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IIGCC calls for more private sector finance to tackle climate change

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The Institutional Investors Group on Climate Change has advocated a number of urgent measures to boost the effectiveness of carbon markets globally and to leverage private sector invest

The Institutional Investors Group on Climate Change has advocated a number of urgent measures to boost the effectiveness of carbon markets globally and to leverage private sector investment in developing countries to mitigate the risks of climate change.

In the first report, entitled Toward an Effective Global Carbon Market, IIGCC proposes a number of measures which will enable carbon markets to fulfill their potential as a major catalyst for investment and support the development of a global low carbon economy.

Firstly, the IIGCC asserts that while carbon markets have achieved significant growth in recent years, reaching USD110bn in 2008, emissions trading schemes (ETS) must provide companies and investors with a strong price signal to give them the confidence to make long-term investments in low-carbon solutions. Additionally, each scheme needs to set ambitious caps, in line with the Intergovernmental Panel on Climate Change recommendations in order to create sufficient scarcity and demand and therefore a price for carbon at a level that will boost investment in low carbon technologies.

Peter Dunscombe, IIGCC chairman, says: ‘The credibility of emissions trading schemes would be greatly improved with a robust price signal as well as clear and frequent communication from the regulator on trading data and improved transparency over direct government participation in schemes. We encourage governments to learn from the experience of the EU ETS and the problems faced by long-term investors as a result of excessive volatility and uncertainty.’

The report also states that over the long-term, carbon markets will need to include cap and trade schemes from advanced emerging economies in order for emissions reductions to meet the IPCC’s recommended targets.

In its report, the IIGCC notes its continued support of the Clean Development Mechanism (CDM), but suggests a number of measures aimed at further improving its scale and effectiveness. These include setting sector or programme-based targets, as opposed to the current project-by-project approach. In addition, the IIGCC asserts that the institutional framework supporting the CDM must be improved to allow the board to focus on executive tasks such as ensuring the transparency and efficiency of the operational rules for assessing low carbon projects.

Even with these reforms, however, the IIGCC makes clear that the carbon markets and the CDM alone will not generate the significant investment flows required to tackle the climate change crisis. In a further report, released alongside the carbon markets paper, the IIGCC considers other types of financing mechanisms which would raise funds from the private sector to finance climate change mitigation and adaptation, particularly in developing countries.

Institutional investors in the EU already have a steady stream of investment opportunities in renewable energy and a similar flow of opportunities is starting to open up across some of the larger emerging markets. The IIGCC’s paper suggests that strong, stable and credible policies at a national level are the essential foundation for attracting finance for low carbon technologies in the developing world.

The IIGCC suggests that multi- and bilateral development finance institutions should establish mechanisms whereby private sector institutions from developed and developing countries can access debt or equity based support packages, backed by targeted export credit guarantees and political risk insurance. This step would facilitate the establishment of large-scale infrastructure and private equity investment that properly addresses the global issues around climate change.

The IIGCC also welcomes proposals for ‘climate bonds’ backed by OECD governments, but warns that their success will depend on their risk/return characteristics and their ability to provide tangible evidence for investors of the climate change benefits they deliver.

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