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Scaling Up Climate Change Financing

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How will countries in East Asia and Pacific raise enough finance to reduce emissions, cope with the impacts of unavoidable climate change and deploy new technologies, while continuing to grow and reduce poverty?

Worldwide, mitigation and adaptation will require massive annual investments. Rich countries must take the lead in developing effective mechanisms to help bring the world within a reasonable temperature range. Although developing countries have historically contributed very little to climate change, their growing contributions make low-carbon development imperative for the future. Climate-smart development will also have important benefits in reducing pollution at the local level.

But current levels of climate finance fall far short of foreseeable needs (see chart). Compounding the shortfalls in climate finance are significant inefficiencies in how funds are generated and deployed. Looking forward, the WDR argues that pricing carbon (whether through a tax or through a cap-and-trade scheme) is the optimal way of both generating carbon finance resources and directing those resources to places where the mitigation costs are lowest and the adaptation needs greatest. In the near future, however, the Clean Development Mechanism (CDM) and other performance-based mechanisms for carbon offsets are likely to remain the key market-based instruments for mitigation finance in developing countries and are therefore critical in supplementing direct transfers from high-income countries.

Creative approaches to climate finance are emerging in the region.


Expanding carbon finance. Investments facilitated by the trade of carbon emission reduction credits have been made in thousands of successful individual projects but have not resulted in massive emission cuts so far. As the limitations of the project-based approach have to come to be recognized, and with the regulatory period of the Kyoto protocol coming to an end in 2012, greater emphasis is now being placed on larger scale government policy reforms and investments that have long-term emission reduction potential.

The Bank’s new Carbon Partnership Facility is designed to support this shift. For example, Indonesia’s Ministry of Energy and Mineral Resources is working toward integrating carbon finance to enhance the viability of Indonesia’s nascent geothermal sector to meet the country’s sustainable energy development target. In Vietnam, the Facility helps the government administer programs that support commercial lending and investments in a large number of small hydropower plants by private sector developers.

Tapping all sources of financing. Beyond alternative energy options, Indonesia is considering a wide range of mitigation measures, from reducing energy intensity to developing carbon credits from reduced deforestation through the REDD initiative. The country is therefore working to mobilize financing and create the right environment for change. Indonesia rationalized energy pricing by reducing fossil-fuel subsidies in 2005 and 2008. It is reducing deforestation through improved enforcement and monitoring programs, and provides incentives for import and installation of pollution control equipment through tax breaks.

The Finance and Development Planning Ministries have established a national blueprint and budget priorities for integrating climate change into the national development process. And the Finance Ministry is examining fiscal and financial policies to stimulate climate-friendly investment, move toward lower-carbon energy options, and improve fiscal incentives in the forestry sector.

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The gap is large between estimated annual incremental climate costs required for a 2 degrees Celsius trajectory, when compared with current resources.

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Click chart to view large.



Creating environmental synergies. Climate-friendly projects often respond to several environmental, economic and social objectives. