Transport is a key driver of socio-economic prosperity and livelihoods, enabling passenger and goods movement, powering international trade, and safeguarding rapid crisis recovery. In 2021, the transport sector contributed 7% (USD 6.8 trillion) of the global GDP and employed 5.6% of the world’s workforce (193 million people) [1]. However, transport is also the second-largest greenhouse gas (GHG) emitting sector, accounting for roughly 15.9% of global GHG emissions and 21.9% of total CO2 emissions in 2023. To safeguard the sector’s critical role in our societies and economies, transport systems worldwide will have to undergo significant transformations to become more sustainable, low-carbon, equitable and resilient. Central to these will be fundamental changes in how transport is financed, be it through public or private finance, and how economic instruments, such as subsidies and taxes, are applied in the sector.
2025 is a pivotal year on the global climate and transport policy agenda, presenting a timely opportunity to act upon the needed reforms. This year will not only see the submission of countries’ third rounds of Nationally Determined Contributions (NDCs) to the United Nations Framework Convention on Climate Change (UNFCCC) but will also host the 30th Conference of the Parties under the UNFCCC (COP30), in Belém, Brazil, and mark the eve of the UN Decade of Sustainable Transport set to launch in 2026. Against this backdrop, this article examines the current climate finance and economics landscapes in transport, highlighting their role as both critical bottlenecks but also enablers for the sector’s transformation in line with the objectives of the Paris Agreement and the 2030 Agenda for Sustainable Development with its Sustainable Development Goals (SDGs).
Transport as a key element of the sustainability equation
Last year, the planet reached a record high of 421.73 parts per million [2] and was confirmed as the warmest on record, with the average global temperature exceeding 1.5° Celsius above pre-industrial levels [3]. According to modelling exercises, achieving transport pathways that put us back on track to meeting the 1.5° Celsius target of the Paris Agreement will require a 59% reduction in global transport CO2 emissions by 2050 compared to 2020 levels. Significant emission reductions of over 80% would need to be achieved by road transport (light-duty and heavy-duty vehicles), rail and shipping combined [4].
Under business-as-usual scenarios, however, transport activity is projected to nearly double by 2050, rising 1.8 times for passenger transport and 2.0 times for freight transport compared to 2019 levels [5]. Without more ambitious policies towards structural and systemic transformation, transport CO2 emissions could grow as much as 50% by 2050, putting at risk the achievement of global agendas [6]. The fact that collective progress is insufficient to place us on track to meeting the 1.5° Celsius target has also been reaffirmed by the first two rounds of NDCs, which outline countries’ commitments to reducing emissions and adapting to climate change. Globally, the first-generation NDCs of 2015 were projected to result in an increase of 3.7°Celsius above pre-industrial levels by 2100, and the second-generation NDCs (of 2020) to an increase of 2.5°Celsius to 2.9°Celsius [7] [8].
The periodic stocktake of collective progress towards set global climate objectives is also formally foreseen under the Paris Agreement. The first global stocktake (GST) decision [9] adopted at COP28 in Dubai, United Arab Emirates, in December 2023 encouraged countries to submit “economy-wide” NDCs by 2025 (also referred to as “NDCs 3.0”). Importantly, it also urged the need to accelerate “the reduction of emissions from road transport on a range of pathways, including through the development of infrastructure and rapid deployment of zero- and low-emission vehicles” [10]. Besides these explicit references to the transport sector, the GST also critically signalled the need to “transition away from fossil fuels in a just, orderly and equitable manner to achieve net zero emissions by 2050” while also “phasing out inefficient fossil fuel subsidies”. As the most fossil fuels-dependent energy end-use sector, these references resonate strongly with the transport sector, while underscoring the importance of enacting structural reforms in the financing and economic mechanisms characterising it.
