International climate finance: should private funding be credited? – A look at the possibilities and pitfalls of “private climate finance”

In Cancun, the industrialized countries pledged to mobilize 100 billion U.S. dollars annually starting in 2020 (Section 98, Cancun Agreements). The following section of the agreement states that the support to be provided to developing countries can come from a variety of sources – public and private, bilateral and multilateral, as well as alternative. Since the crediting of private funds toward that commitment is a topic that has arisen repeatedly in recent negotiations and discussions related to international climate finance, we want to address it in this blog.

We would like to note first of all that private investment in climate protection measures in developing countries – and industrialized countries, of course – is very important. When examining the various, and in some cases vastly different, estimates of the funds needed to finance emissions mitigation and climate change adaptation measures in developing countries, it quickly becomes apparent that far more will be required than the pledged US$ 100 billion. For example, the World Bank puts the annual funding requirements solely for mitigation in developing countries at US$ 140-175 billion annually over the next twenty years, while adaptation measures will require a further US$ 30-100 billion a year over the next 40 years. [1] In times of financial crisis, both public and private financial resources will be needed to raise these amounts.

Yet a number of questions and problems emerge when addressing the fundamental question of whether we should consider crediting private funds – and if so, what type of private funds – toward the commitment of US$ 100 billion. If it is already apparent that considerably more than the amount pledged will be needed, shouldn’t those US$ 100 billion consist entirely of public funds? And shouldn’t that public money be used to leverage additional private funding? This could narrow, or in the best case close, the gap between the required and actually pledged financial resources. The ideal situation would therefore be to count only public funds toward the US$ 100 billion commitment.

Opinions therefore vary as to whether private funds can be credited toward the pledge. While some believe that this should be possible, others say that the entire sum should come from public funds exclusively. For a more detailed discussion on the issue of accounting options for private funds and the difficulties they entail, please read the Germanwatch discussion paper, “The goal of 100bn USD of climate finance”. The paper argues that in the case of such crediting, we should adhere closely to the wording of the Cancun agreement – specifically, that the US$ 100 billion must be mobilized by the industrialized countries. The precise definition of “mobilize” is not yet clear. The paper asserts that not all climate-relevant private investments in developing countries should be counted toward climate finance, but at the most only those that have a close, direct causal link with government action. It also puts forward that in the event that private funds are considered eligible, only “net flows” should be credited toward climate finance.

Beyond such accounting issues, a further problem exists: International climate finance resources provided must be measured and reported under the United Nations Framework Convention on Climate Change (UNFCCC). Precise rules regarding the accounting of private climate finance would therefore have to be established to ensure comparability. This includes clarity in reporting related to realized private climate finance measures, as private investments will probably always be subject to confidential information that must be excluded from such reporting.

All of these points show that there are still many issues that need to be clarified. The sooner we resolve them, the better. In any case, they should be addressed before crediting private funds toward the US$ 100 billion commitment becomes common practice.

Linde Griesshaber, Germanwatch

Further papers on the topic of private financing are available, such as Griffiths, Jesse, 2012: ‘Leveraging’ private sector finance: How does it work and what are the risks? Bretton Woods Project (ed.)