Policymakers in developed countries are increasingly looking to leverage private sector funds to finance climate action in developing nations, filling the gap left by tight government budgets and a lack of political focus on climate change in the United States and other major emitting countries.
The numbers are striking. In the analysis we conducted with the World Resources Institute (WRI) and the Overseas Development Institute, we found that the United States’ climate finance is increasingly coming from America’s two business-oriented foreign investment agencies: the Overseas Private Investment Corporation (OPIC) and the Export-Import Bank of the United States (Ex-Im). In 2010, only 20% of U.S. climate finance came from these agencies (which don’t rely on taxpayer dollars), but by 2012 they were spending almost half. Almost all the loans, loan guarantees, and insurance policies issued by OPIC and Ex-Im fund clean energy projects in developing countries.
Globally, the picture is similar. In 2011, companies based in developed countries spent close to $13 billion in support of climate projects in developing nations, surpassing climate-related official development assistance by about half a billion dollars. And there is no doubt that private capital will figure heavily in the coming years as developed countries scramble to demonstrate that they have met their pledge to provide $100 billion in financial assistance to developing nations to address climate change.
Given the current budgetary issues and a lack of focus on climate change in many developed country governments, it’s going to be challenging to get to the $100 billion with or without private sector finance. But what’s even more daunting is that $100 billion is nowhere near the size needed to meet the challenge. Experts estimate that truly comprehensive action on climate will require $700 billion per year of additional climate-related investment in developing countries, and greening another $5 trillion of infrastructure investment per year to 2020. Even if we maintain the current 50-50 split of public-private investment as we reach $100 billion in 2020, and even if every dime of $50 billion in public money leveraged private sector investment (unlikely), a 14:1 leverage ratio would be needed to meet the challenge — substantially higher than the possibly inflated ratios typical of development finance instruments.
So how can the world meet this urgent financing challenge when huge investments are needed and governments can’t come close either through public investment or by leveraging private sector investment through typical development finance? What will generate sufficient private sector investment?
By Michael Wolosin & Abigail Jones, via Climate Advisers