatories to share best practices and engage in a community of experts, to accelerate methane emissions reductions.

Source: Authors’ elaboration based on responses to OECD survey on financing mechanisms for methane abatement.

Multilateral financing

Multilateral financial institutions

Multilateral development banks (MDBs) may provide an important source of financing for methane abatement projects through the provision of concessional finance, the provision of technical expertise, and by partnering with public and private sector stakeholders to de-risk and catalyse private investment – see Table 9.1.

Table 9.1. Multilateral financial institutions: Oil and gas financing

Institution	Summary of policy on oil and gas project financing
African Development Bank (AfDB)	The AfDB does not support oil and gas exploration but will continue to support Africa’s net zero transition during which transition natural gas is a relevant resource for the continent’s industrialisation, particularly for harder to abate industrial sectors, if used in line with the 1.5°C Paris Agreement goal, respective NDCs as well as Long-term Strategies, where these are available.
Asian Development Bank (ADB)	The ADB does not support oil field exploration or oil field development projects but does support financing natural-gas-based power plants as well as safety and efficiency improvements in the transportation of oil and LNG.
Asian Infrastructure Investment Bank (AIIB)	The AIIB supports fossil-fuel–based generation using commercially available least-carbon technology as well as development, rehabilitation, and upgrading of natural gas transportation, storage, and distribution infrastructure, and control of gas leakage, to foster greater use of gas as a transition to a less carbon-intensive energy mix.
CAF Development Bank of Latin America and the Caribbean (CAF)	The CAF provides support for downstream and midstream oil and gas projects. This is aligned with CAF’s strategic decision to support gas projects as an energy transition fuel.
European Bank for Reconstruction and Development (EBRD)	The EBRD combines investments with policy engagement and technical assistance to support methane abatement across a range of sectors. The EBRD does not support oil and gas upstream projects unless aligned with the goals of the Paris Agreement.
European Investment Bank (EIB)	The EIB will not support upstream oil or natural gas production, or infrastructure dedicated to oil and natural gas (networks, liquefied natural gas terminals, storage).
Inter-American Development Bank (IDB)	The IDB does not support upstream oil exploration and development projects. However, on a case-by-case basis, consideration is given to financing upstream gas infrastructure where there is a clear benefit in terms of energy access for the poor and where GHG emissions are minimised, projects are consistent with national goals on climate change, and risks of stranded assets are properly analysed.
Islamic Development Bank (IsDB)	No explicit restrictions on oil and gas financing, although upstream oil and gas is excluded from certain IsDB financing mechanisms – e.g. Green and Sustainability Sukuks issued under its 2019 Sustainable Finance Framework.
World Bank Group	In 2019, the World Bank Group ceased financing upstream oil and gas projects. However, financing for natural gas projects may be provided in exceptional circumstances where there is a clear benefit in energy access for poor countries and the project is consistent with the country’s Paris Agreement commitments.

Source: (AfDB, 2012[15]); (AfDB, 2024[16]); (ADB, 2023[17]); (AIIB, 2022[18]); (CAF, 2024[19]); (EBRD, 2023[20]); (EIB, 2023[21]); (IDB, 2020[22]); (IsDB, 2018[23]); (IsDB, 2019[24]); (World Bank Group, 2017[25]); (IFC, 2019[26]).

Financing oil and gas exploration and production and related activities

In recent years, many MDBs have updated their energy policies and strategies to focus on renewable energy and decarbonisation and to ensure that lending is aligned to the objectives of the Paris Agreement. Consequently, conditions for financing fossil fuel-related projects have tightened as several MDBs have announced a shift away from funding fossil fuels – particularly in respect of coal-related investments and upstream oil and gas exploration and production. For example, the Asian Development Bank (ADB), European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB) have ceased financing upstream oil and gas projects. The ADB will not support any natural gas exploration or drilling activities (ADB, 2023[17]). The EBRD’s 2023 Energy Sector Strategy 2024-28 provides that the EBRD will not invest in the upstream oil or gas sectors (EBRD, 2023[20]). The EIB’s 2023 Energy Lending Policy: Supporting the Energy Transformation notes that the EIB will not support upstream oil or natural gas production, coal mining, infrastructure dedicated to coal, oil and natural gas (networks, liquefied natural gas terminals, storage) (EIB, 2023[21]).

However, some banks still continue to provide financing for upstream oil and gas projects, albeit only under exceptional circumstances. The Inter-American Development Bank (IDB’s) 2020 Environmental and Social Policy Framework stipulates that the IDB will not finance upstream oil exploration and development projects. Financing for upstream gas exploration and development projects is ordinarily prohibited. However, financing may be provided in exceptional circumstances where there is a clear benefit in terms of energy access, where GHG emissions are minimised, where projects are consistent with national goals on climate change, and where risks of stranded assets are properly analysed (IDB, 2020[22]). In 2019, the World Bank Group ceased financing upstream oil and gas projects, except in exceptional circumstances in the poorest countries where there is a benefit to energy access and this is consistent with countries’ NDC commitments (World Bank Group, 2017[25]; IFC, 2019[26]). For example, in 2021 the International Finance Corporation (IFC) provided financing to reduce flaring, improve energy access, and to support a more resilient, sustainable energy sector in Iraq – see Box 9.2.

Box 9.2. IFC financial support for gas flaring reduction in Iraq

Iraq is a major international oil producer but also has significant reserves of natural gas produced as a byproduct of oil extraction. In 2011, Iraq joined the World Bank’s Global Gas Flaring Reduction Partnership (GGFR) [since renamed as the Global Flaring and Methane Reduction Partnership (GFMR)] and in 2013, committed to eliminate all routine natural gas flaring by 2030. However, given the absence of adequate infrastructure to capture and process it, about 70% of natural gas produced in Iraq is flared.

