How can public finance unlock climate investment in contexts where risks are high and markets are still emerging? At the Mitigation Action Facility, grants are an important instrument in addressing this challenge – and they are increasingly combined with other financial mechanisms. By reducing risks, enabling first movers, and supporting early market development, they help lay the foundation for future private sector investment.
This news piece is the first in a series exploring the financial mechanisms of projects supported by the Mitigation Action Facility, starting with its most widely used instrument: grants.
A cornerstone of the portfolio
Grants currently represent a significant share of the Mitigation Action Facility’s Financial Cooperation (FC) portfolio. While other instruments such as guarantees and concessional loans are gaining importance, grants continue to play an important role – particularly when combined with commercial finance – due to their flexibility and effectiveness in addressing investment barriers in partner countries.
In practice, grants are far from uniform. Different types are used to respond to barriers along the investment chain: from early-stage project preparation to incentivising measurable results or supporting market uptake.
Addressing barriers through different grant types
The majority of grants take the form of CAPEX grants, which support upfront investment costs for climate technologies. They are particularly effective in contexts where high initial costs and uncertain returns discourage investment. By absorbing part of this risk, CAPEX grants can enable pioneering projects to move forward in contexts where risks would otherwise be too high.
Other grant types serve more specific purposes. Results-based grants link disbursements to verified outcomes such as emissions reductions or waste recycling, while rebate schemes and price subsidies help reduce costs for end users and accelerate the uptake of green technologies. A smaller share of Technical Cooperation (TC) grants supports early-stage activities such as feasibility studies or technical assessments, often a prerequisite for unlocking finance further down the line.
CAPEX grants in action: transforming Mexico’s housing sector
The impact of CAPEX grants becomes particularly clear when looking at concrete project examples. One such case is the Mexico – Housing project, which illustrates how targeted grant support can go beyond individual investments to transform entire markets.
This example illustrates how CAPEX grants can act as a catalyst for market development, rather than simply subsidising individual investments, when well-targeted and embedded in a broader financing and policy ecosystem.
Lessons learnt: the limits of grants alone
Experience across the portfolio shows that grants are a powerful tool, but not sufficient on their own to drive investment at scale. In several projects, delays in engaging financial institutions or overly optimistic assumptions about market demand have slowed implementation and limited investment uptake.
This underlines the importance of strong project design. Financial incentives need to be aligned with local market realities, target groups must have the capacity and willingness to engage, and private sector actors need to be involved early on. Without this, even well-designed grant schemes may not translate into actual investment.
Perhaps most importantly, CAPEX grants alone are often insufficient to mobilise private finance at scale. Their effectiveness depends on how well they are embedded within a broader financial structure and whether they are combined with complementary instruments.
Looking ahead: towards blended finance approaches
Across the portfolio, there is a clear shift: moving from grant-based approaches towards more diversified financial structures that better mobilise private capital. The role of grants within the Mitigation Action Facility is evolving, increasingly moving towards a more diversified and market-oriented financial approach. Rather than acting as standalone funding, they are more and more being used as part of broader blended finance approaches aimed at mobilising additional capital and ensuring long-term sustainability.
The objective is clear: to move from grant-supported pilot projects towards self-sustaining markets for climate investment; where public finance acts as a catalyst rather than the primary driver.
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