Transport will be an equally important piece of the 2030 Agenda for Sustainable Development [11]. While sustainable, low-carbon transport is not represented by a stand-alone Sustainable Development Goal (SDG), achieving the needed change of paradigm in the transport sector will contribute to nearly every SDG [12]. Out of the 17 SDGs, seven of them include specific targets relating to transport and infrastructure. Notable targets include improving road safety (SDG 3 on health), enhancing access to safe, affordable, accessible and sustainable transport systems and expanding public transport (SDG 11 on sustainable cities), as well as phasing out fossil fuel subsidies and restructuring taxation (SDG 12 on sustainable consumption and production), among others [13].
Climate finance falls short of meeting transport decarbonisation and sustainability needs
Climate finance has been a contentious issue in climate policy over the past decades, with ongoing debates over how best to facilitate its accessibility, distribution and effectiveness. Whereas global climate finance has nearly doubled between 2010 and 2020, to make up 1% of global GDP; it remains largely insufficient and inconsistent across regions [13]. Less than 3% of total global climate finance is directed to the least-developed countries, where it is most needed [13]. The challenges are particularly evident in the transport sector, which, despite receiving approximately 29% of total climate finance, faces the largest investment gap of any sector [14] [15]. This is further compounded by the transport sector’s capital-intensive nature and long infrastructural life cycles, which in turn, mean that any financing and investment decisions will have implications for decades to come.
It is projected that clean transport solutions will cost roughly USD 2.7 trillion annually between now and 2050 – an amount that constitutes seven times the current spending on transport [15]. In reality, the magnitude of the shortfall is likely to be much greater if the critical financing needs linked to workforce development are to be factored in. Moreover, most estimates exclude adaptation and resilience needs, focusing solely on emission reduction efforts. Accounting for the financial costs linked to climate-proofing transport infrastructure assets, alongside the financial costs of loss and damage from extreme weather events, like reconstructing rail infrastructure after flooding, will result in a substantially larger climate finance gap. Natural hazards inflict an estimated USD 15 billion in direct damage to transport systems annually, with low- and middle-income countries (LMICs) bearing around USD 8 billion, the highest costs relative to GDP [11].
The investment gap is especially pronounced in LMICs, where many transport systems are still developing. These countries face challenges in attracting international climate finance due to macroeconomic and political instability, high interest rates, rising debt levels, and limited technical capacity to develop bankable projects. As a result, substantial investment gaps in transport infrastructure are projected for 2040, amounting to an estimated USD 0.8 trillion for Africa and USD 1.6 trillion for Asia [16] [11].
Against this backdrop, the 2024 UN Climate Change Conference (COP29), held in Baku, Azerbaijan, was a missed opportunity in terms of setting a new ambitious climate finance target. Notwithstanding the high expectations from the widely dubbed “Finance COP”, developed countries only pledged to contribute USD 300 billion by 2035 to developing countries starting from 2026. In addition, all actors are supposed to scale up financing from all public and private sources, amounting to at least USD 1.3 trillion per year by 2035 [17].
Despite tripling climate finance to developing countries from the previous goal of USD 100 billion annually, the newly agreed-upon climate finance goal falls significantly short of meeting developing countries’ calls for the trillions required, while allowing developed countries to sidestep their responsibilities in committing long-promised public resources. As a result, the majority of the agreed-upon financing at COP29 will rely on private investment and alternative sources, both of which carry uncertainties regarding their realisation.
Aside from its insufficient quantity, the goal has attracted criticism regarding its qualitative criteria. For instance, the new goal is not accompanied by minimum allocation floors for sub-groups of developing countries (e.g., small island developing states), and neither does it set sub-targets for mitigation, adaptation and loss and damage. Moreover, there are no obligations to prioritise grants over loans, and no safeguards are established to preclude investments in fossil fuel infrastructure from being classified as “climate finance”. The combination of these factors results in little guarantee that the much-needed finance for the transition to sustainable and low-carbon transport will be delivered at the speed required to meet the Paris Agreement and the SDGs [11].