Project details

In 2021, the IFC announced its investment in the Basrah Gas Company (BGC) to support one of the largest gas flaring reduction projects in the world. BGC is a 25-year incorporated joint venture between Iraqi NOC South Gas Company (51%), Shell (44%) and Mitsubishi Corporation (5%) that was created to capture and process associated gas that would otherwise be flared.

The project is expected to increase BGC's gas processing capacity, thereby avoiding flaring and reducing associated GHG emissions by around 10 million tons per year. The project is intended to support Iraq's transition toward a lower carbon pathway, improve access to energy to meet growing power needs, and contribute to a more resilient, sustainable energy sector in Iraq.

Details of financial structure

The IFC is the lead arranger of the five-year loan to BGC worth USD 360 million which is structured as follows:

• USD 137.76 million loan from the IFC's own account

• USD 180 million loan in which participations were syndicated to eight international banks (Bank of China, Citi, Deutsche Bank AG, Industrial Commercial Bank of China, Natixis, Sumitomo Mitsui Banking Corporation, Société Générale and Standard Chartered Bank); and

• USD 42.24 million loan through IFC's Managed Co-Lending Portfolio Program, a platform that allows institutional investors to participate in IFC's loan portfolio.

Source: (IFC, 2021[27]).

The Asian Infrastructure Investment Bank AIIB differentiates between financing for oil projects and for gas projects. While the AIIB will only support oil sector investments under exceptional circumstances to improve basic energy access, there is more flexibility for financing natural gas.

The African Development Bank (AfDB) 2012 Energy Sector Policy does not provide support for oil and gas exploration activities. However, the AfDB Ten-Year Strategy (2024-2033) acknowledges that the AfDB will continue to support Africa’s net-zero transition during which transition natural gas is a relevant resource for the continent’s industrialisation, particularly for harder to abate industrial sectors, if used in line with the 1.5°C Paris Agreement goal, respective NDCs as well as LT-LEDS, where these are available. At the same time, the AfDB will support the acceleration of renewable energy investments and the development of sustainable alternatives to natural gas for industrialisation and securing of related energy security (AfDB, 2024[16]). For climate change mitigation projects, the GHG emission reductions potential is one of the key indicators that the AfDB will assess during appraisal and these reductions will be measured during project implementation and supervision.

The Islamic Development Bank (IsDB)’s 2018 Energy Sector Policy: Sustainable Energy for Empowerment and Prosperity allows for broad financing of upstream oil and gas projects. The IsDB will examine the provision of energy forms such as oil and gas and of the relevant downstream infrastructures, based on the principles of safety, operational efficiency and sustainability (IsDB, 2018[23]). Upstream oil and gas is however, excluded from certain IsDB financing mechanisms, including Green and Sustainability Sukuks issued under its 2019 Sustainable Finance Framework (IsDB, 2019[24]).

Financing midstream and downstream natural gas infrastructure

Despite the shift away from financing oil and gas exploration and production, some MDBs continue to provide support for midstream and natural gas infrastructure. For example, the Development Bank of Latin America and the Caribbean (CAF) provides support for downstream and midstream oil and gas projects. This is aligned with CAF’s strategic decision to support gas projects as an energy transition fuel. For example, in 2023, CAF approved a loan of USD 540 million for the North Gas Pipeline Reversion Project to construct 122.5 km of gas pipeline to allow the transportation of natural gas to the provinces in northern and central Argentina. Regional integration is another area of CAF focus. For example, in 2023 CAF financed a study to promote energy integration between Argentina and Chile, focusing on the increase of gas exports (CAF, 2024[19]).

The ADB, the AIIB and the EBRD have developed methodologies to assess whether investments in fossil fuel-based infrastructure are aligned with the Paris Agreement temperature goals. This means avoiding financing investments in emission reduction opportunities that have the effect of locking in emissions. Such investments slow down the adoption of net-zero alternatives, and result in assets needing to be replaced before the end of their lifetime, when net-zero alternatives become commercially available (OECD, 2022[6]).

For example, the ADB recognises the role of natural gas as a transitional fuel, and therefore may finance investments in natural gas transmission and distribution pipelines, LNG terminals, and storage facilities subject to a set of screening criteria consistent with the Paris Agreement:

i. No other low-carbon or zero-carbon technology, or combination thereof, can provide the same service at an equivalent or lower cost at a comparable scale.

ii. The project’s operating lifetime is consistent with the carbon stabilisation trajectory aiming to achieve carbon neutrality by about 2050, and by a time set by developing member countries that are consistent with their NDCs. The project also avoids long term lock-in into carbon infrastructure and the associated risk of creating stranded assets.

iii. The project is economically viable considering the social cost of carbon and an operating lifetime consistent with condition (ii).

In addition, the ADB may support natural gas-based power generation that employs high efficiency and internationally best available technologies and reduces emissions by directly displacing other fossil-fuel-based thermal power capacity (ADB, 2023[17]).

The AIIB will provide support for mid-stream gas infrastructure (LNG terminals, storage, and transmission pipelines), natural gas-fired power generation, and downstream (distribution and end-use) facilities (AIIB, 2022[18]).

The AIIB’s 2022 Energy Sector Strategy: Sustainable Energy for Tomorrow acknowledges that natural gas will play a transitional role in the energy system of many developing countries. Financing for mid-stream gas infrastructure, natural gas-fired power generation, and downstream facilities is available – subject to the following criteria:

• investments do not conflict with a country’s climate policy and commitments including its NDC, long-term low GHG emissions development strategies and net-zero/carbon neutrality pledges

• investments do not create a risk for carbon lock-in or stranded assets – taking into account a long-term decarbonisation trajectory of the country that is consistent with the mitigation goals of the Paris Agreement

• investments reduce the energy sector's carbon intensity. Appropriate project goals may include, replacing higher carbon fuels, inefficient technologies, oil- and coal-fired energy facilities, or supporting the integration of renewable energy

• investments utilise best available technologies and sector best practices in limiting methane emissions (AIIB, 2022[18]).

