Financing industry decarbonization in developing and emerging countries: assessing the impetus for innovative financial mechanisms promoted by the climate club Open Access

Financing industrial decarbonization is a critical component in the global effort to mitigate climate change. Transitioning to low-carbon industrial processes is essential for not only reducing emissions but also driving innovation, enhancing energy efficiency and maintaining economic competitiveness in a carbon-constrained world (World Economic Forum, 2023). The IPCC highlights the need for coordinated action across value chains to reduce industry GHG emissions (IPCC, 2023, p. 29). The Climate Club is an international initiative aimed at accelerating global efforts toward industrial decarbonization by fostering cooperation among like-minded nations committed to ambitious climate action (Climate Club, 2023a). The idea of creating a climate club has been discussed extensively and in different variations in the literature (Nordhaus, 2015; Hovi et al., 2016; Falkner et al., 2022). German Chancellor Olaf Scholz later championed the idea, which G7 leaders endorsed in 2022 and officially launched at COP28 in 2023 (Kurmayer, 2023).

The Climate Club intends to bring together countries that are determined to align their industrial policies with the goals of the Paris Agreement, particularly focusing on reducing carbon emissions in hard-to-abate sectors such as steel, cement and chemicals. The Club’s approach to industrial decarbonization emphasizes the importance of setting common standards, promoting green technologies and creating favorable conditions for low-carbon investments (Climate Club, 2023a). By establishing a framework for cooperation, the Climate Club seeks to harmonize carbon pricing mechanisms and creating a level playing field for industries across member countries (Climate Club, 2023b). Furthermore, the club intends to promote cooperation among members through the establishment of a Global Matchmaking Platform (GMP). The GMP is intended to inform members about financial instruments, mobilize private capital for industrial decarbonization and match support with the needs of developing and emerging economies (Climate Club, 2023a).

In this light, we ask how financing industrial decarbonization in developing and emerging countries can be improved through innovative financial mechanisms beyond the usual grants or loans. Our article contributes to three strands of research. First, we discuss the climate finance literature regarding the potential benefits and limitations of Climate Club membership for developing and emerging countries. Second, we contribute to the scarce and growing academic literature on financing industry transformations. Third, the literature on climate clubs as part of global climate governance is discussed with specific reference to the benefits (Hovi et al., 2016; Hall, 2024), pitfalls (Eckersley, 2012; McGee, 2015) and legitimacy of such a climate club.

This article is structured as follows. We start by discussing the current climate finance landscape, the role of developing countries and the industrial decarbonization context. The second section then reviews the climate club concept, including its advantages and potential pitfalls. The results section introduces several initiatives and their financial mechanisms. The following section will then discuss the challenges of financing industrial decarbonization in developing and emerging countries, focusing on their needs and suitable financial instruments. The last section entails four policy implications and concluding remarks.

Climate finance is a significant point of contention at the international negotiations under the United Nations Framework Convention on Climate Change (UNFCCC). The climate finance currently provided falls short of what developing and emerging countries need for mitigation, adaptation and addressing loss and damage (Bhandary et al., 2021, p. 529). Trillions of dollars (around $5.8tn–$5.9tn by 2030) will be needed to implement developing countries’ climate plans (UNFCCC, 2023), far above current finance levels. Given the scale of needs, public finance alone is insufficient, as emerging economies may require around $2tn annually by 2030 for mitigation. This is a fivefold increase over current climate investments, with 80%–90% of this needing to come from private sources (Ananthakrishnan et al., 2023). Blended finance has, thus, gained attention as a strategy to leverage limited public funds to de-risk projects and attract private investment. This approach involves using concessional public capital (e.g. grants and guarantees) to improve risk-return profiles and encourage private financiers to participate despite currency, political or technical risks in developing markets (LSE, 2022).

Meanwhile, the negotiations and the outcome of the New Collective Quantified Goal (NCQG) on climate finance at COP29 demonstrated developed countries’ unwillingness to close the climate finance gap (Obergassel et al., 2024). In this environment, developing countries face several challenges. Most climate finance still comes as loans requiring repayment with interest, which strains these countries limited fiscal capacity, especially as many already have high debt levels that constrain climate investment (Ciplet et al., 2022). Consequently, they are calling for a greater share of climate finance as grants or below-market-rate loans. However, large-scale climate finance inflows can pose macroeconomic risks if not carefully managed. Analysts have warned of a potential “climate finance curse” in analogy to the resource curse, where sudden surges of external climate funds, especially as debt, may lead to currency appreciation, inefficiencies or governance challenges in recipient countries. Ensuring high concessionality and alignment with national needs is crucial to avoid unsustainable debt (Jakob et al., 2015), and instruments such as debt relief or debt-for-climate swaps might be required (Federal Ministry for Economic Cooperation and Development, 2023). However, proposals to improve the quality of finance (e.g. setting specific sub-targets for grants vs loans) were considered but not adopted under the NCQG (Obergassel et al., 2024).