Current economic mechanisms do not work in favour of sustainable, low-carbon transport
As implied above, climate finance does not operate in a vacuum, and its effectiveness is strongly influenced by various factors, including the regulatory frameworks and economic mechanisms that it is embedded in. In transport, economic mechanisms are generally used to refer to the regulatory tools (vehicle emission regulations) and market-based instruments (taxes, charges, and tradable permits) that create financial incentives or disincentives for the sector’s decarbonisation and sustainability. Economic mechanisms also cover economic appraisals, which is a key approach to back funding decisions. As such, these economic mechanisms are paramount to determining what transport infrastructure and services are made available, as well as to shaping users’ choices both in passenger and freight transport.
However, the reality is that existing economic mechanisms—such as fossil fuel subsidies, tax exemptions for highly polluting transport modes, and ‘free’ parking—often hinder the sector’s desired transformation. Such distortive economic mechanisms are also to blame for the significant “externalities” generated by conventional transport systems, which manifest themselves in the form of CO2 emissions, health-damaging air and noise pollution, crashes, congestion, and habitat damage, among others. The enactment of frameworks that accurately reflect the full costs of each transport mode on society and the environment will be crucial to guiding transport users, market forces, and investments towards low-carbon, sustainable transport options.
Fossil fuel subsidies are one particularly counterproductive economic mechanism in the efforts towards net-zero by 2050. They can take the form of direct transfer of funds (e.g., grants, loans, equity infusion), government revenue foregone or not collected (e.g., fiscal incentives such as tax credits); or the provision of goods or services other than general infrastructure [18]. According to the International Energy Agency, fossil fuel consumption subsidies account for approximately 13% of global CO₂ emissions. These subsidies primarily cover government support for primary fossil fuel commodities such as crude oil and natural gas, as well as secondary refined products like diesel, gasoline, liquefied petroleum gas, and liquefied natural gas. Data from multiple sources indicate that the global value of fossil fuel subsidies exceeded USD 1.5 trillion in 2022, marking an increase of more than 150% since 2020. This figure surpasses the estimated annual investment required in the transport sector of LMICs to achieve net-zero emissions by 2050. Furthermore, fossil fuel subsidies undermine global climate mitigation efforts by artificially lowering the cost of fossil fuels, thus making highly polluting transport modes more economically attractive compared to cleaner alternatives. This not only raises public health costs by contributing to the deterioration of air quality in urban centres but also diverts scarce public financial resources away from more sustainable alternatives, such as public transport and active mobility infrastructure.
A key challenge in regard to infrastructure investments is the nature of economic appraisals, which traditionally focus on direct costs and benefits—primarily travel time savings—while overlooking externalities such as air pollution from vehicle emissions. As a result, these evaluations often favour investments in private motorisation, and single-mode transport solutions over public, shared and multimodal transport alternatives. This narrow approach also impedes the scaling up of investments that promote equitable transport access and deliver broader societal and environmental benefits. Evolving these appraisal methods is essential for redirecting and scaling up investments toward more sustainable, low-carbon transport solutions [19].
A bold overhaul of climate finance and economic frameworks is urgently needed
With the window to limit global warming to 1.5° Celsius rapidly closing, it is crucial for project sponsors, policymakers, financial institutions, and the private sector to collaborate and take immediate action by investing in sustainable, low-carbon transport [20]. Looking ahead to the next five years of implementation of NDCs 3.0, all stakeholders will need to increase mitigation and adaptation funding for sustainable, low-carbon, and resilient transport, and ensure a just transition in defining avenues to close the climate investment gap in transport. The so-called “Baku to Belém Roadmap”, launched at COP29, will seek to bridge the gap between the 300 billion pledged and the 1.3 trillion called for by developing nations. Sustained pressure will be paramount in the lead-up to COP30 to ensure that sustainable transport is adequately reflected in the eligibility criteria for climate finance.
