WRI Launches Project on Climate Finance and the Private Sector
Submitted by Shilpa Patel on October 23, 2012
Experts estimate the cost of funding low-carbon development in developing nations to be about $300 billion annually by 2020. Photo credit: Flickr/Solar Electric Light Fund (SELF)The Intergovernmental Panel on Climate Change (IPCC) estimates that our best chance of containing global temperature rise to 2°C is to keep atmospheric concentration of carbon dioxide below 450 parts per million (we’re currently at 390 ppm). In addition to several other climate mitigation strategies, sticking to this cap will require significant new investment in low-carbon infrastructure and activities in developing countries.
Experts estimate the cost of funding this development to be about $300 billion annually by 2020, growing to $500 billion by 2030. The problem is, there’s a huge funding gap when it comes to meeting these costs—industrialized nations have only committed to mobilize $100 billion of new funds annually by 2020 to meet these needs. The world will need to figure out a way to come up with the rest of the funding if we’re going to prevent developing nations from feeling climate change’s most severe impacts.
Introducing WRI’s Climate Finance and the Private Sector Project
Tapping into the private sector is one way to bridge the climate finance funding gap. The World Resources Institute’s new Climate Finance and the Private Sector (CFPS) initiative has been designed to specifically address how the public sector can leverage private investment in a low-carbon future.
Private sector investors – individuals; private equity firms or venture capitalists; and larger institutional investors like pension funds, insurance companies, or sovereign wealth funds – currently control several trillions of dollars worth of assets. Financial institutions have the capacity to provide resources for infrastructure development and other activities. The challenge will be to channel these resources towards climate-relevant investments in developing countries, such as renewable energy and energy efficiency projects and other activities that help nations mitigate or adapt to climate change.
One way to make sure funds are directed to these kinds of investments is to improve the investment attractiveness of climate-relevant projects. This is where the public sector can play a significant role.
CFPS seeks to help the public sector understand and fill the roles it has to play in attracting private capital to low-carbon development projects, while also serving as a translator between private sector investors and public sector policymakers. The CFPS project will attempt to address the following questions:
What types of public support best address private sector needs?
How can the public sector ensure that private capital is leveraged at the lowest cost to the public while generating the greatest environmental benefits?
How can governments and public-private initiatives work together to leverage private capital in markets where access to finance is the most challenging?
How successfully have existing sources of finance from development banks, international mechanisms (like the Global Environment Facility and the Climate Investment Funds), and public-private funds leveraged private capital?
What lessons can be learned from past successes and failures?
Look for Our Series of Publications
The CFPS complements ongoing WRI research in areas related to climate change mitigation, adaptation, and finance. We aim to present our findings through a series of working papers that speak to the challenge of mobilizing private capital for climate-relevant investments.
Our first paper, Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Investment, is now available. This working paper frames the issue of leveraging climate-relevant private investments and provides context for the subsequent papers in the series. It outlines how the public sector can foster attractive investment conditions by addressing investment risks in developing countries through the targeted use of public financing instruments. For example, governments could correct energy-pricing distortions that work against renewable energy, directly assist low-carbon projects in a transition phase, or provide loan guarantees and other financial instruments that can help mitigate perceived investor risk.
The second paper in the series, Public Financing Instruments to Leverage Private Capital for Climate-relevant Investment, is forthcoming. This paper will examine some public financing activities, with specific reference to multilateral agencies such as the international climate funds and multilateral development banks. It will include case studies of how public financing institutions have worked together to increase private sector participation in a project.
Subsequent papers will look at the activities of other public institutions, including bilateral, national, and regional development banks; government agencies; and public-private partnership funds. By gaining a broad understanding of the instruments and mechanisms that have been employed to date by various agencies, we can learn lessons about how the public sector can best leverage private sector climate finance in developing nations.