The effect of different financial instruments and types is also controversially discussed with regard to developing countries. Pauw et al. (2024) find that on the one hand, loans, concessional loans and guarantees are usually able to mobilize more finance from the private sector than grants. On the other hand, they deepen the debt levels of countries which is especially severe when it comes to heavily indebted developing countries (Pauw et al., 2022). Despite the preference of developing countries for grants over loans, only 21% of climate finance in 2019 consisted of grants (Pauw et al., 2022). Furthermore, a common definition for climate finance and a sub-target for grants is still required, which “could increase accountability, trust, and transparency, and target the needs of the most vulnerable countries” (Pauw et al., 2022, p. 1241; Carè and Weber, 2023).

Compared to other sectors, industrial decarbonization has been largely neglected by climate finance, with a significant investment gap and no long-term transformative vision (Åhman et al., 2017; Cordonnier and Saygin, 2023). Climate finance for industry is minimal with only about $9bn per year in 2021–2022 out of $1.27tn total (Buchner et al., 2023). This highlights the need for innovative models like public–private partnerships and blended finance to cover high upfront costs and risks in developing countries (LSE, 2022). Mobilizing private capital is seen as vital, but it requires mitigating risks such as policy uncertainty, technology performance and currency volatility (Allan et al., 2021; Ananthakrishnan et al., 2023).

In terms of achieving the development goals, the current climate finance landscape bears the risk of manifesting structural dependencies between developed and developing countries. An example here is the current run-up of green hydrogen projects in developing countries, without attached investments in value added manufacturing. The current development could result in locking developing countries into the role of raw-material suppliers, while wealthier countries retain higher positions in the value chain (Dembi, 2022; Müller, 2024).

Åhman et al. (2017) argue that large-scale decarbonization of energy-intensive industries requires major, targeted financing for R&D and demonstration along with patient, long-horizon capital to lower investment risks in large-scale demonstration and first-of-a-kind plants. They further argue that carbon pricing alone is insufficient because of low rates and exemptions and call instead for robust, multi-decade policy measures (Åhman et al., 2017). As such, financing the decarbonization of the industry sector faces significant challenges, especially in developing countries:

First, a comprehensive sectoral approach (Åhman et al., 2017) is required covering the entire product value chain from raw material sourcing to end-of-life (Cordonnier and Saygin, 2023, p. 14). Second, financing challenges differ across regions. Transitions can disrupt economies and development agendas, especially in developing nations where development goals may clash with decarbonization and risks (e.g. currency fluctuation and political instability) are higher. These countries also often struggle to access necessary finance (Cordonnier and Saygin, 2023).

Third, many low-carbon products are currently either not competitive or in competition with their high-carbon counterparts (Allan et al., 2021). One issue are higher upfront costs of low-carbon manufacturing facilities which deter companies from investing (Cordonnier and Saygin, 2023, p. 30). Thus, there needs to be some sort of existing or future market for low-carbon products to create the incentives for companies and financial institutions to invest in decarbonization. Measures like establishing green lead markets with clear standards or subsidizing the “green premium” (the cost gap for low-carbon alternatives) can spur demand for cleaner products (Otto and Oberthür, 2022). Additionally, to address the higher financing risk in developing markets (e.g. political instability or currency fluctuation), blended finance instruments like guarantees or first-loss capital can be used to encourage banks and investors to fund industrial decarbonization (LSE, 2022). Such tools are already being explored by development finance institutions to share risk with private investors and unlock capital for clean industry projects (Hall, 2024). Fourth, governance of industrial decarbonization is fragmented, and thus, better coordination and standardization across initiatives are needed (Cordonnier and Saygin, 2023; Otto and Oberthür, 2022). Fifth, climate finance largely targets big emitters while overlooking small and medium enterprises (SMEs), so more inclusive approaches are needed to help finance SME decarbonization (Cordonnier and Saygin, 2023).