The EBRD also sets out criteria where, in exceptional cases, targeted support for fossil-fuel investments in the mid- and downstream oil and gas sectors could be possible. The EBRD’s 2023 Energy Sector Strategy 2024-28 provides that such investments must not only be aligned with the goals of the Paris Agreement, but go beyond that requirement to demonstrate strong ambition to accelerate the low-carbon transition. Specifically, these projects must demonstrate:

• alignment with the goals of the Paris Agreement as per the EBRD’s Paris Agreement alignment methodology

• consistency with NDCs and long-term low GHG emissions development strategies

• a low risk of carbon lock-in and therefore do not lead to carbon lock-in

• for projects with significant emissions, be subject to an economic viability test incorporating a shadow carbon price

• be located in a policy context that demonstrates commitment to the goals of the Paris Agreement, and be consistent with this policy context

• transition with a credible low-carbon pathway, either at a national or sectoral level, as per the EBRD’s Paris Agreement alignment methodology

• they do not displace renewable sources or low emissions alternatives

• consistency with the Bank’s Environmental and Social Policy (including requirements for using best available techniques); and

• that they would not lead to stranded assets and therefore be subject to a thorough assessment of climate-financial risks (EBRD, 2023[20]).

The criteria used by ADB, AIIB and EBRD for climate alignment assessments provide examples of methodologies that attempt to take into account geographical specificity, diversity of pathways to achieve global emissions reduction goals, and their applicability in developing countries reflecting real-economy considerations. Fostering progressive convergence and common approaches to assess eligible investments compatible with the Paris Agreement based on climate and complementary alignment-related metrics could facilitate international investment in midstream and downstream gas infrastructure, without unnecessarily constraining national decision-making on how the low-carbon, sustainable transition will be undertaken (OECD, 2020[28]).

Technical support for methane abatement in the oil and gas sector

Alongside financing, several MDBs also offer technical support for methane abatement in the oil and gas sector. For example, the AIIB has supported initiatives to encourage the adoption of national methane abatement policies and regulatory frameworks and has supported collaborative efforts to reduce routine gas flaring and fugitive methane emissions (Alberti and Naran, 2023[4]). The EBRD has recognised the central importance of abating fugitive methane emissions as rapidly as possible and has pledged to engage with its countries of operation to address this issue (EBRD, 2023[20]). For example, the EBRD has continued to offer grants directly to governments, including Kazakhstan and Uzbekistan, to develop methane emissions reduction programmes (IEA, 2023[1]). Lastly, the World Bank Group, through its subsidiaries, provides the following methane abatement support:

• The IFC provides financing and advisory services to projects that reduce gas flaring or fugitive methane emissions in existing oil and gas installations – see Box 9.2 above. Projects funded by the IFC directly or indirectly (through financial intermediaries or investment in third-party funds) are subject to ex ante and ex post verification (IFC, 2017[29]).

• The Global Flaring and Methane Reduction Partnership (GFMR), a multi-donor trust fund composed of governments, oil companies, and multilateral organisations, provides technical and regulatory support to reduce flaring and methane emissions (World Bank, 2022[30]) – see Box 9.3.

Box 9.3. The GFMR: Providing financial and technical support for methane abatement projects in developing countries

The World Bank’s Global Flaring & Methane Reduction (GFMR) trust fund provides governments and state-owned operators in developing countries with technical and financial support for methane abatement projects along the entire oil and gas value chain. Specifically, to:

• conduct campaigns to detect, measure, monitor, and report methane emissions

• adopt best practices in policy and regulations, targeting low-emission energy supply practices

• unlock finance with support of financial advisory services, including a focus on financial due diligence, modelling, optimal capital structure, financial risk analysis and de-risking solutions such as guarantees, and identifying sources of commercial and concessional finance

• adopt low-emission infrastructure design and operational and maintenance practices

• assess, prioritise, identify, and select investment projects to reduce gas flaring and methane emissions; and

• implement flaring and methane emission abatement projects.

Types of support available

• Financial support – this takes the form of grants covering a portion of project capex – generally 10-20% of the project total cost, but this may be increased in specific contexts – for example: FCV (fragile, conflict, violence) countries, countries with very limited capacities, or countries with great difficulties accessing financial markets. Project financing may include grant funding for flaring reduction projects, methane detection and abatement projects, and LDAR programmes implemented by governments or state-owned operators, with close supervision by the World Bank.

• Technical support – this is delivered through analytics and studies funded by GFMR, covering all relevant aspects of a methane and flare abatement project, including technical design, regulatory aspects, emission reduction potential, and financial structure.

Criteria to assess requests for support for methane abatement measures

GFMR financial support decisions are guided by a set of pre-agreed eligibility criteria and fund allocation priorities:

• Methane over carbon dioxide – priority of methane emissions over gas flaring gas, recognising that methane is a much more potent GHG than carbon dioxide.

• High volume – the potential volume of flare gas or methane emissions that could be abated.

• Unit cost – opportunities will be ranked according to the estimated volume of GHG abated per USD.

• Technical assistance needed – priority to government entities and state-owned operators with fundamental and basic gaps in capacity to address flaring and methane emissions.

