By Jeff Swartz, Director of International Policy at the International Emissions Trading Association (IETA)
With carbon pricing policies emerging around the world and the recent show of public support for carbon pricing from 74 national governments and more than 1,000 businesses, one piece of the puzzle that needs to be solved is how to connect systems to create an international carbon pricing framework.
In the lead up to the Paris negotiations this December, governments from around the world – including China, South Africa and Russia – have signaled their willingness to apply a price on carbon, yet businesses and civil society know that we will not be able to move towards a fully functional low-carbon global economy by operating under a fragmented system of international carbon pricing policies. Furthermore, the IPCC’s verdict on the need to increase international cooperation on climate mitigation policies highlights the need for an international carbon pricing framework.
|An IFC investment helps provide clean, affordable water to underserved communities in developing countries.|
Many of the measures proposed in the World Development Report (WDR) 2010 will require substantial engagement with the private sector. The UN Framework Convention on Climate Change has estimated that more than 80 percent of the investment required for climate change mitigation and adaptation will have to be privately financed. For this to happen, the key requirement will be meaningful targets and supportive public policies.
One area in which private initiative will be critical is in the development and dissemination of new climate friendly technology. As the advance edition of the WDR states, "Technological innovation and its associated institutional adjustments are key to managing climate change at reasonable cost. . . . Mobilizing technology and fostering innovation on an adequate scale will require that countries not only cooperate and pool their resources but also craft domestic policies that promote a supportive knowledge infrastructure and business environment."
For several reasons, an increased focus on accelerating new technology is urgently needed.
Proposals aiming to boost innovative climate change solutions often include some form of publicly-supported global venture capital (VC) fund. The rationale for such a fund is that government funding is generally available for R&D and private financing is available for the commercialization of mature technologies; but funding is unavailable for entrepreneurial activities—such as proof-of-concept, piloting, firm-building, and marketing—that happen between these two stages. Given this situation, a global climate change VC fund could have a decidedly stimulating effect. Of course, it would also be important for governments not to put all their eggs in this basket, since the VC instrument could quickly reach its limits.
The financing gap is particularly severe for climate change mitigation and adaptation technologies for a number of reasons. Not only is the market for these technologies still at a very early stage of development but it is also driven by regulation. Both of these factors represent significant risks for investors. In addition, low carbon technologies tend to be more capital-intensive and require much more start-up financing than other typical VC investment sectors like information technology. The funding gap is particularly deep in the developing world, which presents a riskier business environment and a more fragmented market for investors.
Several VC-style climate-change funds have recently been launched. The Carbon Trust, established by the British government, already invests in clean-technology firms based in the UK. In partnership with the Qatar Investment Authority, the Carbon Trust plans to set up a £250 million fund called the Qatar-UK Clean Technology Investment Fund, to be supported by both governments. The fund will primarily invest in the UK, but also to some extent in continental Europe and the Gulf Region. This will be the first major publicly-supported climate change VC fund of its size involving more than one country.