New Study on Private Financing of Adaptation/Mitigation Climate Change Efforts

While the outcome of the 15th COP in Copenhagen was clearly disappointing on a number of levels, one of the most propitious developments was the commitment by developing countries in the Copenhagen Accord to provide $30 billion in short-term (2010-2013) funding, and $100 billion annually in long-term funding by 2020 to meet the adaptation/mitigation needs of developing countries. However, developed States in the past have often abjectly failed to meet such commitments, both in the context of climate change funding and in other areas, e.g. reconstruction aid. The Copenhagen Accord and many independent analysts have acknowledged that the private sector funding may play a critical role in helping to effectuate this commitment. A new statement by the Institutional Investors Group on Climate Change (IIGCC), a forum for collaboration on climate change by European investors representing assets of approximately 4 trillion euros, outlines a number of potential avenues for stimulating market-based financing of mitigation/adaptation projects in developing countries, Non-Carbon Market Financing Mechanisms for Climate Change Mitigation and Adaptation in Developing Countries (2010). The four page publication provides an excellent overview of a topic that I believe is often under-emphasized in climate courses, the potential role of the private sector.

Among the take-aways from the Statement:

  1. Carbon markets and the Clean Development Mechanism will not provide sufficient financial flows to meet all of the mitigation and adaptation needs of developing countries;
  2. While large-scale private investment for mitigation measures in developing countries might be facilitated by the development of the proper institutional framework, most adaptation funding in the immediate future will likely ahve to continue to come from the public sector;
  3. Private investments are already being made by IIGCC members in some of the largest emerging markets, including energy efficiency and biomass power generation in China, ethanol production in Thailand and renewable energy projects in India. However, many investors still perceive these emerging markets as high risk, including the threat the emission reduction targets may be weakened or renewable energy incentives curtailed;
    • An international framework linked to national action plans could be formulated to reduce risk; the international system could register, oversee and review national action plans and offer support and advice to design and implement effective national policies.
  4. Developing countries can optimize their investment environment through policies that foster, inter alia, stability and transparency of the rule of law, develop effective standards of corporate governance, and ensureĀ  the sanctity of contracts;
  5. Public sector initiatives can help to catalyze private sector investments. UNEP’s experience with public financing mechanisms shows leverage rations ranging from 3-15; thus, $10 billion in private funds could leverage $50-150 billion in private investments for mitigation and adaptation activities;
    • Mechanism could include credit lines to local commercial financial institutions, debt financing, private equity funds and technical assistance;
  6. Bonds guaranteed by OECD countries could also generate funds for climate change activities, though the yields would need to be competitive with other government bonds and would need to be liquid. Investors will also expect credible evidence that tangible climate benefits are being delivered.

Some possible discussion questions that might be relevant include the following;

  • Are there any potential downsides to encouraging substantial private investments to address climate change?
  • Given the insistence of developing countries to having mitigation and adaptation assistance funding funneled through multilateral mechanisms which they have substantial input into, how would they likely respond to some of the proposals in the statement?
  • What is the role of the UNFCCC in facilitating the proposals outlined in the Statement?

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