Designing market-linked financing mechanisms for clean air action plans

In a concerted effort to address urban air pollution, multilateral development bank launched a technical assistance initiative to support seven cities in five developing Asian countries in designing customised clean air action plans (CAAPs). Central to this initiative was the creation of innovative, market-linked financing mechanisms to promote the adoption of air quality improvement technologies. The focus was on minimising reliance on state grants and subsidies, which often place undue strain on government resources and limit the scalability of such initiatives. Instead, the project sought to empower cities with tailored financial tools that incentivise private and public sector investment in sustainable air quality solutions.

Through extensive consultations and gap analyses, the project team assessed the unique needs and challenges of each city. Drawing from global best practices, city-specific financing schemes were designed. These schemes leveraged market-based instruments, such as green bonds, emission trading systems and performance-linked financing, to drive clean technology investments in various sectors, including transport, energy and industrial emissions. The approach emphasised creating a self-sustaining financial ecosystem by engaging private enterprises, financial institutions and local governments.

Recognising the importance of aligning economic and environmental priorities, the team developed models that incentivised private sector participation through mechanisms like tax credits, interest rate subsidies tied to emission reductions and public-private partnership frameworks. These mechanisms were structured to provide measurable returns on investment, encouraging stakeholders to prioritise long-term environmental goals. Additionally, the financial tools were tailored to each city’s economic context, ensuring feasibility and scalability.

The financing mechanisms equipped the cities with a robust framework to operationalise their air quality strategies in the future. Key outcomes of the initiative included detailed city-level CAAPs outlining tailored financing strategies, actionable recommendations for market-linked mechanisms and tools to attract private sector investments. The project underscored the importance of designing innovative financing models that align with local contexts while minimising government expenditure and providing a replicable framework for other cities facing similar challenges.

The project empowered cities to leverage market-linked financing mechanisms, reducing reliance on government subsidies and enabling sustainable investments in air quality improvement technologies.