There is a strong case for the Green Climate Fund to support private sector investment in the move towards a low carbon, climate resilient – or ‘climate compatible’ – future. To have a chance at maintaining the climate at two degrees over pre-industrial levels, economies will need to transform. This implies significant investment in both mitigation and adaptation to help move countries onto climate compatible pathways. The public sector has a critical role in setting goals, building the enabling environment, and investing in research, development and public infrastructure in ways that support the transition. But businesses and households will be responsible for the bulk of the investment needed, and will need access to finance.
Private sector investors will deploy their capabilities and capital on low-emission investments only to the extent that risk-adjusted returns are positive and competitive. Investors look to countries with good investment climates and well-developed capital markets where the regulatory environment and pricing signals are clear and stable. These elements are not in place in many developing countries where country and currency risks, uncertain sector regulations, execution risks, capacity and knowledge gaps deter investment. Even if these barriers to investment can be addressed through risk reduction mechanisms, technology cost gaps between high and low-emission alternatives remain in many sectors, particularly in the absence of a price on carbon.
Thus far, international public funds have been used to provide subsidies to the private sector through concessional loans or grants to close the technology cost gap, but in amounts that are far below what is needed. While stepped up funding will be needed as an important bridge, this approach will not be sustainable over the longer term. Climate finance that focuses on closing the cost gap should have a clear transformative intent of achieving sufficient scale to reach environmental, economic and financial sustainability. Climate finance should be used to accelerate the reduction in technology costs or provide a pathway for policy and/or international markets to price carbon or fully internalize environmental costs associated with greenhouse gas emissions.
This paper outlines the need for, and barriers to, private sector investment, and presents a range of complementary strategies for overcoming these barriers including:
- Putting in place a strong enabling environment
- Using public funds to support early entry projects at the country level that will be of sufficient scale to help transform markets and thus pave the way for further private investment
- Catalyzing private capital with innovative tools that will attract the private sector as an investor at scale