Private Capital to Finance Climate Change

The latest World Bank calculations of the cost of climate change mitigation and adaptation confirm previous studies by the UN, and the recent IIED report, that there is a crisis in climate change funding. Even if the global economy were in a healthier shape, the challenge of covering the costs of weaning it off greenhouse gas emitting technologies and adapting to the already changing climate would be enormous.

Developing countries are facing the most acute difficulties. More socio-economically vulnerable to climate change than industrialised countries, and with less financial and technical capacity to adapt, developing countries also face the greatest barriers to changing their carbon-dependence to a more sustainable, yet still developmental, course. Again, lack of financial and technical capacity play a fundamental role.

Diverse stakeholders in the development and environment sectors have made their opinions heard in the lead up to Copenhagen. Governments must make unprecedented commitments to increase climate change funding to developing countries. But given the figures – WB estimates mitigation costs in developing countries at $140 – $675 billion and adaptation costs at $75 billion (an underestimate according to IIED’s report), while presently available funding stands at $8 billion and $1 billion respectively – it seems futile to expect public finance to be able to cover these costs.

The potential for private capital to play a leading role is not only seemingly necessary but, maybe surprisingly, it looks feasible. Given the right incentives by inter-governmental policy, private investment in clean technology development (for mitigation) and alternative economic activities (for adaptation) could make for an attractive profit-making proposition. A strong commitment to tax dirty businesses and possibly also dirty investment across borders, multi-laterally guaranteed bonds hedging otherwise risky clean investment (in otherwise risky countries), and the widespread adoption of a ‘green rating’ akin to credit ratings to help with signaling are all instruments that governments could agree on in December to push their limited public coffers to stimulate private capital not only to foot the bill, but also turn a profit.

In any case, a desperately needed first step to stimulate privately financed climate change mitigation and adaptation is a firm commitment signal from leaders in December. Policy over-shooting is probably a good way of sending that signal, though it must avoid regulation that might constrict the formation of mainstream green markets.


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