Global carbon pricing under financing inequality

Global cooperative efforts to address climate change increasingly rely on the implementation of effective carbon pricing policies. However, emerging markets and developing economies (EMDEs) often face significantly higher financing costs for clean energy investments. This unequal financial environment weakens the incentive effect of carbon pricing and exacerbates disparities in global emission reduction responsibilities and economic burdens. This study develops a top-down, multi-regional integrated assessment model that incorporates both non-cooperative interactions among regions and heterogeneity in clean energy financing costs. The model is employed to systematically evaluate how unequal financing conditions affect the performance of carbon pricing policies. We consider three policy scenarios: unlinked carbon pricing, linked carbon pricing, and carbon pricing under a global social planner. The results show that when EMDEs are subject to high financing costs, their clean energy investments fall short, and the investment-inducing effect of carbon pricing is significantly diminished. In such cases, achieving emission reduction targets requires a higher optimal carbon price. Compared with unlinked carbon pricing policy, a linked carbon market facilitates the reallocation of abatement efforts across regions through permit trading, which helps curb the rise in carbon prices and alleviate the emissions cost burden on EMDEs. This study highlights the crucial role of a linked carbon market in promoting an equitable low-carbon transition and enhancing policy effectiveness.