Investing in sustainable transport: Reducing the climate financing gap in LMICs

Alarm bells are ringing. Transport emissions are rising at a higher rate in low- and middle-income countries (LMICs) than in high-income countries. The reasons behind this are closely linked to road-based transport and rates of motorization. LMICs are also at risk of locking into the wrong technology, which would bring higher switching costs in the future. The public and private sectors must act urgently to significantly mitigate climate risks and make investments that promote sustainable transport. 

While investments needs are high, returns from investing in resilient transport are even higher

Financing climate action is expensive—around $417 billion per year between 2015-2030 is needed to pursue a climate action pathway for LMICs. But, despite the cost, these investments are effective Building more resilient infrastructure in LMICs could generate $4.2 trillion in savings, with $4 in benefit for each $1 invested.

Transport Financing is falling short

Of the total global climate financing flows, estimated at $1.27 trillion each year, the transport sector received just $336 billion (on average for 2021-2022). Most of this investment occurred in developed countries. Less than three percent of the global total ($30 billion) went to or within least developed countries (LDCs). 

A majority of this financing is devoted to electrification of vehicles in developed countries, while the 10 countries most affected by climate change  only received $23 billion between 2000 and 2019, which is less than two percent of total climate finance. There is still limited focus on sustainable transport options other than electric vehicles. There are many reasons behind this.

First, there’s a lack of bankable projects. In many cases, green projects fail to monetize revenues to repay loans and rely on limited government funding to make them financially viable. This is often the case of public transport, investments in active mobility, and infrastructure resilience. 

Second, many markets lack the necessary demand to attract large-scale capital investments at the sector or country level. As a result, their focus remains on individual projects, which are often disconnected from other potential investments that could enhance climate action.

Third, it is essential to diversify financing sources and allocate risks according to each actor's capacity to manage them effectively. However, for publicly sponsored projects, many governments lack access to commercial borrowing or a track record of doing so without the involvement of DFIs to mitigate some of the risks.

How LMIC governments can move the needle

Financing the transition to a low-carbon transport requires complex decisions on how we move people and freight, land use, pricing, and taxation. 

Three things are very clear: (1) Eliminating harmful subsidies is a crucial initial step toward achieving transport decarbonization; (2) Users of private motorized transport, as well as air transport and shipping, must bear the full social costs of their activities; and (3) Tax revenues generated from pricing transport externalities should be reinvested into green and resilient projects, prioritizing those that deliver the highest impact.

Governments need to address the fundamental bankability issues in projects, which are reinforced even more in green transport projects. Incorporating transport-specific climate action targets with a comprehensive understanding of what is “green” by establishing a green transport taxonomy and standards to package transport projects can be a starting point for many public agencies. 

By ensuring a portfolio of bankable green projects, agencies can harness new financiers and capital markets investors that are focused on transport sustainability. In parallel, DFIs need to scale up their financing to climate mitigation and adaptation in transport, beyond lending, to play a larger role in derisking instruments to mobilize private capital and scaling up small projects in cities.

A new World Bank report makes several recommendations on how to do this well:  

1. Set transport-specific climate action goals.
2. Establish green transport–specific regulation and institutional frameworks.
3. Incorporate GHG and adaptation analysis in transport planning.
4. Optimize funding mechanisms to incentivize greening and resiliency actions.
5. Ensure public spending efficiency.
6. Focus on research and development by leveraging the private sector’s ability to innovate.
7. Develop a financing strategy which includes blended financing and credit enhancements to leverage sustainable finance into the Paris Aligned transition.

A more comprehensive approach is needed, one that considers the social and economic complexities of how transport users interact with the built environment. Now is the time, particularly for LMICs, to prioritize transport as a key tool for achieving their climate goals.