Signal failure? Real economy signals for developing country climate finance and the future of the Green Climate Fund

London, 07 July 2011

The debate over developing country climate finance frequently ignores the fundamental issue of how we pay for the incremental costs of decarbonisation in the developing world. Instead it is has become focused on risk reduction mechanisms as the way to secure the investment needed. If we don't change approach and rebalance the debate, we will fail to shift investment onto a green growth path, says a new report by Climate Change Capital's think tank.

Ben Caldecott, head of European policy at Climate Change Capital and one of the report's authors, said:

"At the heart of successfully creating climate change projects in developing countries is the presence of suitable domestic policies and international incentives, such as carbon pricing and regulation. Without these 'real economy' signals it will not be possible to deliver developing country investment at the scale and pace necessary to help tackle climate change."

"But efforts to create real economy signals in developing countries, such as through the international carbon market, are faltering at exactly the moment they are needed to scale up. The development of the new Green Climate Fund (GCF) is an opportunity to turn the tide and support the development of real economy signals for developing country climate finance. Through new and innovative mechanisms, which could include Emission Reduction Underwriting Mechanisms (ERUMs), the GCF can successfully leverage significant quantities of private capital."

The report explains how ERUMs created by the GCF would be temporary underwriting facilities for emission reductions. They would create a guaranteed price for certain types of emission reductions with delivery dates in the future and thus create a forward price curve for projects against which investors could then deploy capital. It is a tool that can enable significant private investment today, while maximising the leverage and effectiveness of public funds committed to the GCF.

Background

The GCF was proposed at the Cancun climate conference in December 2010 with the aim of supporting climate change projects, programmes and policies in developing countries where it could play a role in meeting the goal of US$100 billion per year by 2020 for developing climate finance.

A Transitional Committee was established to design and set-up the GCF and this will provide recommendations to the COP at its 17^th session to be held in Durban, South Africa, from 28 November to 9 December 2011.

To read the research paper visit /thinktank/publications.aspx

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Climate Change Capital Ltd

Daniel Cremin +44 (0)20 7939 5319 dcremin@c-c-capital.com

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Signal failure? Real economy signals for developing country climate finance and the future of the Green Climate Fund