• Government willingness and commitment – established eligibility criteria:

  • Operator commitment to measure and report emissions accurately through OGMP2.0 or another similar comprehensive, measurement-based international reporting framework

  • Operator commitment to achieve near-zero absolute methane emissions by 2030 by reducing methane intensity to below 0.2% of the volume of the total gas marketed; and

  • Operator commitment to achieve Zero Routine Flaring by 2030 (ZRF).

• Sustainability and replicability – priority to projects that are part of a multi-phased, programmatic approach, or may be embedded in an existing World Bank energy sector programme in the country.

• Funding needed – priority to government entities and operators in fragile and conflict-affected countries or those with poor finances.

Source: Authors’ elaboration based on responses to OECD survey on financing mechanisms for methane abatement.

International initiatives that provide support for methane abatement

In response to the increasing global recognition of the urgency of tackling fossil methane emissions, several international initiatives have been launched in order to drive collective global action on tackling oil and gas sectors methane emissions. Several of these initiatives provide technical support for methane abatement activities (improved data transparency, MMRV, methane abatement policies and regulations), that developing countries can access to address upstream oil and gas sector methane emissions.

The Climate and Clean Air Coalition (CCAC) is a voluntary partnership of over 160 governments, intergovernmental organisations, and non-governmental organisations founded in 2012, and hosted by UNEP. The CCAC offers funding and technical support for signatories of the Global Methane Pledge to develop national methane roadmaps or action plans – see Box 9.4. Specifically:

• Fossil Fuel Regulatory Programme (FFRP) – CCAC provides financial support for project funding through the FFRP for policy and regulatory development, capacity building, and technical assistance in the fossil fuel sector to reduce short-lived climate pollutants including methane and black carbon. From mid-2024 to mid-2027 the FFRP will support up to 20 developing country governments with tailored support for capacity development, regulatory frameworks, and enforce compliance with existing frameworks.

• Additional project funding – the CCAC Trust Fund provides financing for developing countries to enable actions that deliver climate, air quality and development benefits. Project funding is split between national policy development and implementation of mitigation measures. Recent methane abatement funding projects include the delivery of a methane emissions inventory, mitigation plan and MRV framework for the oil and gas sector in Gabon and the delivery of training workshops and guidance for methane leak detection and repair in the oil and gas sector in Côte d’Ivoire.

• Technical assistance – CCAC can support countries eligible for official development assistance by providing access to technical experts within our partnership and small-scale grants for short-term services, such as guidance on technology options, funding opportunities, and policy development. Technical assistance services typically last less than 12 months and are small in scale (up to USD 50 000). In particular, CCAC supports developing countries to develop methane roadmaps and design policies to reduce methane emissions to realise the goals of the GMP. These services may include regulatory analysis, cost-benefit analysis, and peer-to-peer exchanges.

Box 9.4. CCAC funded projects: Supporting methane reduction in Gabon and Côte d’Ivoire

Gabon – Methane emissions inventory, mitigation plan and MRV framework for the oil and gas sector

Gabon is the fifth-largest oil producer in Sub-Saharan Africa. While the country also has considerable associated gas resources, more than 90% of gas production is either re-injected or flared for lack of economic alternatives. In addition, Gabon’s flaring intensity (i.e. gas flared per unit of oil produced) is also significant – representing the second highest jurisdiction after the Bolivarian Republic of Venezuela in a recent study by the World Bank.

Gabon has recognised the importance of tackling methane emissions from the upstream oil and gas sector. In 2015, Gabon submitted its NDCs to the UNFCCC, highlighting its commitment to reducing greenhouse gas emissions by at least 50% by 2025. Gabon has also joined the GMP.

To meet these targets, Gabon’s General Direction of Environment and Natural Protection at the National Climate Council engaged with CCAC to deliver an improved and updated methane emission inventory, mitigation assessment and MRV framework for the oil and gas sector.

Project details

Between 2023 and 2025, CCAC, through its implementing partners, CATF, will carry out the following activities to support Gabon’s commitment to reduce methane emissions in the upstream oil and gas sector:

• Develop a methane emissions inventory for the Gabonese oil and gas sector using CoMAT

• Develop a methane mitigation plan and an MRV framework for the oil and gas sector

• Map currently conducted and ongoing studies of relevant activities and policies within the oil and gas sector; and

• Draft a report on gaps and recommendations for utilisation of methane from the oil and gas sector.

Côte d’Ivoire – Training workshops and guidance for LDAR in the oil and gas sector

Following recent discoveries, Côte d’Ivoire has aspirations of becoming a major African oil and gas producer. In order to ensure that new and existing gas infrastructure does not contribute to increase methane emissions, policy makers and regulators in Côte d'Ivoire will need a comprehensive understanding of modern LDAR methods and related best practices and regulatory requirements.

In this regard, Côte d’Ivoire’s Ministry of Environment and Sustainable Development engaged with CCAC to develop training on the design and implementation of LDAR programmes at oil and natural gas facilities, as well as provide a review or related regulatory requirements in other jurisdictions.

Project details

Between 2023 and 2024, CCAC, will carry out the following activities to support Côte d’Ivoire’s capacity to develop and implement methane leak detection and repair protocols. This includes:

• training on the key objectives of an LDAR programme, the characteristics of fugitive equipment leaks, designing and implementing an LDAR programme, and LDAR equipment selection

• catalysing actions to manage fugitive equipment leaks in Côte d'Ivoire's oil and gas sector; and

• the creation of relevant benchmarks against which government and industry can assess the effectiveness of their related actions.

Source: (CCAC, 2023[31]); (GFMR, 2023[32]); (CCAC, 2023[33]).

The European Commission identified methane emissions as an important and urgent issue requiring action in the European Green Deal in 2020. The European Commission’s objective is to reduce methane emissions in the EU but also to support similar action internationally. In that regard, the Commission provides support that developing countries can draw on for assistance in reducing methane emissions.

