Green Climate Fund must clear the path for climate finance

Raising $100bn annually from 2020 is only part of the Green Climate Fund’s challenge. It must also ensure money can make it from initial pledge to finished project. Louise Brown, research analyst at the World Resources Institute suggests four ways to smooth this path.

By Louise Brown

Research shows that developing countries will need about $531 billion of additional investments in clean energy technologies each year in order to limit global temperature rise to 2°C above pre-industrial levels, thus preventing climate change’s worst impacts.

While developed countries have pledged to provide $100 billion of climate finance per year by 2020, this amount is well below what’s needed to help developing nations mitigate and adapt to climate change.

So how can countries bridge this funding gap? The answer lies in part on how well developing countries implement “readiness” activities, as well as how effectively developed nations and international institutions like the Green Climate Fund (GCF) can mobilize finance to support them.

The GCF must do more than collect donations for low carbon projects, it must also prepare developing nations to receive investment (Source: Kibae Park/UN Photo)

The need for readiness

To attract investments on the scale required, developing country governments must provide an attractive investment climate – one that encourages public and private sector investors to put their money into climate-friendly projects like solar and wind energy.

On their end, developed countries need to offer financial and technical support for “readiness” activities that create the right conditions for these investments.

Readiness includes any activity that makes a country better positioned to attract investments in climate-friendly projects or technologies.

A few examples include: developing a policy to promote energy efficiency in industry; passing a law that gives a new or existing institution the mandate to promote renewable energy; conducting an assessment of a country’s wind energy resources; or strengthening a bank’s capacity to lend to small businesses in low-carbon sectors.

International institutions such as the GCF can play a big role in supporting readiness activities, thereby helping developing nations attract the investments that will help them transition to a low-carbon, climate-resilient development path.

How the Green Climate Fund can support readiness

Supporting readiness activities is a topic on the agenda of the GCF Board’s third meeting in Berlin, Germany this week.

The Board will have to grapple with questions around what areas to prioritize for readiness support, how to effectively deliver it to countries, and how to ensure that it is complementary to other areas of GCF support.

The GCF, established at the UNFCCC climate change conference in Durban in late 2011, is expected to become the main global channel for acquiring and delivering climate change finance.

Its Board faces the challenging task of ensuring that the funding it channels achieves mitigation and adaptation objectives.

It also must figure out a way to leverage additional climate finance on a much bigger scale. Setting aside adequate funding for readiness activities and designing effective mechanisms for delivering this support will be critical.

WRI’s new report, Mobilizing Climate Investment, draws on six developing country case studies to highlight a set of lessons for readiness. It also sets out a framework to identify readiness activities that climate finance institutions like the GCF can support to create the conditions that will attract scaled-up investments in low-carbon technologies.

The experiences of the six countries studied (India, Indonesia, Mexico, South Africa, Thailand, and Tunisia) inform a number of recommendations for the GCF. Here are four of them:

Dedicated funding for readiness activities

While the case studies clearly show that even small amounts of readiness funding can make a big impact on scaling up investment, they also reveal that it can take 5-10 years or more to create the right enabling environment for investment.

It’s important for the GCF to set aside dedicated funding for enabling activities, especially for Least Developed Countries, which may have a long way to go in creating attractive conditions for investment.

The GCF should promote coordination

A number of existing funds and institutions – including multilateral development banks (MDB), UN agencies, the Global Environment Facility (GEF), and others – are already providing funding for climate change activities – some with more emphasis on readiness than others.

The GCF should facilitate greater coordination and collaboration between existing institutions in order to enhance their collective impact. It should also promote a stronger role for developing country institutions – such as national development banks – in supporting readiness activities in their respective countries.

The Private Sector Facility should integrate strategic readiness activities into larger projects

The GCF’s Private Sector Facility, which is designed to support and leverage private sector investments in low-carbon activities, will be particularly well-placed to support readiness activities that target industry and financial sector actors.

For example, it could play an important role in supporting activities that strengthen small businesses’ involvement in developing countries’ low-carbon sectors.

A fast-track mechanism could support readiness before the GCF is fully operational

Developing and developed countries have a strong interest in initiating readiness activities that will help nations in preparing to access funds once the GCF becomes operational.

The Board could create a fast-track mechanism to support strategic readiness activities, such as engaging stakeholders to design low-carbon, climate-resilient development plans; establishing multi-stakeholder committees to coordinate climate change policies and initiatives; and conducting assessments of the needs and costs of various adaptation and mitigation options.

This mechanism could help countries prepare for finance now and hit-the-ground-running once GCF funds are delivered.

While there is no simple approach to supporting readiness, the GCF has a unique opportunity to strengthen the enabling conditions that will help developing nations attract investments.

The GCF should ensure that its support is predictable and sustained, allowing developing countries to draw on these resources as they need them.

Furthermore, the GCF should be responsive to the needs of individual countries and ensure that its support is both demand-driven and aligned with national low-carbon development priorities.

If it fails to adequately support readiness activities, it will be harder for the GCF to make a lasting impact in the countries it supports.

By fostering the right enabling environments for investment, the GCF could be catalytic in putting developing countries firmly on the path to a sustainable, low-carbon, and climate-resilient future.

This article originally appeared on the World Resources Institute’s Insights blog

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