CDKN's Director of Policy and Programmes, Ari Huhtala, attended the Carbon Expo in Cologne from 30-31 May. His first blog from the Expo, reported on a dynamic mood and strong calls for more ambitious targets to encourage low carbon investment. Here, he discusses the challenges of engaging the private sector with low-emissions development pathways.

Climate finance is not synonymous with carbon finance. It has sometimes been difficult to get this message across; however it now seems to be increasingly understood by the carbon market community. On the second day of this year’s Carbon Expo in Cologne, I had the pleasure of moderating a plenary panel 'Expanding climate finance: Linking private flows with low emissions development'. Over a hundred guests joined us to hear four eminent and experienced practitioners representing quite different backgrounds and stakeholders:

• James Cameron, Chairman, Climate Change Capital
• Agus Sari, Chair, working Group on Funding Instruments – Presidential Task Force on REDD+, Indonesia
• Vikram Widge, Head of Climate Finance Policy at the Climate Business Group of the IFC (World Bank Group)
• Scott McGregor, Chief Executive Officer, Camco

As parties struggle to make progress in global negotiations for an inter-governmental agreement, most countries are already taking action to shift their development paths to a low-emission and climate-resilient direction. This cannot be done without active participation and ownership by the private sector. My questions to the panel were: What have you done? What would you like to do? Why can’t you do it? How can we make the private sector embrace low-emission options as their natural choice?

The messages from the panellists were more optimistic that what I had expected. Yes, there is behavioural inertia in companies towards embracing long-term risk - risk aversion and resource productivity as driving forces for investment decisions. Yes, there is a lack of confidence in taking decisions amid uncertainty from the public sector. But there were also positive examples of  consultations where governments have listened to the private sector to guide the design of policies and incentives. New legislative frameworks in Australia, California and South Korea were cited as excellent examples of good progress made, as well as regulations related to renewable energy in South Africa.

The role of the domestic markets should not be underestimated when discussing investment and leverage at the country level. Governments can demonstrate stability and predictability to the private sector through clear, incentive-driven targets. Governments can also channel considerable volumes of investments to low-emission options through public procurement programmes.

The overall consensus was clear: a smart combination of well-targeted public grants or soft loans for outcome-related projects, with clear methodologies for measuring progress, can catalyse considerable volumes of international and national private resources.  Policies and incentives can be designed through consultative processes rather than lobbying, and can be supported by early stage public interventions by tariffs or debt support, upon which the private sector can build and then take over. Governments need to be consistent in implementing and enforcing the regulations and policies which it has formulated through these consultative processes.

There is a lot of room for capacity building to make this happen. Banks need to understand the nature of resource efficiency, long-term risk considerations, emerging instruments and assets such as Certified Emission Reductions. CDKN is well placed to get involved in synthesising and sharing best practices and good examples as part of its broader engagement in improving developing countries’ access to climate finance : a process which must take account of the vital role of the private sector.

Image: Traders work on the floor of the Ghana Stock Exchange in Accra, Ghana, June 15, 2006. Photo: © Jonathan Ernst/World Bank