How climate finance is implemented in developing countries too often ignores the fundamental issues of how we pay for the incremental costs of decarbonisation in the developing world, a new report highlights.
A study by European investor Climate Change Capital, Signal failure? Real economy signals for developing country climate finance and the future of the Green Climate Fund, said developing country finance has become too focused on the risk reduction mechanisms as the way to secure the investment needed.
The firm warned that if this approach does not change and the debate is not rebalanced, then the investment community will fail to shift capital commitments onto a green growth path.
Ben Caldecott, head of European policy at Climate Change Capital, said the presence of suitable domestic policies and international incentives was at the heart of successfully creating climate change projects.
‘Without these ‘real economy’ signals it will not be possible to deliver developing country investment at the scale and pace necessary to help tackle climate change,’ he said.
‘But efforts to create real economy signals in developing countries, such as through the international carbon market, are faltering at exactly the moment they are needed to scale up.’
He said the development of the new Green Climate Fund (GCF) was an opportunity to turn the tide and support the development of these ‘real economy’ signals for developing country climate finance.
The GCF was one of the main decisions to come out of the climate change conference in Cancun, Mexico in December and is meant to support climate change projects and policies, playing a critical part in meeting the goal of $100bn per year by 2020 for developing country finance.
But the report warned, ‘…only using the GCF to enhance the capital base of existing conduits risks missing an important opportunity to think about new mechanisms and vehicles.’
It said through new and innovative mechanisms – that include Emission Reduction Underwriting Mechanisms (ERUMs) – the GCF can leverage significant quantities of private capital.
These ERUMs would be temporary underwriting facilities, the report explains, that would create a guaranteed price for certain types of emission reductions with future delivery dates.
As such, a forward price curve would be created for projects against which investors would then be in a position to deploy capital against.
‘It is a tool that can enable significant private investment today, while maximising the leverage and effectiveness of public funds committed to the GCF,’ Climate Change Capital said.
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