Rethinking Tax Incentives for Climate Finance: Lessons for the 30th UN Climate Change Conference (COP 30)

One of COP 30’s top priorities is boosting climate finance from both governments and private investors. Why is this especially crucial for emerging and developing economies? 

Despite record-high investment in renewable energy last year, emerging and developing economies (EMDEs) face a USD 2.2 trillion financing gap each year through 2030 to meet their goals under the Paris Agreement. Countries need to attract investments that can lower emissions while expanding access to affordable energy and creating jobs. Unlike major emerging economies, such as China, India, or Brazil, which attract the majority of global renewable energy investment, the climate transition of many lower-income EMDEs continues to be held back by limited access to affordable finance, perceived country or sector-related risks, and weaker policy frameworks. 

In response, mobilizing both public and private finance is crucial. Public financial support is needed to crowd in larger private investment, such as through targeted subsidies including incentives, budget transfers, concessional lending, and market mechanisms that reduce investment risks. This must go hand in hand with phasing out inefficient tax incentives for fossil fuels to level the playing field and encourage a shift by consumers and investors toward less polluting alternatives. Raising taxes on fossil fuels to reflect their social costs—through excise or carbon taxes can also accelerate the transition in an economically efficient way, provided that protections are in place for vulnerable groups. 

What have governments already committed to in terms of renewable energy capacity?

At COP 28, 133 governments agreed to the collective goal to triple the world’s installed renewable energy generation capacity by 2030, taking into consideration different starting points and national circumstances. Limited fiscal space and rising debt require that public support be used strategically, such as by lowering investment financing costs. The global FfD4 process has underscored the mounting pressure on public budgets and the need for more efficient deployment of resources.  

Without this combination of public and private finance, EMDEs cannot accelerate the energy transition in line with the COP 28 commitment.  

 

What mechanisms at COP 30 could help scale green investment and turn commitments into action? 

COP 30 has been framed by the Brazilian Presidency as a COP for implementation, where countries work to turn their climate commitments into action. This could be achieved through the Baku to Belém Roadmap to 1.3T, which sets out a plan for how climate finance from all sources can be scaled up to USD 1.3 trillion annually by 2035. 

However, as IISD has noted, while the Baku to Belém Roadmap recognizes that phasing out environmentally harmful subsidies, including fossil fuel subsidies, can have long-term benefits, these points are not reflected in recommendations. This means we risk COP 30 becoming a missed opportunity for redirecting public finance from fossil fuels to renewables. 

Ambitious reforms also require financial backing. At COP 30, a decision on Article 2.1(c) (the Paris Agreement’s goal on aligning financial flows with climate-resilient, low-carbon development pathways) is expected. For the past 3 years, the Sharm el-Sheikh dialogue on Article 2.1(c) has taken place, leading to a greater understanding of what the Article means. However, more work remains to be done, and COP 30 could establish negotiations toward a framework for Article 2.1(c), perhaps under a work programme. A decision on Article 2.1(c) could contain a commitment to phase out public finance for fossil fuels to ensure investment is climate compatible.  

COP 30 could also move the dial on strengthening public finances and growing governments’ fiscal space for climate action, for example, through advancing the conversation on ambitious debt relief. 

Tax policy is one tool for leveraging public resources to scale private investment. What role can tax incentives play toward closing the green investment gap, especially in EMDEs? 

Tax incentives that target green investment, if strategically designed, can help lower the cost of capital for climate projects, unlocking private finance and accelerating renewable energy deployment. They already have in countries that use them well.

Designing strategically means shifting away from broad profit-based tax holidays toward incentives that address real investment constraints. Targeted tools like allowing businesses to write off the cost of renewable energy capital faster (“accelerated depreciation”), partial relief from import duties for certified green technologies, or time-limited tax credits for investment in energy grids and storage can really move the dial on climate projects through reducing upfront and operating costs. 

What other levers should governments be using to mobilize private finance? 

Incentives work best as part of a broader policy mix that includes planning, regulation, and infrastructure development. Without clear energy targets, ready energy grids, and streamlined permitting for energy projects, even generous incentives will fail to attract investment. 

Tax policy is only one lever among many for promoting green investments.

 

Countries also use many non-tax instruments to encourage clean energy investment, particularly for technologies that are already cost competitive, such as solar and onshore wind. Market-based mechanisms can provide the certainty that investors need without a large net impact on public finances. 

These include measures that stabilize prices, such as feed-in premiums, contracts for difference, and auctions for long-term power purchase agreements. Domestic and international public financing can reduce the high cost of capital that is common in many EMDEs. While some of these mechanisms can be more complex to administer than broad-based tax incentives, they have proven effective in large EMDEs that are rapidly scaling up clean energy, including Brazil, China, India, and Vietnam.        

Policy stability and an enabling regulatory environment are also key to attracting investment. 

How can countries ensure that green tax incentives achieve results for climate without eroding the tax base unnecessarily? 

Our research shows that tax incentives deliver the strongest results in sectors with high upfront costs, such as early-stage renewables, storage, industrial efficiency, and mini-grids, rather than in mature technologies that already attract private investment. Focusing on these areas is where countries are most likely to see tangible results. 

Countries can ensure that green tax incentives support climate goals without undermining revenues by focusing on efficiency, effectiveness, and targeting. Incentives should directly address barriers such as high upfront costs or technology risks, be time-bound and performance-linked, and include clear monitoring and review mechanisms. 

Shifting from broad profit-based tax holidays to cost-based measures such as accelerated depreciation, which I explained earlier, or investment tax credits, makes sure the support catalyzes new investment rather than rewarding activity that would occur anyway. This is a strategic use of public resources, maximizing climate impact while maintaining fiscal sustainability. 

Additionally, one of the key elements is tying tax incentives to real economic outcomes, like new capacity or job creation or to environmental goals, with priority going to projects that fit a national green taxonomy and meet environmental and community consent standards. 

Transparency throughout the process is also essential. Tax expenditure reporting at the economy-wide level helps governments track the fiscal cost of incentives by clearly presenting revenue forgone across sectors and brings other benefits. The Coalition on Tax Expenditures Reform launched by IISD and partners seeks to support countries in increasing reporting and evaluation of incentives. 

You analyzed 35 different countries for the report The Use of Green Tax Incentives for Renewable Energy Deployment. What trends did you spot in terms of countries’ use of tax incentives to drive green investment? 

Our analysis reflects trends among smaller EMDEs (excluding larger emerging economies such as China, India, or Brazil), where governments are increasingly using tax incentives to attract private investment into clean energy but are often challenged by limited fiscal space, weak targeting, and inconsistent implementation. 

These countries continue to rely on profit-based tax holidays, which tend to be less effective in stimulating renewable energy investment. These incentives only apply once firms become profitable, yet in many lower-income markets, renewable projects often face long development timelines, grid connection delays, and high financing costs, which postpone or reduce taxable profits. 

However, we also observe a gradual shift toward targeted, cost-based measures, with more countries adopting investment tax credits, accelerated depreciation, VAT exemptions, and import duty relief for renewable energy components—policies that are more likely to be cost-effective and better aligned with climate objectives. 

What did you find on the design of these tax incentives?

The design of these tax incentives varies widely, and policy fragmentation remains a major issue. In many countries, incentives are scattered across investment laws, tax codes, and special economic zone legislation, creating complexity for investors and tax administration, and increasing the risk of overlapping or duplicate incentives. Very few countries include clear eligibility criteria, performance conditions, or sunset clauses. 

Most incentives we analyzed were open-ended and did not require any reporting on energy generation, job creation, or emissions reductions. Without reporting requirements, governments have no reliable basis to assess whether tax incentives are delivering value for money or contributing to climate and development goals. As a result, it becomes difficult to evaluate tax expenditures, compare their cost-effectiveness against other policy tools, or justify their continuation when public finances are already squeezed. 

Fresh data shows that, at the global scale, investment in renewable technologies and projects reached a record. To what extent have tax reforms helped make that happen, and what can EMDEs learn from it? 

Indeed, global investment in renewable energy reached a record USD 2.1 trillion in 2024, up 11% from the previous year. Much of this growth came from large emerging economies. 

China alone accounted for over one-third of global clean energy investment in 2024, and India is consistently among the top 10 countries for renewable energy investment. 

 

While it is difficult to isolate the specific impact of tax incentives, countries that combine fiscal measures with broader policy frameworks such as clear renewable energy targets, grid investments, and stable power purchase mechanisms tend to attract the highest levels of renewable energy investment. This has been an instrumental strategy in China, the European Union, and the United States, where extensive renewable energy support measures are in place. 

Other successful strategies include those of India, which used accelerated depreciation, GST reductions for renewable components, and tax holidays in earlier phases to rapidly scale wind and solar, and South Africa introduced a 125% tax deduction for businesses investing in renewables, helping unlock new private sector projects during its energy crisis. This measure complements the Renewable Energy Independent Power Producer Procurement Programme, which awards long-term power purchase agreements through competitive auctions to provide investment certainty. Together with other renewable energy fiscal policies, these initiatives illustrate how combining fiscal incentives with clear procurement frameworks can effectively mobilize private investment and advance broader development goals. 

The United States showed how powerful tax incentives can be when combined with industrial strategy through the Inflation Reduction Act, which used production and investment tax credits to crowd in manufacturing and deployment. 

The global trend also shows that successful countries adapt their tax incentives over time. China initially relied heavily on VAT rebates and tax holidays to build its solar manufacturing base but has gradually phased these out as the industry became globally competitive. India has taken a similar path, unwinding broad tax breaks as its renewables market matured and shifting toward more targeted measures, like reverse auctions for deployment of renewables and production-linked incentives, viability gap funding, and concessional lending for manufacturing. 

This evolution highlights an important principle: tax incentives should be temporary, targeted, and tied to performance, not permanent giveaways. For EMDEs, this is especially critical given limited fiscal space and competing public priorities. Incentives must therefore be designed to catalyze private investment without compromising revenue sustainability, ensuring that scarce public resources are used efficiently and can continue to support essential development and social spending.