The Commission uses criteria to assess requests for support for methane abatement measures in upstream oil and gas projects. Activities are only financed if they are clearly consistent with the overarching goal of transitioning away from fossil fuels. In addition, requests must not contravene the exclusion criteria listed in Article 29 of the Regulation (EU) 2021/947, namely, funding cannot support actions or measures which:

• may result in the violation of human rights in partner countries

• are incompatible with the recipient country’s NDCs

• promote investments in fossil fuels

• cause significant adverse effects on the environment or the climate (unless such actions or measures are strictly necessary and are accompanied with appropriate measures to avoid, prevent or reduce and, if possible, off-set these effects).

While the Commission’s funding is often channelled through implementing partners, notably UNEP’s CCAC and IMEO, direct funding can be provided for country-specific projects (e.g. in Turkmenistan). Developing countries wishing to access Commission funding can engage with the Directorate-General for Energy’s (DG ENER) focal points, who are the lead Directorate for the European Commission’s engagement as champion of the Global Methane Pledge, as well as with the Directorate-General for International Partnerships (INTPA), the Directorate-General for Neighbourhood and Enlargement Negotiations (DG NEAR) and EU delegations.

Strategic investment funds

Strategic investment funds (SIFs) may also form an important source of financing for methane abatement. SIFs are special purpose investment vehicles, backed by governments or other public institutions, that pursue a dual mandate of both financial returns and policy objectives, and aim to mobilise commercial capital for investments where private investors are not available.1 Investment strategies of SIFs are driven by their policy objectives. These objectives will vary among different SIFs but can include accelerating a country’s economic development, infrastructure development, employment creation, and climate change mitigation and adaptation (World Bank, 2022[30]).

SIFs are likely to have flexibility to provide financing for methane abatement. Research by the World Bank found that 20 SIFs included oil and gas within their investment mandate (although only 16 of those SIFs appeared to have made investments in the oil and gas sector). SIFs domiciled in oil and gas economies are likely to have even more flexibility to fund projects in the oil and gas sector and therefore may be able to provide financing for methane abatement. For example, the Nigeria Sovereign Investment Authority provided USD 650 million to the Nigeria Infrastructure Fund (NIF). The NIF fund has a broad investment mandate which includes the ability to invest in gas pipelines, infrastructure, and storage projects, alongside the broad power sector (World Bank, 2022[30]).

There are several SIFs in the Middle East that actively invest in the oil and gas sector and that may be able to provide financing for methane abatement. SIFs have a strong understanding of their country’s investment environment, including access to its project pipeline, and often play the role of project developers as well as financier (World Bank, 2022[30]). In the United Arab Emirates, the Mubadala Investment Company PJSC owns 100% of Mubadala Energy – an international energy company, headquartered in Abu Dhabi, with activities in 11 countries. Mubadala Energy’s portfolio is 66% natural gas and views gas as a key bridging fuel to a lower carbon future (Mubadala Energy, 2024[34]). In another example, the Kuwait Investment Authority (KIA) holds a 15% share in the Arab Petroleum Pipelines Company – an Egyptian oil and gas service provider that owns and operates pipelines and associated storage facilities connecting the Red Sea and the Mediterranean. Other shareholders include: the Egyptian General Petroleum Corporation (EGPC), Mubadala Energy, Saudi Aramco and Qatar Petroleum (Mubadala Energy, 2024[35]). The newly established Africa Energy Bank can also support methane abatement projects in Africa.

Table 9.2. Strategic investment funds: Oil and gas financing

Fund	Geographic focus	Description
Africa50	Africa	Africa50 is an infrastructure investment platform founded by the AfDB and African states.
Emerging Africa Infrastructure Fund	Sub-Saharan Africa	The EAIF was launched to raise and deploy blended finance for transformative infrastructure projects across sub-Saharan Africa. Anchor investors include: the UK, Dutch, Swedish and Swiss Governments
Infraco Asia	Asia (South and Southeast)	Sectors include: power and energy; Oil and gas distribution. Note that InfraCo Asia does not participate in project development that could have damaging environmental or social impact.
Investment Corporation of Dubai	Dubai / global	ICD is the principal investment arm of the Government of Dubai that invests across a range of sectors, including upstream oil and gas.
Mubadala Investment Company	Abu Dhabi / global	MIC is an Emirati sovereign wealth fund that invests across a range of sectors, including upstream oil and gas value chain.
Nigerian Sovereign Investment Authority (National Infrastructure Fund)	Nigeria	The National Infrastructure Fund focuses entirely on domestic investments in selected infrastructure sectors, including motorways, healthcare, power, and agriculture.
Public Investment Fund	Saudi Arabia / global	The PIF is a Saudi Arabian sovereign wealth fund formed to invest in Saudi Arabia and globally, in line with Saudi Vision 2030.
Russian Direct Investment Fund	Russian Federation / global	RDIF is a Russian sovereign wealth fund, formed to co-invest alongside other investors primarily in Russia.
Silk Road Fund	China / global	The Fund is a Chinese medium- and long-term equity investment fund formed to foster increased investment in countries along the Belt and Road Initiative.

Source: (World Bank, 2022[30]).

Emissions trading schemes

Emissions trading schemes (ETS) can be powerful tools to encourage and finance methane technological innovation, deployment and scale-up as they provide long-term price signals to incentivise companies to reduce their methane footprint. Across industrialised economies, ETS tend to be the most effective mechanisms to reduce emissions as they ensure environmental effectiveness and incentivise use of the most efficient technologies and those that cost least. Therefore, as part of a long-term strategy, fossil fuel-producer emerging and developing economies may consider how to leverage explicit carbon pricing through the introduction of a market mechanism on methane abatement such as an ETS. This could create opportunities to mobilise climate finance for methane abatement (OECD, 2022[14]).