The limitations of multilateral negotiations under the UNFCCC have once again become apparent with the disappointing results of the NCQG at COP29. The limited progress of the COP29 finance negotiations underscored the UNFCCC’s difficulties in enforcing climate commitments consistent with a 1.5°C trajectory (Climate Action Tracker, 2023). Climate governance has become increasingly complex and fragmented, with many initiatives outside the UNFCCC (Falkner, 2016; Jordan et al., 2018). While some view this fragmentation negatively (Biermann et al., 2009; van Asselt and Zelli, 2014), others point to a polycentric approach where multiple authorities address climate issues in complementary ways (Ostrom, 2010; Dorsch and Flachsland, 2017). In such a landscape, orchestration by central actors (e.g. international organizations or clubs) can help align diverse initiatives (Abbott, 2012).

In this context, minilateral regimes such as climate clubs have emerged as a complementary approach to international climate governance (Falkner, 2016). Climate clubs exemplify minilateral cooperation as small “clubs of the willing” (Dee, 2024) where members voluntarily engage in shared, ambitious climate goals (Hovi et al., 2016; Hall, 2024). In theory, such clubs offer a flexible alternative to the UNFCCC by allowing tailored strategies, technology sharing and peer pressure among like-minded members (Falkner, 2016). The climate club concept builds on club theory (Buchanan, 1965), where certain “club goods” are shared exclusively by members (Morin et al., 2024; Hall, 2024). Nordhaus (2015) applied this to climate governance, proposing that a small group of countries commit to deep emissions cuts and impose penalties (e.g. tariffs) on nonmembers to address free-riding. For a climate club to succeed, it must offer meaningful benefits to members, exclude nonmembers from those benefits and maintain stable participation (van Asselt and Zelli, 2014; Busby and Urpelainen, 2020).

Climate clubs offer several advantages in advancing global climate action. Their smaller size and focused objectives make decision-making more efficient compared to large multilateral negotiations, where reaching consensus can be challenging (Hovi et al., 2016). The flexibility of clubs allows them to accommodate diverse needs, especially those of developing countries, fostering more ambitious climate targets (Hall, 2024; Falkner, 2016). Leading countries in these clubs can set powerful examples, creating a “snowball effect” that encourages wider participation, particularly when club benefits (e.g. technological cooperation and climate finance) are combined with disadvantages for nonmembers, such as border tariffs (Hovi et al., 2016; Gampfer, 2016). Clubs can also serve as incubators for innovation, allowing members to test new policies and technologies (Falkner et al., 2022). They help prevent carbon leakage, as seen in initiatives like the G7 climate club and the Carbon Border Adjustment Mechanism, which act as de facto climate clubs (Huseby et al., 2024; Becconsall-Ryan, 2022). Additionally, clubs can play a role in raising awareness and building networks to prepare for emission reductions (Unger and Thielges, 2021).

However, clubs have drawbacks. Their exclusivity, while fostering ambition, can marginalize smaller nonmembers and raise legitimacy concerns if club decisions affect outsiders (Eckersley, 2012; Gampfer, 2016). There is also the risk of duplicating and, thus, fragmenting efforts or undermining principles like Common But Differentiated Responsibilities if powerful countries use clubs to sidestep UNFCCC commitments (Widerberg and Pattberg, 2017; McGee, 2015). In its current form, the climate club will most likely not be a climate club in the strict sense as proposed by (Nordhaus, 2015) with punitive measures for noncompliance. Instead, it will facilitate cooperation between its members on industry decarbonization and, thus, rely on club goods as benefits. In this sense, the club is closer to already existing club-like climate initiatives and legitimacy might not be the major concern of this club. However, this comes at the potential cost of driving ambition.

This article examines which financial mechanisms the Climate Club could advocate, in light of fostering industry decarbonization and different circumstances in emerging and developing countries. Thus, we examined a number of existing climate initiatives with a financial mechanism. Drawing on Flyvbjerg (2006), we selected “extreme” cases to account for “innovative” financial instruments beyond the usual provision of grants or loans. The research was motivated by the assessment framework from Unger et al. (2020) and Unger and Thielges (2021). They used an explorative-qualitative research design involving a small number of case studies to examine the contribution of climate initiatives for global climate governance (Unger and Thielges, 2021). We, therefore, relied on desk-research and focused on selecting “information-rich” (Patton, 2015) or “instrumental” (Stake, 1995) cases to provide examples for innovative financial instruments and understand particularly novel approaches. We note that focusing on a small number of innovative initiatives (extreme cases) has limitations which are further discussed below.

