15.08.2013

Global climate fund promotes investments in national climate change mitigation measures

Photovoltaic facility in South Africa

Photovoltaic facility to power a chromium mine in South Africa. Picture: CRONIMET

Avoiding the most severe consequences of climate change, and successfully limiting global warming to a two-degree rise in mean temperatures will depend on a turnaround in energy policy in the very near future. This can only be achieved with increased investment in energy efficiency and renewable energies. At the UN Climate Change Conference in 2009 in Copenhagen, the industrialised countries agreed to mobilise funds for international climate financing, which should amount to USD 100 billion annually from 2020 onward. The agreement includes both public and private funding from a large number of possible sources. The money will provide financial support for developing and emerging countries as they carry out measures to reduce harmful greenhouse gas emissions, and to adapt to the impacts of climate change. However, while the 100-billion-dollar pledge has already become an important political target, the relevant financing mechanisms for implementation are still missing.

Innovative risk structure creates investment incentives

Against this backdrop, the Global Climate Partnership Fund (GCPF), launched by the German Federal Environment Ministry (BMU) and KfW Entwicklungsbank, is playing a significant pioneering role. Since 2010, GCPF money has been used to finance numerous measures for reducing greenhouse gas emissions in developing and emerging countries. The innovative concept of the GCPF offers different categories of risk for public and private shareholders.

Public monies in the Fund's 'junior' and 'first-loss' tranches are exposed to the highest risk of default. This means that, in the case of a loss, the public share of the capital serves as a kind of risk buffer for the other pieces ('mezzanine' and 'senior' tranches). This risk structure creates incentives for national and international financial institutions as well as the private sector to make additional investments in the Fund. At the same time, the Fund does not use up the public funds it contains but rather deploys them on a revolving basis.

In 2010, the Fund was launched with EUR 32.5 million of capital, provided by BMU with funding from its International Climate Initiative (IKI). To date, it has received commitments worth USD 234 million from investors, of which USD 153 million have already been invested. In addition to BMU and KfW, the public-sector investors in the GCPF include the International Finance Corporation (World Bank Group) and the Ministry of Foreign Affairs of Denmark. In December 2012, the Ärzteversorgung Westfalen-Lippe – a pension insurance scheme for doctors – invested USD 30 million in the Fund, thereby becoming the first private investor besides Deutsche Bank, which is the Fund's investment manager. The GCPF has therefore effectively demonstrated its potential for mobilising private capital for international climate financing purposes.

Financing for renewable energies and energy efficiency

Last year, the Fund provided credit lines worth more than USD 150 million to banks in its partner countries Brazil, Ecuador, South Africa, Ukraine, Turkey, Mongolia and Viet Nam. These banks are passing on the funds as loans to small and medium-sized enterprises and to private households, which invest the money in energy efficiency, renewable energies and greenhouse gas reduction measures. For example, the Mongolian bank XacBank received a credit of USD 15 million with which it is now promoting the local production of energy-efficient cooking stoves. Compared to traditional stoves, the new stoves reduce emissions of CO2 by between 30 and 50 per cent.

The Fund also disburses two per cent of its capital directly to individual climate protection projects in the partner countries. The first of these direct investments was made in South Africa in 2012, where the GCPF financed a one-megawatt photovoltaic facility to power a chromium mine. In the future, this will be able to save 1,700 tonnes of CO2. Overall, the Fund has set itself the goal of reducing CO2 savings by at least 20 per cent in its individual investment projects, thereby supporting these countries on the path to a more climate friendly economy.

The GCPF's success story demonstrates how it is possible to use a limited amount of public funding in order to mobilise private capital. As such, the GCPF can serve as a pioneering model for subsequent initiatives, and provide impetus to discussions surrounding the future of the global climate financing architecture.


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