In Cancun, United Nations climate negotiators agreed to create a Green Climate Fund, which will channel part of the $100 billion a year pledge of international financing for climate change mitigation and adaptation. A Transitional Committee tasked with designing the Green Climate Fund has been meeting for the past few months and is expected to complete its work in time for the next UN climate change meetings in South Africa this November. One of the big issues being debated is the role of private sector finance and investment in the Green Climate Fund.
In a recent paper, I offer advice to the Transitional Committee and argue that there is a strong case for the Green Climate Fund to support private sector investment in the move toward a low-carbon, climate resilient or ‘climate compatible’ future.
Currently, there are certain barriers to private sector investment, such as country and currency risks, sector specific barriers, knowledge and capacity gaps, and technology cost gaps. Here are my thoughts on how to overcome these barriers, including using international public funds to:
- Put in place a strong enabling environment
- Support early entry projects that will be of sufficient scale to help transform markets and thus pave the way for further private investment, and
- Catalyze private capital with innovative tools that will attract the private sector as an investor at scale
I suggest four structural options that the Green Climate Fund can use to take advantage of some or all of these strategies:
- Option 1, the GCF would support the public sector efforts to strengthen the enabling environment.
- Option 2, the GCF could also support country-based private sector operations, but within the same windows that the public sector would access for support.
- Option 3 provides for a dedicated Private Sector Window that would focus on reaching scale by combining country-based private sector operations with support for emerging innovative modalities— like investment in private funds— to scale up access to private capital.
- Option 4 combines options 2 and 3.
Given the focus on the importance of maximizing private sector investment and leverage, options that support developing an enabling environment that allows both country-specific private sector operations and innovation to catalyze private capital have particular merit. Option 2 has an emerging track record under the Clean Technology Fund and can be introduced into the Green Climate Fund relatively easily. However, if the Green Climate Fund is looking to make significant breakthroughs, providing a focus on private sector leverage and innovation through either Option 3 or 4 should be seriously considered by the Transitional Committee.
In next few months, climate scholars including myself will be looking more deeply at barriers to private sector investment across different regional, institutional, sector and market settings. We will consider and assess additional ideas and options that come from planned stakeholder consultations and examine the opportunities from the strategies and options outlined in the paper against a set of a set of principles and metrics. We are planning to release a set of practical and implementable recommendations before the UN climate change meetings in South Africa later this year.