By Center for American Progress
November 2, 2010 - Finance is central to
international negotiations on climate change. The 1992 United
Nations Framework Convention on Climate Change (UNFCCC) obliges
industrialized countries to help the developing world meet the
costs of reducing greenhouse gas emissions.
However, no agreement has yet been reached concerning the
overall sum of developing country climate costs or how finance
should be raised and spent.
The Copenhagen Accord, supported now by more than 120 countries,
states that, 'developed countries commit to a goal of mobilizing
jointly $100 billion a year by 2020 to address the needs of
developing countries'.
While this sum falls short of credible estimates of 2020
developing country costs and the Accord does not state how the
finance will be raised, it is now taken by many to represent an
international climate financing target.
Perhaps because of existing obligations under the UNFCCC, the
debate about how and how much climate finance will flow from
developed to developing countries has always been highly
politically charged.
A solution to the capital problem is fast becoming the holy
grail of clean energy financing. The United Nations Advisory Group
on Finance-charged by Secretary-General Ban Ki-moon with analysing
how $100 billion of climate finance might be raised - will report
within the next few days.
It examines a range of proposals and options, but is expected to
argue that 'careful and wise use of public funds in combination
with private funds can generate truly transformational investments'
and calls for further work in this area.
In terms of mechanisms to leverage private finance, the study
proposes five mechanisms that could be used by individual developed
country govern-ments or an international climate fund to help
developing countries access private capital. These are:
1. Loan guarantees. Governments agree to underwrite loans to
clean energy projects with taxpayers' money to safeguard the
private investor against defaults.
2. Policy insurance. Governments could insure investors against
the risk of policy uncertainty. They could do this through standard
insurance or by issuing 'put' options that they would buy back if
policies changed.
3. Foreign exchange liquidity facility. Governments can offer
credit to help guard against risks associated with currency
exchange fluctuations.
4. Pledge fund. A developed country government-backed fund that
would identify and analyse smaller, relatively low-risk clean
energy projects and offer these to investors that would pledge to
invest a set amount of equity capital up front.
5. Subordinated equity fund. For higher risk clean energy
projects, a government-backed fund would invest a proportion of the
equity but receive returns last.
GCN estimates that for every US$1 of public finance invested,
between US$2 and US$10 could be leveraged from the private sector
by using these mechanisms. A GCN-Center for American Progress paper
containing a greater level of detail on these mechanisms is
published alongside this summary.
Continue reading
Read the full report (pdf)
Download the executive summary
(pdf)