Financial incentives to poor countries promote net emissions reductions in multilateral climate agreements

Reducing global greenhouse-gas emissions needs global cooperation and will have a positive and profound impact on sustainable development. Climate agreements, in line with the UNFCCC, encourage developed countries to provide funds to help developing countries adapt and mitigate. However, up to now, no financial incentive (FI) has been implemented, and it remains unclear to what extent FIs can increase net emissions reductions (ER). Here we investigate a restrictive form of FI, employing both behavioral experiments and game theoretical analysis. We show that FIs significantly increase both ER and social welfare in the absence of any binding enforcement. We also find that the more developed countries invest in FIs, the more developing countries mitigate. This induces developed countries to incentivize developing countries to adapt and mitigate via FIs, resulting in a net global increase in ER. Our results are robust to different monitoring periods, loss probabilities, and mitigation cost ratios.