Although the landscape of climate initiatives is vast, only a limited number of initiatives has an innovative financial mechanism. As such, several selection criteria have been applied. First, all of these initiatives require a financial mechanism which supports decarbonization beyond capacity building and the typical modes of providing grants or loans. Second, at least one country has to be involved on the recipient side; third, private sector participation is included in the initiatives. Initiatives which focused solely on networks or capacity-building were, therefore, excluded, as were private-led initiatives without any country involvement. In the identification process, we relied on Web-based research (Google, ChatGPT and Gemini) examining the relevant literature, reports and policy documents as well as databases such as the Climate Action Ecosystem (Future of Climate Cooperation, 2024). Finally, five initiatives were selected that serve as examples for novel and innovative financial mechanisms. They were chosen purposefully to represent a diverse set of financial instrument types (e.g. results-based credits, auctions, blended finance, etc.) and to cover different industry decarbonization contexts. This selection ensures that each case illustrates a distinct innovative mechanism, thereby providing a well-rounded basis for analysis. The rationale for focusing on these five is to highlight a representative spectrum of creative financing approaches relevant to the Climate Club’s goals.

Note on AI tools: In conducting this research, the authors used OpenAI’s ChatGPT and Google’s Gemini in a limited capacity. These tools were used to assist with literature search and to refine language, under strict author supervision. No new content was accepted without verification against sources, and the final manuscript was wholly authored and edited by the human authors.

To explore how the Climate Club can enhance the financing of industrial decarbonization, particularly in developing countries and emerging economies, a range of existing climate initiatives that deploy novel financial instruments were examined. These initiatives illustrate how climate finance can be structured to mobilize private capital, incentivize public policy reform and support sector-wide transformations. They can, therefore, serve as examples on how to balance equity and effectiveness in global climate finance, offering important lessons for the design of the Climate Club’s GMP. Our analysis highlights how results-based financing, carbon crediting, policy-linked incentives and blended finance mechanisms could be used to align the interests of governments and private actors. In particular, the question how innovative financial mechanisms can be tailored to meet country-specific and sector-specific needs in industrial decarbonization was explored. The analysis covers the following initiatives: Energy Transition Accelerator (ETA), H2 Global Foundation, Nitric Acid Climate Action Group (NACAG), Transformative Carbon Asset Facility (TCAF) and the Pilot Auction Facility (PAF). The initiatives were analyzed using the criteria eligibility, functioning of the financial mechanism and risk allocation, transparency and transformative potential and scalability. The results are summarized in Table 1.

The ETA is a proposed financial mechanism designed to leverage private capital for the decarbonization of the power sector in developing countries. It is a public–private initiative established through the cooperation of the US Department of State, The Rockefeller Foundation and the Bezos Earth Fund. The ETA aims at accelerating the decarbonization of the power sector in developing countries through a sector-scale crediting approach (US Department of State et al., 2023).

Eligibility: To be eligible for the scheme, ETA partner countries must meet a set of criteria, such as having a Nationally Determined Contribution (NDC) that includes electric power generation and a Just Energy Transition Plan either in place or under development. In terms of the club idea, the requirements function effectively as an entry barrier which restricts access to the benefits of the ETA. The ETA builds on a market-based approach, allowing companies to purchase and use ETA credits. These companies must meet certain requirements, such as having a GHG inventory and committing to a science-based target.

Functioning of the financial mechanism and risk allocation: The ETA support is being provided in the form of results-based payments based on carbon credits. ETA partner countries will be able to generate these credits through three different crediting approaches. First, absolute emission reduction crediting will be possible in countries that have reached their peak emissions and can show continuous absolute emission reductions. Second, countries experiencing rising GHG emissions in the power sector may generate ETA credits by reducing their emissions against emission rates that take into account anticipated increase in electricity production. A third approach will be tailored to the specific challenges of countries with low per capita electricity access and limited grid development. In the medium term, all countries will have to use the absolute emission reduction approach (Bumpers et al., 2023). In terms of the use of the credits, ETA’s core framework (US Department of State et al., 2023) envisages different use cases for ETA credits. They can be used to offset a limited number of unabated emissions or for beyond value chain mitigation, where they are not used for offsetting but contribute to broader climate goals. There are also potential compliance use cases, where credits may be used to meet obligations under frameworks like CORSIA or through sovereign results-based payments (US Department of State et al., 2023). The ETA brings together (public) supply and (private) demand. As the payments are made upon delivery of the carbon credits, the risk largely remains with partner countries, who in turn are being supported through capacity building programs.

