It is estimated that transitioning to a low-carbon, and climate resilient economy, will require significant scaling up of both public and private sources of finance. The World Bank/OECD/IMF/EBRD joint paper, "Mobilizing Climate Finance" answers the request of G-20 Finance Ministers to explore new sources of finance in developed countries to support climate change adaptation and mitigation in developing countries.
The use of market instruments to implement mitigation pledges may not only deliver cost-effective mitigation but also provide a stable source of public revenue that can be partly dedicated to financing action on climate change. The climate change chapter of the OECD Environmental Outlook to 2050 shows that if the Copenhagen Accord/Cancun Agreements pledges and actions for developed countries were to be implemented as a carbon tax or a cap-and-trade schemes with fully auctioned permits, the fiscal revenues would amount to more than 250 billion USD, i.e. 0.6% of their GDP in 2020. (see also Costs, Revenues and Effectiveness of the Copenhagen Accord: Emission Pledges for 2020, and summary flyer).
The importance of reforming policies supporting fossil fuels was explicitly recognised in the OECD’s June 2009 Declaration on Green Growth. To support G-20 commitments to “rationalize and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption”, the OECD and the IEA have been compiling estimates of fossil fuel subsidies and other support measures for a large number of countries.
Greener export credits could provide an important opportunity to stimulate trade and private investment in developing countries to support low carbon development. The majority of the medium and long term official export credit flows from OECD governments to developing countries support the transport and industry sectors.
Source: Monitoring and Tracking Long-Term Finance to Support Climate Action (2011) citing OECD Export Credit Agency data 2010.
Export credit agencies are encouraged, under a 2007 OECD Recommendation to assess the environmental impacts of projects that they finance or support, and special rules governing the provision of support for renewable energy and water projects were established in June 2009. OECD countries are currently negotiating how to address ongoing challenges related to climate change in the export credits area. See: Smart Rules for Fair Trade: 50 Years of Export Credits, 2011; and Arrangement on Officially Supported Export Credits, 2011.
A recent paper, “The Role of Pension Funds in Financing Green Growth Initiatives” (2011) examines some of the initiatives currently under way around the world to encourage pension funds to help finance green growth projects. Transitioning to a low-carbon, climate resilient economy will require significant investment and consequently private sources of capital on a large scale. With USD 28 trillion in assets, pension funds and other institutional investors have an important potential role to play in financing such green growth initiatives. The report outlines various financing mechanisms, and suggests what governments and pension fund authorities can do to support pension fund investment in this sector. It proposes the following policy recommendations: provide supportive environmental policy backdrop; create appropriate investment vehicles and foster liquid markets; support investment in green infrastructure; remove investment barriers; provide education and guidance to investors; improve pension fund governance.
Bilateral donors play an important role in the delivery of climate change finance. The OECD Environment and development has been tracking climate change mitigation related official development assistance (ODA) from bilateral donors using one of the “Rio Markers” for the last 10 years. ODA for climate change mitigation has increased 150% from 2006, amounting to more than 10 billion USD in 2009. In 2010 the OECD’s Creditor Reporting System added a policy marker for tracking ODA in support of climate change adaptation. The DAC statistical team is currently working towards broadening the scope of the Rio Marker tracking framework from tracking ODA to also tracking other aspects of climate financing – an important element of a global MRV framework.
An important challenge is to ensure that such climate change finance effectively contributes to the economic development objectives of recipient countries. The OECD DAC has worked in collaboration with organisations such as the African Development Bank, Asian Development Bank and UNDP to carry out regional dialogues with officials from Asia-Pacific and Africa to apply lessons learned from development experience to climate change financing. The key outcomes of these regional consultations will be featured at a high level session on Climate Change Finance and Development Effectiveness at the late November 2011 High Level Forum on Aid Effectiveness in Busan (Korea).
For further reading:
Climate change chapter of the OECD Environmental Outlook to 2050 (2012)
Defining and Measuring Green FDI: An Exploratory Review of Existing Work and Evidence (2011)
Economics of Climate Change Mitigation: Policies and Options for Global Action beyond 2012 (2009)
Financing Mechanisms to Reduce Emissions from Deforestation (2007)