You Can Provide Feedback
In addition to our series of working papers, we’ll be publishing short blog pieces like this one to provide snapshots of the work CFPS is doing and explore different aspects of the climate finance agenda. If there are specific topics you would like to see addressed in such a forum, please let us know in the comments section below. You may also contact Giulia Christianson (gchristianson@wri.org) or Aman Srivastava (asrivastava@wri.org) for more information.
4 Comments
This is indeed an important
This is indeed an important and timely area of work, as mobilizing private sector investment and innovation will be crucial both in mitigation, and adaption.
This is an excellent primer on the range of financing and de-risking instruments to improve the risk-return profile for low-carbon investments.
However, one area of disappointment (or perhaps anticipation for future studies..) is that although the paper does acknowledge the role of policy measures to address underlying risks, and public support mechanisms which provide guaranteed and visible revenue streams, it does not delve into how such mechanisms can best be blended with the with the capital-cost lowering instruments.
Some of the most interesting work on scaling up private sector investment, I think, are those initiatives working out how to make these 3 different approaches work together - as in the case of the Norwegian led Energy + Initiative, and Deutsche Bank's GET FiT initiative. The Center for Global Development's proposals for cash-on-delivery climate finance are also interesting.
Thank you for your comment!
Thank you for your comment! We are glad you found the Primer helpful - its purpose was to lay out the various structures and instruments currently used in financing low-carbon investment. You are right that it does not delve into specifics of the use of public policy to underpin or complement de-risking instruments, other than to acknowledge that public policy measures remain key. Such a discussion was deemed outside the scope of this particular paper.
However, as you rightly point out, some of the most informative work comes from understanding how the different elements of successful policy come together - and such lessons are often best learned through case studies. Forthcoming papers in WRI's Climate Finance Series will hopefully give you a flavor of successful initiatives that have been implemented across a range of countries, and help us all to better appreciate the complex play of policy, support mechanisms and de-risking instruments that is needed to deliver results.
WRI could not have chosen a
WRI could not have chosen a more important project at this pivotal time.
Important because, much of the investment in climate change mitigation projects is coming from development banks (regional and national) which are by default skewed towards large size projects. It would be a miracle to even find investment ready projects in most countries, let alone large size of project thus creating a gap which could be expored. Part of the fund could be directed towards a technical assistance facility to mature and prepare projects that are investment ready and also in tailoring financial structures to local needs. Now more than in the past there is pressure for project inflows to payback investment outside of carbon credit purchases for the simple reason that the carbon credit market has lost trust among investors and the EU ETS is yet to quench those doubts.
Timely because unless such interventions as you mentioned above are done, the post Kyoto era would be uncertain and unproductive. Such efforts will in a subtle way continue the discussion on climate change mitigation with tangible result and indirectly influence any post Kyoto legal structure.
Lastly, I was astounded as to how for example the successful 'forfeiting structure - where the beneficiary of the energy savings forgoes the reduced utility bill which in part pays back the loan' could not fit in another EU country having worked fine in Germany. The slightest of demographic and cultural aspects mattered. In the end I adopted a version from Denver, mixed it with the German forfeiting approach, discussed with local players and finally came up with a more acceptable and effective model.
Thank you for your comment on
Thank you for your comment on the blog. It would indeed appear that to date, much of the mitigation investment has taken place via larger projects; certainly transaction costs and processing timelines associated with development bank lending make it uneconomic to finance very small projects. But many development banks have been doing interesting work via local financial intermediaries, which allow them to reach a different audience and finance smaller projects.
The “forfeiting” models you refer to appears to be ESCOs (energy service companies) which undertake an energy efficiency investment in, say, a factory, without the owner having to front the investment costs. The cost savings that result are shared in some fashion between the owner and the ESCO. This is a very interesting model and is used in several countries in the developed world; however, its uptake in developing countries has, on the whole, been slow. In part this is due to inadequate legal frameworks and regulatory mechanisms to govern such transactions. But in part it is also due to a lack of awareness about such models.
WRI’s Climate Finance Series hopes to shed light on a number of climate finance issues, so stay tuned and watch this space!
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