In fact, there is already precedence for a ETS financing methane abatement projects in the oil and gas sector. The Clean Development Mechanism (CDM) established under the Kyoto Protocol allowed a country with an emissions reduction commitment to implement a mitigation project in a developing country in exchange for a UN-issued Carbon Emissions Reductions (CERs), or carbon credits, which could be used to contribute to its emissions reduction commitments or to be sold. Fossil fuel producer emerging and developing economies are particularly well-placed to generate climate finance through the use of an ETS given the many methane emissions abatement opportunities across their oil and gas value chains. For example, oil and gas methane projects can create these credits through the capture and utilisation of associated gas or by implementing LDAR in natural gas facilities. Since inception of the CDM, there has been 45 oil and gas methane projects – including in Bangladesh, India and Oman. Although, governments should note that the future of the CDM is uncertain pending the outcome of negotiations under Article 6 of the Paris Agreement governing the functioning of an international carbon market (IEA, 2023[1]; OECD, 2022[14]).

Box 9.5. Funding methane mitigation in Bangladesh: The Clean Development Mechanism

Natural gas is a significant source of primary energy in Bangladesh for both industrial and residential purposes. Natural gas is distributed nationally through an aging gas pipeline network that contributes to Bangladesh’s total methane emissions through leaks.

To address this challenge, the CDM has been utilised to fund methane abatements projects. Under the scheme, gas distribution companies engage third parties to identify and repair methane leaks to improve operational efficiency and safety (e.g. LDAR activities). For example, in 2021, Titas Gas Transmission and Distribution Company Limited (Titus), a gas supplier, signed a Certified Emission Reductions Project Investment Agreement with Danish company NE Climate A/S (NES) to deploy LDAR activities at Titus infrastructure. This project was registered by the UNFCCC in 2025 and has reduced methane emissions by around 4 million metric tons of CO₂ equivalent annually.

Source: (CLDP, 2023[36])

On the basis of the model established by the CDM, a number of regional economic groupings and in some cases provincial governments, have set up their own ETS – see examples from Alberta in Box 9.6. As of 2021, there are 33 ETS schemes in operation around the world covering 16% of global GHG emissions and jurisdictions making up 54% of global GDP. Furthermore, sixty-one countries, including major fossil fuels producer countries such as Egypt, Kazakhstan and Nigeria, have signalled their intention to utilise carbon markets to meet their NDC commitments (OECD, 2022[14]).

However, governments should be cognisant of the risks of the CDM (or similar schemes) creating perverse incentives that may encourage the continued and expanded use of fossil fuels. For example, this may include incentivising oil and gas producers to dilute methane in order to continue trading in emission reductions, where abatement above a certain threshold is required by regulation or advancing an investment in methane abatement that would have happened anyway (OECD Development Centre, 2020[37]). To avoid this, ETS should set incremental performance-based methane abatement requirements.

Box 9.6. Financing methane emissions reductions through emissions trading schemes: The Alberta Emission Offset System

In 2015, the Government of Alberta set a target to achieve a 45% reduction in oil and gas methane emissions by 2025 (relative to 2014 levels). In pursuit of this target, Alberta is using a combination of regulatory requirements and economic instruments to create incentives for companies to reduce emissions. The Technology Innovation and Emissions Reduction Regulation sets out a mechanism to reduce emissions at facilities which emit more than 100 000 tonnes of CO₂ per year, covering about 60% of Alberta's emissions. To meet this emissions reduction requirement, facilities can either: reduce their emissions; submit emission performance credits; submit emission offset credits; or pay into a compliance fund.

If companies can demonstrate that they have reduced their emissions beyond the targets set out in regulations, they can generate credits under the Alberta Emission Offset System (AEOS), which can then be sold on the open market. Companies participating in the AEOS must be registered in the Alberta Emission Offset Registry and must undergo a third-party verification process to determine that emissions have been measured in accordance with Alberta’s quantification protocols. Since its induction, operators have replaced existing pneumatic equipment with technology to reduce methane emission in 560 projects and have captured or reduced vented gas in 230 projects. Collectively these projects have avoided around 9 Mt CO₂-equivalent methane emissions.

The AEOS encourages third party companies to provide financing for emissions reductions without imposing any direct costs on the asset owner or operator. Under this model, third party companies provide finance for emissions reductions at specific sites/facilities, and recoup their costs through selling emissions credits that have been earned by the project and from selling captured methane that would have otherwise been lost. Once the upfront capital expenditure has been recuperated or the project breaks even, proceeds are shared with other project partners, including the asset owner. Since 2017, around 200 methane reduction projects have been developed for 35 companies, saving an estimated 1.7 Mt CO₂-eq of methane emissions.

The AEOS has created an opportunity for third party service providers to assist oil and gas operators to finance the deployment of emissions reduction measures that otherwise would not have had the necessary financial capacity. The IEA has noted how this approach may be of value to companies with limited investment capacity, including NOCs and companies in low- and middle-income countries.

Source: (Government of Alberta, 2019[11]); (IEA, 2023[1]).

Sustainability-linked financing

Green, transition, and sustainability-linked bonds are linked to the sustainability performance of a company or by compliance with external third-party criteria and represent an important mechanism through which governments, multilateral institutions and the private sector can raise finance in a range of low-carbon investments, including methane abatement projects in the upstream oil and gas sector.