Transparency: Key information on the functioning of the approach (including methodologies) and its current status has been publicly available on the initiative’s website since the initiatives launch in 2023.

Transformative potential and scalability: It should be noted that the ETA is still work in progress and that many design features are not yet agreed. It is, therefore, unclear whether the ETA crediting standard will be sufficiently robust to ensure environmental integrity of carbon credits, as highlighted by a recent analysis of the scheme (Kreibich, 2024).

Despite this, the approach could inform the design of similar initiatives. Assuming sufficient private demand for credits, the ETA’s sectoral crediting approach has significant scalability potential. However, its transformative impact will remain limited if ETA credits are used for offsetting instead of beyond-value-chain mitigation.

The H2Global Foundation, launched in June 2021 by the German Federal Government, aims to bridge the price gap between the production and consumption of green hydrogen, a key element in the transition to sustainable energy (H2GlobalStiftung, 2024). The initiative is set to operate over a maximum of 10 years, with initial financial losses expected to decrease as the market matures.

Eligibility: The initiative seeks to link green hydrogen generators at a global scale with hydrogen users in the European Union (EU). Sellers and buyers are identified through auctioning, with no additional eligibility requirements being applied.

Functioning of the financial mechanism and risk allocation: At the core of H2Global’s approach is its “double auction model.” In the first stage, an international auction is held to purchase hydrogen at the lowest bid, typically through long-term contracts of around ten years. This incentivizes stable investment and production planning. The second stage involves reselling the hydrogen within the EU through a second auction, where it is sold to the highest bidder, thus promoting the development of hydrogen facilities in the EU (BMWK, 2024).

Transparency: Key information on the H2Global Foundation and its approach is publicly available via the website, the governance and financing structure as well as the list of donors supporting the initiative. The website also provides information on the ongoing auctioning process by for instance informing about the outcome of H2Global’s first pilot auction for renewable ammonia.

Transformative potential and scalability: Overall, H2Global seeks to close the price gap in the hydrogen market and establish a strong hydrogen economy to support global climate goals. The approach has significant scaling potential by pooling funding from governments, corporate donors and philanthropy partners. However, there is also the threat that an exclusive focus on importing green hydrogen from the developing world could replicate old patterns, where developing countries serve as raw material suppliers, while value-added manufacturing remains in industrialized economies.

The Nitric Acid Climate Action Group (NACAG), launched by the German Federal Government in 2015, aims to reduce nitrous oxide (N₂O) emissions from nitric acid production, a significant contributor to global warming. NACAG promotes the adoption of N₂O abatement technology by offering both technical advice and financial support to nitric acid plant operators worldwide.

Eligibility: NACAG support is only available for plant operators based in countries whose governments have committed to sustaining these emission reduction activities over the long term. This commitment must be formalized through a Statement of Undertaking, ensuring that abatement efforts continue after direct NACAG support ends (NACAG, 2024). To access funding, the plant operators must further successfully pass a due diligence process.

Functioning of the financial mechanism and risk allocation: NACAG support is provided on the basis of a grant agreement that provides both financial resources and technical expertise for implementing and maintaining N₂O abatement technologies. By providing this support, NACAG seeks to not only mitigate the environmental impact of nitric acid production but also drive a global shift toward more sustainable practices in the sector. The risk is distributed across the different actors involved who depend on each other: the donors supporting the initiative, the host country governments and the plant operators.

Transparency: The approach used by NACAG is transparently communicated via the initiative’s website and publicly available knowledge material. The website provides information about the cooperation with partner countries and informs about ongoing and past tenders for plant operators.

Transformative potential and scalability: NACAG’s public–private approach has strong transformative potential because of its long-term design, but its scalability is constrained by reliance on public funds. Still, the Climate Club’s platform could replicate this model for similar targeted initiatives.

TCAF is a World Bank trust fund designed to support the global transition to low-carbon economies. It provides results-based payments for verified emission reductions to developing country partners.

Eligibility: The TCAF approach is directed toward developing and middle-income countries that aim to implement scaled-up crediting programs. To become eligible for TCAF funding, countries must develop a detailed program and submit the requested documents in a stepwise approach.

