The costs of creating a low-carbon global economy are high. To avoid the dangerous impacts of climate change, global mean temperature must be limited to an increase of 2 degrees centigrade above pre-industrial levels. To achieve this goal, the International Energy Agency estimates that the required additional capital investments for developing and emerging (non-OECD) economies – above and beyond the underlying investments needed by various sectors regardless of climate considerations – will amount to $197 billion in 2020. This is nearly twice the amount that developed countries agreed to provide in the UN Framework Convention on Climate Change (UNFCCC) Cancún Agreements. With developed country government debt-to-GDP ratios expected to rise to 110% by 2015, there is a growing understanding that public revenue transfers from north to south will only play a small (albeit vital) part in the overall finance needed by developing countries to create a low carbon future. Moreover, most energy investment around the world comes from private (or para-statal) finance, and public climate finance will, at most, fund only the incremental cost.

Even if public finance is delivered at scale, private investment will continue to have the most important role to play in shaping the configuration of future energy supplies.

This Background Note focuses on how public finance and risk mitigation instruments can remove the barriers to private sector investment and thereby leverage significant amounts of private capital for climate change mitigation. It discusses available options and makes some further proposals on how public sector financial institutions can further engage with this critical issue.