Green bonds are fixed-income debt securities which offer investors relatively low-risk returns over a given period of time. The first green bond was issued by the EIB in 2008. Since then, the green bond market has grown quickly, and accelerated rapidly following the signing of the Paris Agreement in 2015. Green bond issuances in developing and emerging countries have increased significantly in recent years, with 25 countries having issued green bonds since 2012. In 2019, total issuances in emerging markets amounted to USD 52 billion. For example, in 2017, Repsol, the Spanish energy company, issued a green bond for EUR 500 million with a five-year maturity. The proceeds were linked to energy efficiency projects and low-emission technologies, including reductions in flaring and methane emissions mitigation, and sought to avoid around 1.2 Mt CO₂-eq emissions. Following maturity of the bond, Repsol produced a report setting out how the proceeds were used to achieve the green bond objectives, and these findings were independently verified by a third-party (IEA, 2023[1]). However, generally accepted green bond standards are likely to focus on purely “green objectives” and exclude methane abatement projects from the eligible uses of proceeds. Therefore, green bonds may only form a limited avenue for methane emission reduction financing (OECD, 2022[14]; World Bank, 2022[30]).

Transition bonds are a very recent initiative, and the market is still in its infancy with less than 20 issuances explicitly labelled as such, and mostly issued by non-financial corporates in Asia. Transition finance focuses on the dynamic process of becoming sustainable, rather than providing a point-in-time assessment of what is already sustainable (Cordonnier and Saygin, 2023[38]; OECD, 2022[6]). As such, transition finance does not necessarily require countries or companies to have achieved certain performance standards to be eligible for financing, but instead provides finance for countries and companies that set themselves on an ambitious and verifiable path of transition, including performance milestones and targets to be met over a certain period, measured by pre-defined and verifiable KPIs and metrics which can help balance inclusiveness with climate integrity and avoid emissions lock-in. Although transition bond standards are still in the early stages of development, the rationale for these products (i.e. to assist developing countries and companies to decarbonise) is consistent with the climate mitigation goal of reducing methane emissions in the oil and gas sector (OECD, 2022[14]; World Bank, 2022[30]).

In recent years, there has been a growing market in sustainability-linked bonds. These differ from other sustainable bonds, such as green bonds or social bonds, in that proceeds are not used exclusively to fund specific green or social projects. Instead, sustainability-linked bonds are sovereign or corporate performance-based instruments that allow governments or companies to raise finance for general purposes, while setting out sustainability performance targets that need to be achieved by the issuer. The bond’s finance terms are linked to these targets and vary depending on whether the issuer achieved the predetermined target. Targets can generally cover several sustainability-related dimensions, including climate, environmental and social elements, though nearly 60% of issuances in Q1 2022 specifically targeted GHG or carbon emission reductions (OECD, 2022[14]; World Bank, 2022[30]). See Box 9.7 for the example of Eni.

Box 9.7. Structuring sustainability-linked bonds to reduce emissions in the upstream oil and gas sector – the case of Eni

In 2023, the Italian oil and gas company, Eni issued a sustainability-linked bond for EUR 1 billion with a 7-year maturity. The bond was issued for general corporate purposes but was linked to ENI’s achievement of two specific Sustainability Performance Targets:

• Net Carbon Footprint Upstream (Scope 1 and 2) equal to or lower than 5.2 MtonCO2eq (-65% vs 2018 baseline); and

• Renewable Installed Capacity equal to or greater than 5 GW.

The Bonds are expected to pay an annual coupon ranging between 2.625% and 3.125% but if one or both targets indicated above are not achieved, Eni shall pay an amount equal to 0.50% of the principal amount of the Bonds on the fourth interest payment date (14 September 2027).

Financial institutions involved

A number of banks and financial institutions were involved in providing support or guarantees to Eni’s issued a sustainability-linked bond. These included:

• Global co-ordinator, documentation and facility agent – Mediobanca

• Global and sustainability co-ordinator – MUFG

• Global co-ordinators – Citi and Natixis

• Bookrunners – HSBC, UniCredit, and Intesa Sanpaolo

• Mandated lead arrangers – Bank of America, BNP Paribas, BPER Banca, Société Générale, and Wells Fargo

• Lead arrangers – Agricultural Bank of China, BBVA, Banco BPM, Barclays Bank, Credit Agricole CIB, Deutsche Bank, DNB Bank, First Abu Dhabi Bank, Goldman Sachs, J.P. Morgan, National Bank of Kuwait, Santander Corporate & Investment Banking, SMBC Bank, and Standard Chartered.

Source: (IEA, 2023[1]); (Eni, 2023[39]); (ESG News, 2023[40]).

Sustainability-linked bonds are not project specific, allowing for increased ability to balance strategies across portfolios. Similar to transition finance, the rationale for these products is consistent with the climate mitigation goal of reducing methane emissions in the oil and gas sector. However, the successful uptake of sustainability-linked bonds to address methane emissions in the oil and gas sector will depend on the existence of effective MRV mechanisms to preserve the integrity of the mechanism and avoid risks of greenwashing. Governments should be cognisant that these monitoring costs may be too high for all but large gas flaring and methane reduction projects (OECD, 2022[14]; World Bank, 2022[30]).

Debt for climate swaps

Debt-for-climate swaps – also referred to as debt-for-nature swaps – are financing mechanisms that may be able to help developing countries accelerate climate action by supporting projects that reduce methane emissions. In a debt-for-climate swap, bilateral creditors forgive host country debt and in return, the debtor government agrees to invest in national climate mitigation and adaptation projects, rather than continuing to make external payments to continue servicing its debt (OECD, 2022[14]; IGCD, 2020[41]). The rationale for these complex financial agreements is to provide emerging and developing economies with the fiscal space to respond to present environmental and climate-related challenges. The mechanism is particularly attractive if it can help unlock funding for climate projects, which do not ordinarily generate attractive financial returns but remain a priority for many emerging and developing economies (Jain and Verhoeven, 2023[42]).

