On Monday, G7 leaders in Germany reiterated their determination to mobilize USD 100 billion per year in developing countries by 2020, a commitment originally made by developed countries six years ago at the international climate negotiations in Copenhagen. They also announced initiatives to increase to 400 million the number of people in the most vulnerable developing countries covered by insurance against climate impacts by 2020, and to support the development of renewable energy in Africa and other developing countries to reduce energy poverty.
While decisions on what is included in the USD 100 billion will be taken at the international climate negotiations in Paris later this year, the experience of the last six years offers lessons to political leaders at the G7 on what developed country governments could do to ensure the USD 100 billion goal is met on time and how they can ensure the finance mobilized has the maximum possible impact in terms of helping developing countries achieve low-carbon, climate-resilient growth.
Today, flows of climate finance in developing countries have increased but still fall short of this goal. Significant new sources of international climate finance have emerged. Some sources that were expected to play a large role back at the beginning of the decade – like revenues from a global carbon price – haven’t come to fruition. Others are performing above expectations.
In 2013, public climate finance flows from developed to developing countries reached USD 32 billion, 10% of global climate finance captured. Bilateral agencies and development finance institutions chanelled USD 26.5 billion of this. Multilateral development banks and climate funds also played an important role, and with the pledges made to the Green Climate Fund and the new Asian Infrastructure Investment Bank in the process of being set up, these banks and funds will play an increasing role in future. USD 2 billion in renewable energy project investments flowed directly from private investors in OECD countries to developing countries in 2013.
In total, that makes USD 34 billion that we can track. The true figure is undoubtedly higher – data gaps in some sectors make it impossible to see how much private investment is flowing from developed to developing countries – but it is clear that public institutions such as bilateral agencies, bilateral development financial institutions, and multilateral development banks play a pivotal role channeling and mobilizing resources. So what lessons can developed countries – including G7 members – draw from these results and the experience of the last years?
1. As shareholders of development finance institutions, developed countries should require them to integrate climate considerations into all development activities. By ensuring their activities are consistent with climate goals, these institutions could achieve climate co-benefits, policy coherency and better value for money.
2. Countries should consider providing grant finance to build technical capacity and to encourage investment in climate resilience, in particular. In countries and markets where private investors are not yet investing, grant finance plays an important role by helping governments to develop the policy frameworks that enable private investments, by demonstrating the benefits of climate-resilient investments, and by building private actors’ capacity to evaluate and make those investments. Experience shows that predictable regulatory and economic frameworks are essential to mobilizing private investment which provides the majority of climate finance globally. This is particularly true for adaptation policies, which tend to lag behind those for mitigation.
3. Public institutions should provide risk instruments to attract private investment. Bilateral and multilateral development financial institutions and export credit agencies have expanded the coverage of risk mitigation instruments such as guarantees, political risk insurance, foreign exchange risk coverage, and insurance so that they are now lowering the risks, reducing the costs, and improving the returns of climate investments. However, these instruments are still used more often for high-carbon rather than climate-friendly investments. This should change. Evidence shows that where investors can balance risks and returns, private finance will follow.
4. Both the public and private sector must continue to improve understanding of how public and private interests can be aligned to most effectively mobilize finance for climate investments. A number of initiatives are working to track private climate investments and to better understand the connection between public and mobilized private finance. This should further improve understanding of how public and private interests can be aligned to most effectively mobilize finance for climate investments, and how effective policies and instruments are in balancing risks and returns of climate investments.
The capital exists to achieve a wider global transition to a low-carbon and climate-resilient future. Mobilizing it will, however, require public, private, international, and domestic financial resources to shift from a high-carbon to a low-carbon economy. Whether scaling up finance to meet the USD 100 billion commitment, or for wider low-carbon investment needs, success will depend on the willingness of governments around the world to show strong leadership to align policies, pricing signals, and financial instruments to chart a path towards a low-carbon and climate-resilient future. It will not necessarily be easy, but it is possible. A prosperous future depends on it.