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Set the Right Price on Carbon and Investors Will Come

Karin Rives's picture

 Dana Smillie/World Bank

This was not the time to discuss the science of climate change, or ways to protect coastal cities against monster storms.

The development experts, journalists, policy wonks and investment professionals who gathered at the Center for Global Development in Washington this week were there to sort out a much thornier issue: How to mobilize and spend the $700 billion or so the world will need annually – above what’s already being spent – to slow and adapt to climate change.

Their consensus: Current levels of public and private finance won’t even begin to do the job.

Four years after advanced countries promised in Copenhagen to raise $100 billion annually by 2020 to fight climate change – in addition to the $30 billion they pledged to raise through 2012 in “fast-start” financing for developing nations ­– the road forward is murky at best.

Fiscal constraints make governments less willing, or able, to spend money on a long-term problem, no matter how critical.

“We should have no illusions that public money is going to come rushing back to solve this,” said John Morton, chief of staff at the Overseas Private Investment Corporation, the United States development finance agency. “Therefore the role of the private sector is absolutely critical.”

So what will it take to get risk-averse, institutional investors with trillions of dollars in clout to enter climate finance in emerging economies?

A technology revolution? New investment strategies that take the risk out of green projects? The elimination of $485 billion in fossil fuel subsidies and other policy reforms?

Or perhaps a pact between those forward-looking countries that are willing to set a price on carbon, once and for all? By banding together, they could create the size market investors are looking for.

The U.S., the world’s second-largest emitter of greenhouse gases, likely won’t be leading such a coalition effort any time soon. But China might.

Xueman Wang, team leader for the World Bank’s Partnership for Market Readiness, noted that five cities and two provinces in China are now piloting emissions trading systems with the goal of eventually building a national market.

It’s also working with South Africa, which is planning to implement a carbon tax in 2015. South Africa wants to position itself as a leader in a new world where polluters must pay for each kilo of carbon dioxide they emit into the air, Wang said.

In all, the Partnership for Market Readiness is working with 16 emerging economies that are looking to emissions trading, carbon taxes and other instruments to scale up their greenhouse-gas mitigation efforts.

A price on carbon, as leaders of the World Bank Group and the OECD noted this week, will send a signal to private investors that renewable energy and low-carbon projects are, in fact, very profitable. It may be the game changer everybody’s waiting for.

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