Box 9.8. Debt for climate swaps in practice

Debt for climate swaps are a political and economic tool that seeks to address interrelated policy objectives – managing debt sustainability issues in often fiscally constrained developing countries; and catalysing climate action and sustainable development in developing countries.

Debt for climate swaps have three important elements: existing debt is repurchased at a discount through the use of a loan. Then, new bonds are issued at an interest rate which is below the market rate for the country and with a guarantee from a highly rated financial institution (which creates fiscal savings). Lastly, the debtor country commits to use part of those savings toward conservation activities (e.g. climate adaptation and biodiversity preservation).

The successful execution of a debt for climate swaps requires co-ordination by multiple actors (e.g. private creditors, governments, MDBs etc.). Such agreements ordinarily assume one of the following forms:

• Two-Party (Bilateral) Swaps – these are the simplest form of debt for climate swaps and involve the write-off of a bilateral loan by a creditor in return for agreed actions (generally environmental results within the debtor country). For example, in the 2006 TFCA swap for Botswana, the US Government forgave USD 8.3 million of bilateral debt in exchange for Botswana’s commitment to facilitate grant financing for its tropical forests, funded partially through its savings from the swap.

• Multi-Party (Commercial) Swaps – these differ from bilateral swaps due to the involvement of third-party donors with the intention to buyout an existing sovereign debt instrument from the current creditors. In these agreements, the donor or intermediary will offer to purchase debt at a substantial discount from the creditors who currently hold it, and in return, the debtor country would allocate a portion of the savings to conservation activities – typically targeted to climate adaptation and biodiversity preservation. The primary intermediary in this arrangement is often an environmentally oriented NGO (e.g. CI, TNC or WWF) or a group of donor institutions may co-ordinate and share the burden of a single transaction.

Source: (Karaki and Bilal, 2023[43]); (Jain and Verhoeven, 2023[42]); (ANRC, 2022[44]).

Originally, debt-for-nature swaps were used for protecting and expanding carbon sinks and building resilience in ecosystems. In 1987, the first debt-for-climate swap was initiated by Bolivia, and subsequently, more than 100 similar transactions were facilitated during the 1980s and 1990s – before numbers peaked in1993 and a sharp decline in debt-for-climate swaps followed. However, in recent years, there has been resurgence of interest in debt-for-climate swaps, as an innovative finance mechanism, leading to the conclusion of new deals. These include the successful execution of debt-for-climate swaps in Seychelles in 2015 (blue bond issued in 2018), Belize in 2021, Barbados in 2022, and Ecuador and Gabon in 2023 (Jain and Verhoeven, 2023[42]). In addition, in 2022, debt swaps were explicitly referred to in the Sustainable Debt Coalition Initiative launched at the COP27 and featured at the 2023 Summit for a New Global Financial Pact among other innovative financial solutions to support developing countries, including those vulnerable to climate change (Karaki and Bilal, 2023[43]).

Debt-for-climate swaps could help developing countries accelerate climate action by strategically supporting projects that reduce methane emissions in their jurisdictions. Debt-for-climate swaps could provide fiscal space for indebted developing countries to invest in methane abatement measures including preventing flaring, venting and reducing fugitive emissions in the upstream oil and gas sector (IGCD, 2020[41]). However, this form of financial instrument may not be applicable in all country contexts – especially in jurisdictions characterised by debt distress where debt restructuring should be prioritised in the first instance. Instead, debt-for-climate swaps could be utilised in context where debt level is significant but not unsustainable and where alternative financing instruments, including concessional finance and grants, are limited. In order for debt-for-climate swaps to be effective, they must be underpinned by a pipeline of interrelated projects and bankable projects to invest in, rather than one-off projects or transactions (Karaki and Bilal, 2023[43]).

However, while debt-for-climate swaps present an innovative opportunity for debtor nations to reduce their debt while making advances toward climate objectives, the widespread implementation of this mechanism is likely to be challenging. For example, although recent estimates suggest that climate-linked debt instruments could provide up to USD 105 billion of debt relief and help mobilise USD 329 billion in new borrowing, the total value of current debt-for-climate swaps is only a fraction of that amount (around USD 3.7 billion) and is nowhere near the USD 45 billion needed to achieve sufficient reductions in oil and gas methane emissions in low- and middle-income countries (Karaki and Bilal, 2023[43]; ANRC, 2022[44]; IEA, 2023[1]; IEA, 2024[2]). In addition, the capacity of some developing countries to manage large-scale climate mitigation projects, and the wisdom of insisting these governments spend resources on climate projects rather than provision of basic services, has also been questioned. Therefore, to overcome this objection and to attract the requisite creditor finance, debt-for-climate swaps should include criteria based on the Sustainable Development Goals to measure the impact on development gains to ensure that methane abatement measures not only reduce methane emissions, but also translate into improved energy access and the provision of services at the local level.

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[9] UNFCCC SCF (2021), Biennial Assessment and Overview of Climate Finance Flows, United Nations Framework Convention on Climate Change, https://unfccc.int/topics/climate-finance/resources/biennial-assessment-and-overview-ofclimate-finance-flows.

[30] World Bank (2022), Financing Solutions to Reduce Natural Gas Flaring and Methane Emissions, World Bank, http://hdl.handle.net/10986/37177.

[25] World Bank Group (2017), World Bank Group Announcements at One Planet Summit, World Bank Group, https://www.worldbank.org/en/news/press-release/2017/12/12/world-bank-group-announcements-at-one-planet-summit.

Note

← 1.  While many SIFs are national funds (backed by governments), others are multilateral – for example, the IFC Global Infrastructure Fund, Emerging Africa Infrastructure Fund, Marguerite II.