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Document Abstract
Published: 2016

Aid and climate finance

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In 2009, the Copenhagen Accord was the first effort to spell out the financial implications of a global effort to reduce carbon emissions. Although not a legally binding document, delegates from all countries attending the COP15 meeting agreed to “take note” of the accord. Developed countries made three financial commitments as a result:
  • to provide $30 billion for mitigation and adaptation financing for the period 2010-2012
  • to mobilize $100 billion per year by 2020; and
  • to make such funding new and additional, and sourced from public and private, bilateral and multilateral institutions

Following Paris, the author argues, we can expect to see continued technical work on refining the measurement of climate-related finance. Debates will inevitably continue as to how to define “mobilization” of private capital. For example, if a country reforms its energy sector policy framework through the support of developed countries (or a multilateral institution), and this then “causes” additional private investment in the sector, should the investments count? Conversely, if a private investment was likely to happen anyway, but an official agency decides to offer a guarantee as a sweetener, should this be counted as additional finance being 'mobilized'? While such debates may appear arcane, the definitions provide the incentive structure for how official agencies will behave, and therefore have real consequences.

We should, nevertheless, see considerable, rapid improvement in the transparency and accountability, by agency, of climate-related finance.

We can also expect to see continued debate over the mechanisms through which climate finance should be channeled. The preference of the developing countries is to use the newly established Green Climate Fund, partly because it promises to allocate financing equally to mitigation and adaptation, and partly because it could use countries’ own financing needs as the basis for disbursements. Developed countries may encourage greater use of the multilateral development banks with proven track records but that would need to scale up their ability to lead public-private partnerships in infrastructure
projects.

In both cases, an upsurge in private investment in climate-related projects is expected. Given the relatively stable and long-term returns from infrastructure investments, and the low long-term real interest rates prevailing in capital markets in developed countries, there are significant financial incentives for private investors to participate in infrastructure projects in developing countries. If public money is added to the available blend of funds, and the right recipe of technical assistance, risk-mitigation, and dialogue platforms to build trust is found, there could be a tipping point of an exponential rise in project finance. If such a tipping point can be reached, Paris will have been a successful meeting for climate finance.

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Authors

H. Kharas

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