FEATURE: Mobilising resources and financial instruments
Authors: Diana Smallridge, Barbara Buchner, Chiara Trabacchi, Maria Netto, José Juan Gomes Lorenzo, Lucila Serra; InterAmerican Development Bank discussion paper
This paper analyses how and why National Development Banks (NDBs), building on the example of the Latin American NDBs, have high potential to unlock and scale up private investments to tackle climate change. Why? Government resources cannot finance the low-carbon transition alone. Therefore, unlocking private sector capital will be essential to achieve large, transformational, and long-term impacts across all economies. However, the private sector will not fully unlock its potential unless some public finance is injected to take on some of the policy risks and tackles country-specific barriers to investments that both affect risk return profiles. In this regard, NDBs can both complement and catalyse private sector players as they have access to local financial markets and understand local barriers to investment.How? Public financing from NDBs can be used to leverage private investment by: 1) Increasing the demand for investments and financing in climate-friendly projects; and 2) providing the necessary incentives to mobilise climate-friendly investments from the private sector. The paper states that Latin American NDBs have a high potential to intermediate and mobilise climate finance. However, some of them require support so that they can become actively engaged in climate change finance.
Why we recommend this:
This paper argues that designers of the international climate change finance architecture should consider the particular experience of NDBs in developing effective mechanisms for long-term climate change investment financing on the ground. It also provides recommendations on how to strengthen the NDBs in Latin America for them to actively and successfully mobilise and intermediate international climate finance and scale up private investments needed in Latin America. Such as: 1) Enhance the coordination of relevant national and international climate finance actors, 2) Enhance the dialogue between national policymakers and NDBs, 3) Build knowledge about best practices of NDBs in climate finance, and 4) Encourage NDBs to develop readiness strategies for international climate finance mobilisation and intermediation.
Authors: Ari Huhtala, Neil Bird, Celine Herweijer
Date: February 2013
Tackling climate change in developing countries will soon cost hundreds of billions of dollars annually. The paper highlights that public funding for private sector investments for climate compatible development is increasing but still falls far short of needs. As the GCF is being operationalised, developing countries will require immediate support to start mitigating climate change and adapting to the impacts. The paper finds that there are huge gaps in knowledge of the existing sources of finance and their applicability, and low capacity to access, manage and blend these sources of finance, as well as little harmonisation and effectiveness of climate finance. There is also a gap in readiness: developing countries have limited capability to develop and package bankable investments; the investment climate is poor due to lacking policy on transparency, lack of projects, and lack of human resources.
Why we recommend this:
The CDKN paper identifies a number of gaps and challenges in knowledge/capacity to mobilise and disburse climate finance that are hindrances to the scaling up of resources (including private investments) and the implementation of low-carbon projects on the ground. Identifying these gaps will help the GCF better address them, particularly with regards to the transparency and readiness issue. The paper is also of relevance as it lists CDKN activities and outputs that can support work of the GCF Board.