8
World Bank Study
investments which require low upfront capital, thus displacing other important clean investment opportunities with higher upfront financing needs; (iv) the inability to provide upfront financing where it is most needed and where the impact on rates of return are the highest; and (v) the inability to encourage innovation and risk taking to develop incubator renewable technologies. Following the Cancún Summit, agreement was reached on reforming CDM limitations and other similar schemes have been proposed in line with this objective. However, what remains critical to the success of an upgraded CDM is a well-functioning and reliable carbon market as the future flows of carbon finance are clearly dependent on price stability as well as a continuation of the program. Climate Investment Funds (notably the CTF and the Strategic Climate Fund, SCF) have provided significant financial support in the form of concessional loans and technical assistance (TA) for clean projects. Generally, these funds are blended with other financing to reduce the overall cost of borrowing. The TA is typically applied toward project development and assessment. The CTF helps to scale up financing for demonstration, deployment and transfer of low-carbon technologies with significant potential for long-term GHG reductions. In contrast, the SCF serves as an umbrella fund to support targeted programs with dedicated funds to pilot new approaches that could scale up and transform activities related to specific climate change problems or sectoral responses. The GEF was established in 1991 as a multilateral trust fund with a Secretariat and a governing Council operating in partnership with three original Implementing Agencies (World Bank, United Nations Development Programme, and United Nations Environment Programme). Today it has expanded to work with governments through a wider range of agencies and is one of the largest grant facilities supporting activities aimed at improving the global environment. The GEF provides upfront funding for both TA and project investments in a co-financing arrangement that emphasizes leverage to the GEF contribution. While these funds have made a significant contribution in funding clean investments, it is not necessarily evident how the operational guidelines of these funds could have been adequately shaped without the consideration of the externality costs or of the combined deployment of public interventions. CTF’s desire to maximize the leveraging of other financing, for example depends substantially on the cash flow characteristics of individual projects as well the extent of the total externality costs inherent in a given green investment. As such, CTF funding of one investment can achieve a very different leverage ratio than another. Moreover, CTF could conceivably support projects already viable on their own, or alternatively, reward policy distortions in a given economy. Governments still lack a comprehensive framework for assessing their investment climate for green investments and for determining an appropriate mix of measures required to accelerate investments.
A significant number of governments have proposed approaches in order to classify the broad array of possible public interventions. However, these attempts have not yet yielded a comprehensive framework tailored to country-specific environments to promote green investment opportunities. Public sector interventions should be conducted more broadly by deploying various policy, fiscal, financial, regulatory, and other instruments in concert. Countries are however, adopting pro-green policies at increasing rates and are also developing financing schemes and instruments for funding clean investments within their boundaries. This is especially evident in Western Europe, Japan and the United States as well as in China, India and South Korea. Many of these countries have set aside sizable funds toward clean investments following the recent global crisis. The UK and the United