Climate Finance
Cost of capital
The return investors require to fund a project, which determines whether a long-dated activity is viable.
Cost of capital combines the risk-free rate with a premium for the specific risks of an investment. Long-lived, uncertain activities attract higher premia, which is why nature-based projects struggle to compete.
De-risking instruments — floors, guarantees, offtakes, insurance — work by lowering that premium. Much of climate finance design is, in practice, an exercise in reducing the required return.
Frequently asked questions
Why does it matter more for removals?
Because costs are front-loaded while revenues arrive years later, so the discount rate dominates the economics.
Can policy lower it?
Yes, through guarantees, stable regulation and credible long-term demand signals.