Besides encouraging ambitious transport commitments, backed by sufficient financial resources, NDCs 3.0 should promote broader financial reforms to enable the needed transformations in transport. A complete overhaul of counteractive economic mechanisms will be necessary to meet the targets of the Paris Agreement. For instance, to ensure that transport investments align with sustainability goals, policymakers must reform conventional economic appraisal frameworks by 1) establishing suitable policy and institutional frameworks, 2) standardising comprehensive and integrated economic appraisal approaches and tools, 3) building multi-stakeholder engagement in the economic appraisal process, and 4) quantifying and monetising all costs and benefits that accrue from the implementation of different projects [19].
Shifting to new approaches to economic appraisals based on broad sustainability criteria will also be key to demonstrating how, for example, public transport, walking and cycling offer a high return on investments. To illustrate, a transport system based on public transport, walking, and cycling requires half of the transport spending from governments and individuals compared to a car-centric system, even before accounting for improved health and increased productivity. Moreover, integrated public transport, walking, and cycling solutions significantly reduce CO₂ emissions at a lower cost per unit of reduction compared to individual projects. Even on their own, such projects provide substantial economic value; for instance, every USD 1 invested in public transport generates USD 5 in economic returns through job creation, emissions reduction, and lower community costs, 28 times less than private vehicle costs.
Given this evidence, governments must redirect fossil fuel subsidies, which overwhelmingly benefit private, fossil fuel-powered transport, to bridge the financing gap for sustainable transport solutions across both the passenger and freight segments. Research suggests that eliminating all consumer fossil fuel subsidies could cut global carbon emissions by 6.4–8.2% by 2050 [21]. The provision of a clear political signal to operationalise the transition away from fossil fuels, building on the first GST decision, will be key to encouraging countries to stand behind their pledges and plan for the phase-out of fossil fuel subsidies in transport. This, in turn, stands to create much-needed fiscal space to redirect funds towards sustainable, low-carbon and resilient transport infrastructure and services and increase the use of renewable energy in transport. The Coalition on Phasing Out Fossil Fuel Incentives, launched at COP28, provides a critical platform for advancing this agenda.
Conclusions
2025 marks key milestones in global climate action: the third round of NDC submissions, the tenth anniversary of the Paris Agreement, and just five years remaining until both the SDGs deadline and the Intergovernmental Panel on Climate Change target to halve emissions. Moreover, 2025 is the eve of the UN Decade of Sustainable Transport. These milestones are not just symbolic—they offer critical opportunities to put an end to inefficient investments, avoid future costly retrofitting and accelerate systemic changes needed for transport decarbonisation. At the core of its transformation will be fundamental reforms in the financing and economic instruments that shape the sector.
NDCs 3.0, in particular, are critical opportunities for national governments to boost both mitigation and adaptation funding for low-carbon, sustainable and resilient transport while supporting broader financial and economic reforms. Besides the scarcity of financial resources, the transformation of transport systems is hindered by inefficient economic mechanisms, such as fossil fuel subsidies and tax breaks for highly polluting transport modes. Comprehensive reforms of such distortive economic mechanisms will be crucial to aligning the transport sector with the objectives of the Paris Agreement and the SDGs while helping to unlock critical new funding streams for the sector. The phase-out of fossil fuel subsidies, specifically, stands to release critical funding for sustainable transport, reduce public health costs from pollution, and ease fiscal pressure on governments. Another crucial reform will entail introducing new approaches to economic appraisals based on broad sustainability criteria, which demonstrate how sustainable, low-carbon alternatives, such as public transport, walking and cycling, offer a high return on investments.
These efforts can be embedded within the UN Decade of Sustainable Transport, which seeks to strengthen the links between all modes of transport to achieve the SDGs. This initiative presents a unique opportunity to elevate transport’s role in sustainable development and to mobilise innovative solutions, resources, and partnerships for a cleaner, more equitable transport future.
The authors.
By Teodora Serafimova, Policy Analyst, Nikola Medimorec, Director of Data Analysis and Research, and Genevivie Ankunda, Research Officer, SLOCAT
