International Public Finance for Climate-friendly Investment: Vehicles, availability, and governance

Sustainable development at its heart is an investment problem—a challenge to replace unsustainable infrastructure, productive technologies, and consumer goods with more sustainable stock.

Nowhere is this more evident than in the effort to address climate change, where investment is needed in areas as disparate as clean energy, transportation, industry, forestry, agriculture—in virtually all sectors of productive economic activity.

But the sheer scale of the need is staggering to contemplate. The case of clean energy, which provides powerful environmental and development benefits, provides perhaps the best elaborated testimony to the size of the challenges involved. The IEA estimates that achieving the target of carbon dioxide (CO₂) concentrations at 450 parts per million (ppm) will demand incremental investment across sectors like transportation, power generation, buildings and energy efficiency of a staggering US$1 trillion per year over the period 2010-2035, and even this may not achieve the Copenhagen Accord's goal of limiting global temperature increase to 2o C. Most of this investment needs to occur in developing countries.

All this cannot come from public coffers alone, and certainly the IEA scenarios assume no such thing. It thus falls to policy-makers to explore how public spending might act as a catalyst for the much larger flows of private investment in this area; that is, what policies might governments pursue to enable and facilitate investment by individuals and firms to fundamentally change the energy matrix on which we currently rely.

This report aims to serve as a useful guide to policy-makers contemplating how to meet exactly those challenges within the energy sector and other sectors that are critically important to climate change and sustainable development. It is elaborated specifically for policy-makers in developing countries, where the majority of new investment is needed. It consists of two parts. The first section looks at the sorts of policies that have been successful in the past in catalyzing this sort of clean energy investment, relying on case study work for Brazil, China, and India, all of which have valuable lessons applicable even to states with much smaller economies. The second part surveys the sorts of financing platforms that policy-makers might access to support possible policy reforms. There is a dizzying variety of sources of international finance dedicated to such support, and this report is thorough in trying to make sense of this complex landscape.