Partnerships and financing. Issue 16

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POLICY BRIEF

Photo: Eskinder Debebe / UN

Progressive countries, including some of the world’s poorest, are acting to green their economies and build resilience to climate change. There’s also a growing appetite for investment in these areas. In 2012, governments and investors poured an estimated US$359bn into projects targeting low carbon and climate resilient development. But a closer look at the numbers reveals three big gaps: ● First, the sum invested to date is a tiny fraction of the trillions of dollars it will cost to decarbonize the global economy and adapt to the impacts of climate change. For developing nations, this gap is especially worrisome. Rwanda, for instance, estimates it faces a financing gap of approximately US$100m per year over the next 20 years

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Photo: Gerhard Jörén / World Bank

by NANKI KAUR, Senior Researcher in the Climate Change Group at the International Institute for Environment and Development (IIED)

for investments in climate resilience and green economy. ● Second, private investments dominate climate finance, accounting for 62% of the total. But most private finance both originates and stays in developed countries where investors are more comfortable with risks. This means developing nations need to target international sources of public finance to fill their funding gaps. ● Third, 94% of money invested in 2011 targeted mitigation – primarily renewable energy and energy efficiency. This trend has significant implications for the majority of developing nations which have low carbon emissions. They must instead prioritize adaptation and will support green economy initiatives only if they contribute to development objectives.

The challenge for developing nations is that the costs of making the transition to climate resilient green economies will be huge, and the actions needed come with

Intermediaries

First, these countries have started to recognize the roles of a range of intermediaries, such as multilateral development banks and national financial institutions, in mobilizing and disbursing climate finance.

There is also an increasing trend towards establishing national climate change funds such as those set up in Bangladesh, Ethiopia and Rwanda. These support a more programmatic approach to climate finance, drawing in funds from national and international sources and managing the money to best effect.

Rwanda’s fund has been designed to evolve as different sources of finance and new investment areas become viable. In the Photo: Lauren Day / World Bank

How developing nations can close climate finance gaps

very specific financing needs. On one hand, green economy initiatives have the potential to bring returns on capital investments and so can attract private finance. On the other, climate resilience is often a public good, and would ordinarily need public finance in the form of grants.

Over the past year the IIED has worked with seven countries – Bangladesh, Ethiopia, Kenya, Nepal, Rwanda, The Gambia and Zanzibar – to identify ways public sector actors can respond to this context and the emerging appetite for investment in these areas. In March 2014, policymakers met in Addis Ababa and identified the following three steps: