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As climate negotiators assemble in Panama this week to try to make progress on a global treaty ahead of the December climate summit in Durban, South Africa, a key debate will center on the next steps for the Green Climate Fund. Conceived at the 2009 UN climate conference in Copenhagen and officially launched at last year’s conference in Cancun, the fund is supposed to mobilize billions of public and private dollars to help developing countries cut carbon emissions and cope with climate changes already underway.

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Why does the world need a new fund for climate change?  Why not leave it to markets to make the necessary investments? Because the world has been unable to agree on policies to set a global carbon price that reflects the negative impacts (externalities) of carbon emissions.   A reasonable global carbon price, which could result from an emissions tax or a global cap-and-trade system such as the one in place in the EU (ETS), would provide market signals to drive investment into new technologies that cut carbon emissions from energy, transport and housing.  The right carbon price would also push investors to look for opportunities to deploy low-carbon technologies in the fast growing emerging market economies.  Lacking a simple carbon price mechanism, finance mechanisms like the Green Climate Fund are needed.

The amount of funding needed for emissions cuts and adaptation in developing countries is enormous: an estimated $130 –$400 billion a year, according to the World Bank.  This comes on top of current development assistance (about $120 billion a year) and the shortfall in funding needed to help low income countries reach the Millenium Development Goals (projected by the UNDP to be $135 billion by 2015).

Where will funding for all this investment in addressing climate come from?  With OECD governments strapped for cash, dealing with large fiscal deficits and financial crisis in Europe, the prospect of ramping up public funding for climate is dismal.  Yet, as I showed in a working paper earlier this year, banks and institutional investors are sitting on tens of trillions of dollars of investible cash.  How can that cash be attracted into new low-carbon technologies and investments in climate action in developing countries?

Using public funds to draw private capital to invest in clean technology in emerging markets is one of the sticking points in the work of the Transitional Committee that is designing the new Green Climate Fund.  Some developing countries insist that their mitigation and adaptation needs should be covered entirely from public funding.  Some negotiators are suspicious of the private sector and worry that public funds will be used to subsidize private profits.  They point to the recent bankruptcy of Solyndra, the Californiasolar power company that received $528 million in federal loans from the U.S. Department of Energy. As the official account of the September meeting of the Transitional Committee in Geneva put it: “uncertainty and divergence remain over the specific types of private sector engagement that should be promoted and the best operational modalities that should be employed.”

And yet, given the scale of financing needed, tapping into the large pools of institutional investor funds is a tantalizing goal.  Towards that end, my CGD colleagues Darius Nassiry and David Wheeler have developed a Green Venture Fund (GVF) proposal that would use the limited public climate funding available to create investment vehicles that could attract large-scale private investment.   The GVF proposes two fund-of-funds vehicles, one targeted at early stage technology and one focused on deployment of high-quality renewable energy technologies in emerging markets. The proposed structure of the funds protects against problems like the Solyndra bankruptcy, since in the GVF private and public funds would be treated equally (pari passu).

Renewable energy funds are blossoming in emerging markets, from Asia to Latin America and even in Africa. The scale of these funds ranges from tens to hundreds of millions of dollars.  The GVF fund-of-funds approach would build upon these, aggregating wind energy funds in China with geothermal funds in Africa and solar funds in the Middle East into an investment vehicle that is large enough to draw in the big institutional investors like pension funds and endowments.

At its next meeting in Capetown on October 16-18, the Transitional Committee should encourage the use of public funds as cornerstone equity to funds-of-funds approaches like the GVF that can dramatically boost private investment in the research and development of new renewable energy technologies and in the deployment of proven renewable energy technologies in developing countries.

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CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.