Financing the integration of climate change mitigation into development

Abstract

The Bali Action Plan and many other authoritative recent climate reports point to expectations that additional financing will be central to future international agreements to address climate change. Several donor governments have announced commitments to contribute significant additional amounts of funding to support climate change financing in developing countries. However, the context for financing of climate change mitigation is evolving rapidly, with significant implications for climate policy. Two key changes are the dramatic improvement in access to capital in many of the most rapidly growing, large greenhouse-gas-emitting, developing nations and the increasing shift of wealth to oil-exporting countries and Asian central banks. Energy investment is fundamental to development and is capital-intensive, and access to finance is not equally available across countries and for different types of investments. Less carbon-intensive, clean energy investments frequently remain more difficult to finance, due to their smaller scale and innovative nature. Taking climate risk into account as an element of financing is potentially consistent with the investor's need to balance risks with expected returns, but the methodologies, geographical scale, and data required are not yet commensurate with the time periods and project scope typical of financing for developing countries. The policy challenge is in making the financing available commensurate with the scale and short time available for addressing climate change. Most of the likely targeted financing programmes will not be adequate for this purpose. Rather, policy makers need to focus on creating adequate signals that climate change will be an important and continuing factor in government policies for the foreseeable future in ways that will affect investor expectations of relative risk and reward. If this is done, financing will follow.