Ways of triggering multi billion dollar, low carbon technology investments in developing economies have been outlined in a report issued by the UN Environment Programme, a global partnership of investors and insurance companies.
Experts indicate that investments of around USD500bn a year will be needed to assist developing countries adapt to climate change while powering low carbon growth.
Much of the money will come from the private sector but will only flow if creative public policies that reflect the differing circumstances of developing economies are swiftly adopted, says the report prepared by Vivid Economics.
The report makes several broad recommendations to overcome current hurdles:
• Country risk cover: insurance against country risk – i.e. risk of expropriation, breach of contract, war and civil disturbance – should be expanded and explicitly provided to support low carbon funds.
• Low-carbon policy risk cover: insurance should be provided where countries renege on policy frameworks/incentive schemes that are underpinning low-carbon investments, e.g. emissions trading, renewable energy support mechanisms.
• Funds to hedge currency risk: public finance could provide currency funds which offer cost-effective hedges for local currencies which would otherwise not be available in the commercial foreign exchange markets.
• Improving deal flow: in order to provide a series of easily executable, commercially attractive projects, vehicles specialising in early-stage low carbon projects could be developed, and technical assistance could be provided to increase demand.
• Public sector taking subordinated equity positions in funds: the public sector could invest directly in low carbon funds via “first loss equity”, thereby improving the overall risk-return profile of such vehicles.
The findings were presented in Cape Town at the 2009 Global Roundtable of the UNEP Finance Initiative which brings together investors, financial institutions, policymakers and civil society from around the world.
A recent study commissioned by the United Nations Framework Convention on Climate Change says the private sector will have to supply close to 90 per cent of the funds needed to meet the climate challenge. However, at present, the private sector is unable to undertake the level of investment needed in developing countries because the returns on low carbon investments are not commensurate with the risks.
The report considers how public sector funds can be deployed most effectively to leverage private sector investment in developing countries. This requires an effective distribution of roles between public and private sectors. It says that through appropriate public finance mechanisms, the public sector can assist in managing those risks the private sector is not able to control and alter the risk reward balance for private investors.
PFMs can also fund the technical assistance required to generate demand for low-carbon projects at a scale likely to be attractive for large private sector investors. Furthermore, PFMs can leverage significant private capital, with previous research suggesting that USD1 of public money spent through well-designed mechanisms can leverage between USD3 and USD15 of private sector investment.
One of the report’s recommendations is for the establishment of a forum for on-going dialogue between the public and private sectors, to improve the design of the proposals outlined and implement the mechanisms proposed.
Achim Steiner, United Nations under secretary general and UNEP executive director, says: “Combating climate change represents an important opportunity to move economies onto a low carbon, resource efficient, green economy path. If this is to succeed, developing countries should and must be part of that transformation. Today’s report underlines a range of public policy options that reflect the varying circumstances currently prevailing in developing economies and show how existing barriers to a green economy can be leap-frogged. In doing so it opens the door to a new partnership between North and South.”