Functioning of the financial mechanism and risk allocation: TCAF provides results-based payments for verified emission reductions (VERs) operating across three key types of programs: policy-based, sector-based and jurisdictional. Through policy-based programs, TCAF assists national policymakers in designing and implementing domestic policies that foster sustainable energy reforms and promote low-carbon mobility. In sector-based programs, TCAF sets sectoral targets and supports the implementation of minimum energy performance standards, particularly in energy-intensive industries. Jurisdictional programs focus on broader, multi-sectoral initiatives like Sustainable City programs, which integrate sustainable practices across various urban sectors. The facility envisages two funding pathways for the use of VERs: results-based climate finance, which supports countries’ NDCs under the Paris Agreement and Internationally Transferred Mitigation Outcomes (ITMOs), which allow VERs to be transferred outside the host country for use in meeting other countries’ climate targets (TCAF, 2023).

Transparency: The TCAF makes all key documents publicly available, including templates for partner country governments interested in accessing TCAF funding. The website also informs about the current status of initiative. Notably, in 2024, Uzbekistan became the first country to receive TCAF payment (approximately $7.5m for 500,000 tons CO₂ reduced), illustrating the mechanism’s impact (World Bank Group, 2024).

Transformative potential and scalability: By linking financial support directly to measurable emission reductions, TCAF not only incentivizes effective climate policies and practices but also provides a scalable model for other countries aiming to meet their climate commitments while accessing much-needed financial resources. However, TCAF walks a fine line by combining the RBC pathway with the ITMO pathway: The first is much more promising from a host country government perspective, as results-based climate finance will allows the country to use the support for NDC achievement. At the same time, funding for this pathway can be expected to be limited. The ITMO pathway, in turn, can be expected to mobilize more funding, in particular if it is combined with ITMO demand from the private sector. ITMO generation, however, means that the emission reductions are transferred out of the country and can, therefore, not contribute to NDC attainment. Striking a balance between these two components and equitably sharing the mitigation outcomes can be expected to be challenging for developing countries, in particular if capacities are limited.

The Pilot Auction Facility for Methane and Climate Change Mitigation (PAF) was an instrument developed by the World Bank to leverage private investments into climate change mitigation activities. It was launched in response to the collapse of carbon credit prices in the early 2010s (following weak demand in the EU ETS), which put many methane-reduction projects at risk (World Bank Group, 2021).

Eligibility: Access to the initiative was limited to proponents of carbon market activities registered under the Clean Development Mechanism as well as other crediting programs that met specific criteria. The eligibility criteria for projects were changed over time to allow for the participation of projects from different sectors and crediting programs.

Functioning of the financial mechanism and risk allocation: The initiative applies an innovative results-based finance mechanism by auctioning tradable put options. The put option can be acquired by investors who obtain the right (but not the obligation) to sell future carbon credits to the PAF at a price established through the auction. This reduces the put option owner’s risks for investing in carbon market activities. The purchase of the put option involves costs. However, as the put options can be traded as bonds, these costs can also be forwarded. In March 2020, the last auction took place, securing a minimum price of $1.98 per ton and allocating 8.25m of climate finance (PAF, 2025). Cumulative funding disbursed through the total of four auctions amounts to around $40m (World Bank Group, 2021).

Transparency: PAF implementation was characterized by high transparency. The eligibility criteria were communicated on the initiatives website, as well as the outcomes of the auctions.

Transformative potential and scalability: Although PAF is particularly innovative, a potential pitfall in implementation is its complexity, because the financial structure must be well-understood by participants, and there can be relatively high transaction costs to set up auctions and verify outcomes. For the Climate Club, a similar design would need clear guidelines on how the auction is run and who bears the cost of honoring the put options. Ensuring transparency and fairness in such auctions would be important for legitimacy.

Each of the mechanisms discussed (ETA, H2Global, NACAG, TCAF and PAF) offers distinct strengths and addresses different barriers in financing industrial decarbonization. Meanwhile, each mechanism also has potential limitations that need to be carefully addressed when taken up by the Climate Club. Taken together, they illustrate that there is no one-size-fits-all solution to decarbonizing industries in developing and emerging countries. Instead, a portfolio approach is needed, matching appropriate instruments to specific country and sector contexts. The Climate Club’s GMP has the potential to serve as a tool to facilitate this, by aligning the needs of countries or industries with the expertise and financial support most suited to them. For example, a lower-income country struggling with basic infrastructure might benefit more from grants or debt relief, whereas a middle-income country with ambitious climate policies might leverage results-based carbon payments or credit guarantees to engage its private sector. In this regard, the appropriateness of each mechanism varies with the context: For example, ETA’s carbon-credit model channels corporate funds into sectoral projects; H2Global’s subsidies suit countries with green hydrogen potential; NACAG provides a targeted fix for a specific industrial emissions source; TCAF supports broad policy programs; and a PAF-like auction helps in situations requiring investor risk guarantees. A major role for the Climate Club is to promote complementarity among these mechanisms and ensure that, for example, an ETA project in a country could be reinforced by a PAF-backed price guarantee. Integrating these tools can help overcome multiple barriers simultaneously, from high upfront capital costs to risks associated with decarbonization.

