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Green climate fund private sector facility: an opportunity for climate compatible development

By Celine Herweijer, CDKN Chief Strategy Advisor

In Durban over coming days, negotiators will take on the issue of whether to approve or re-open the proposed Green Climate Fund (GCF) design developed by the Fund’s Transitional Committee over the course of 2011. One particular area of contention is around the proposed Private Sector Facility of the GCF. The purpose of this facility is to scale up private sector finance, as well  as local private sector development and innovation to help developing countries onto climate compatible growth pathways.

Back in 2009 in Copenhagen, developed country governments first made the pledge to mobilise US$ 100bn per year by 2020 to help developing countries tackle climate change. Many developing countries are focused on public finance primarily, and believe this needs to flow first, and flow efficiently. Private finance would be expected to come later. Some worry that their weaker investment climate will continue to make private investment difficult to materialise at scale, while others are concerned that leveraging private finance is a way for countries to reduce their public pledges.

Mobilising the US$100bn a year that was pledged at Copenhagen will require realism, ambition and innovation.

Realism because the impact of the current global economic slowdown will be felt perhaps most directly at Durban around finance. The ability of the developed countries in the short term to write big cheques is dwindling. With the reality of reduced public services in many developed countries, one can anticipate a period of increasing aid austerity. The OECD has recently predicted a sharp slowdown of aid levels in the next three years, and a number of countries have already announced cuts to their overseas development assistance in line with gloomy national GDP growth forecasts at home.

Ambition because there are large financing needs to respond to climate change in developing countries, and these are likely to grow significantly more than the politically agreed US$100bn per annum target. Public finance alone will not be sufficient.

Innovation because with or without the burden of the Eurozone crisis and widening recession fears, we need to mobilise additional financing to provide developing countries with the increased, sustainable and resilient sources of external finance they need for climate compatible development. Innovative financing refers to a range of non-traditional mechanisms to raise additional funds. It is the only way to ensure that finance is additional to existing development assistance commitments. New sources of climate finance continue to be discussed by negotiators – from an aviation tax and a tax on shipping emissions, to a Financial Transactions Tax (FTT). We’ll also need to harness creative ways of using public funds to leverage increased private sector investment and engagement in developing countries; this is what the GCF private sector facility aims to address.

Public finance mechanisms could be used to support early movers, and to pool increased private capital into developing countries (for example, using risk guarantees to underpin credit worthiness, fund incentive mechanisms and concessional finance to complement early stage risk capital). In addition, more indirect mechanisms are being proposed, from green bonds to challenge funds aimed at catalysing local private sector innovation around climate change solutions and services (including innovation from domestic companies, local SMEs and social entrepreneurs).

Building conditions for a healthy local private sector is one of the pillars of economic growth, creating jobs, income and other social benefits. Hence the challenge, and the recipe for success, will be establishing the appropriate focus on – and frameworks for – transparency, monitoring and reporting, social end environmental safeguards and governance. If we can get these aspects right, the opportunity for increased finance to help the climate compatible development transformation speaks for itself.

Image credit: World Bank

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