A common thread is the need to address structural inequalities in climate finance and avoid continued dependencies. Traditional climate finance has often been top-down, with developed countries dictating terms and developing countries reliant on external support with limited involvement. The Climate Club must demonstrate that a club approach can be both ambitious, legitimate and equitable, if it is to be a real alternative to the UNFCCC process. This means designing financial initiatives in a way that empowers developing countries rather than placing them in subordinate roles. Some of the mechanisms inherently incorporate elements of this: NACAG’s requirement for local commitment encourages shared responsibility; TCAF’s focus on NDCs respects national ownership of climate targets; H2Global’s deals, if structured as true partnerships, can build new industries in the Global South rather than just extracting resources. But there are also pitfalls to these approaches. Without careful safeguards, hydrogen deals or carbon credit sales could lock developing economies into being exporters of raw decarbonization commodities (hydrogen and offset credits) while remaining importers of high-value clean technologies. To prevent this, the Climate Club should encourage deeper value-chain integration. For example, it could ensure that green hydrogen projects also support local manufacturing, technology transfer and skills development. This way, developing members can climb the industrial ladder (e.g. producing green steel domestically using green hydrogen instead of just exporting iron ore and hydrogen). The Club could also tie its financial support to social and environmental co-benefits to ensure decarbonization projects create jobs and reduce pollution.

Another issue is how well these instruments mobilize private sector investment. Achieving industrial decarbonization at scale will require trillions in investment, much of which must come from businesses and capital markets in addition to public funds. Each mechanism offers a different way to catalyze private capital: ETA leverages corporate climate finance; H2Global uses public finance to unlock private project investment; TCAF incentivizes countries to enact policies that will spur private action; PAF de-risks revenue for project developers; and even NACAG, although it is grant-based, ultimately hands over responsibility to industry and government actors to maintain the emission cuts. The Climate Club should build on these approaches to address one of the biggest hurdles for industry in developing countries, namely, the higher perceived risk and upfront cost of clean technologies. By creating enabling conditions, these tools collectively reduce the risk-adjusted cost of capital for green industrial projects. A steel plant in a developing country, for instance, might consider investing in electric arc furnace or CCS carbon capture and storage technology if it knows that there are price supports or payoff-for-performance programs in place that improve the business case. Additionally, the Club could coordinate green lead markets and standards to strengthen this effect. If member countries commit to preferential procurement of low-carbon materials or adopt common product standards for green steel/cement, then they create more demand for these products. Moreover, in terms of inclusivity, the climate club could also foster the integration of local SMEs in decarbonization.

Ensuring compatibility with the Climate Club’s overarching goals, particularly through the GMP is another issue. The GMP could act as a “toolbox” coordinator, as it could for example identify that a country’s cement sector might need a mix of debt relief, a price guarantee (PAF-style) for low-carbon cement and a TCAF program paying per ton of CO₂ reduced, all backed by Climate Club member support. This kind of orchestration is ambitious but achievable with a focused coalition, arguably more so in a fragmented or polycentric climate governance landscape. It also speaks to the theory of club benefits, where members of a climate club commit resources and coordination capacity and in return gain access to a network that multiplies their individual efforts. In essence, members contribute resources and coordination capacity and, in return, gain access to a network that amplifies their efforts. Nonmembers, by contrast, miss out on these financing opportunities and coordinated markets. While this approach lacks explicit penalties, the prospect of losing these benefits could still motivate broader participation.

Furthermore, it is important to consider potential pitfalls in implementation and the institutional design of the Climate Club itself. As such, a major concern is legitimacy. The Climate Club must demonstrate that it is not just a self-selected group pushing its own agenda but a constructive force in global climate governance. This means transparency in how decisions are made, inclusive governance in which developing countries are included as well as alignment with UNFCCC objectives. Another pitfall is the potential for complexity and coordination failure, as managing multiple innovative instruments requires strong institutional capacity, and as such, there is a risk of fragmentation of the climate finance landscape. Currently, climate finance is channeled through a patchwork of overlapping funds and initiatives, which leads to inefficiencies and high transaction costs for developing countries. A new Climate Club mechanism must avoid adding to this “bureaucratic maze.” The Climate Club’s GMP should, therefore, act as an orchestrating platform, which coordinates existing finance efforts and matching resources to needs, rather than a wholly new silo of climate finance. This approach can address fragmentation by improving alignment among initiatives, as also called for by the G20 and others (who urge integration over proliferation of climate funds (Rastogi, 2025). By design, the GMP could link club members’ finance to projects in developing members, serving as a conduit that makes access simpler and more transparent, instead of creating new complexity.

This study focused on five illustrative initiatives, which, while offering rich insights, do not capture the full diversity of climate finance mechanisms. The narrow scope and qualitative desk-study methodology mean our findings are exploratory. The research relied on published reports and data (no field interviews or quantitative metrics), which could introduce bias or omit context-specific challenges. These choices were made to examine innovative cases in depth, but they inherently limit the generalizability of results, and they do not capture the full diversity of climate finance mechanisms and initiatives. This tradeoff was considered acceptable for an initial inquiry, as it highlights emerging best practices and hypotheses that future research can test more systematically. As such, findings should be seen as exploratory and hypothesis-generating rather than conclusive.

Given these limitations, future studies should test and expand our findings. In-depth case studies in specific developing countries could validate how the Climate Club’s financing mechanisms work on the ground and assess sector-specific needs. Comparative analyses of additional innovative initiatives (beyond the five examined here) would provide a more comprehensive picture of financing options. Moreover, as the Climate Club and its GMP become operational, empirical research should monitor their implementation, effectiveness and legitimacy, especially from the perspective of nonmember developing nations. These efforts would help determine how the Climate Club can continually adapt to ensure equitable and effective industry decarbonization.

In this article, it was asked how financing the industry decarbonization in developing and emerging countries can be improved through a wider set of innovative financial mechanisms that are novel and innovative. For this purpose, climate initiatives with financial mechanisms that offer a novel and innovative approach were analyzed. The goal was to identify alternative ways to improve financial support for decarbonization efforts through the Climate Club, particularly in lights of different circumstances in developing and emerging economies. Based on the analysis, we identified four policy implications:

1. Leverage blended finance through the Climate Club: The Climate Club should use its GMP to align diverse financial instruments with decarbonization projects in developing and emerging economies. By acting as a broker between project hosts and funders, the Club can mix public and private finance, for example, through combining grants, concessional loans, guarantees and green bonds to mobilize larger capital pools. This blended approach can lower risks for private investors while ensuring affordable financing for high-impact industrial decarbonization projects.

2. Ensure equity and transparency: To address climate finance inequities, the Climate Club must prioritize projects in less-developed member countries and ensure transparent criteria for support. The platform should match funds to projects based on clear metrics (e.g. emissions reduction potential, local sustainable development benefits and fair risk-sharing arrangements). Emphasizing capacity-building and local ownership in funded projects will make outcomes more effective and build trust among member countries.

3. Mitigate macroeconomic risks: The Climate Club’s financing strategy should avoid over-burdening developing countries with debt (the “climate finance curse” risk). This can be done by favoring grants or equity-like instruments for highly indebted countries and by coordinating with international financial institutions on debt relief where appropriate. Additionally, the Club could set up monitoring to ensure climate funds enhance fiscal stability, for example, by tracking debt ratios.

4. Integrate with global initiatives and carbon pricing: To prevent fragmentation, the Climate Club must coordinate with existing climate finance initiatives (e.g. Green Climate Fund, regional decarbonization programs) and align its efforts with broader policies like carbon markets or carbon pricing mechanisms. The Club’s platform should be designed to complement rather than duplicate these efforts. This can be done, for example, by filling gaps such as niche industrial projects or innovative financing models not covered elsewhere. Clear governance arrangements (with defined roles for members and partners) will help the Climate Club avoid overlaps and add unique value to the global climate finance architecture.

In sum, a Climate Club that orchestrates diverse financial tools ranging from carbon credit schemes to auctions and guarantees could significantly accelerate industrial decarbonization in developing and emerging countries. The key is to design these initiatives to be fair, transparent and complementary to existing efforts, thereby offering a legitimate, effective alternative to business-as-usual climate finance. If implemented well, then the Climate Club’s approach can help close the industrial emissions gap in line with Paris goals, while also strengthening trust between developed and developing partners.

The authors acknowledge support by the Open Access Publication Fund of the Wuppertal Institute for Climate, Environment and Energy.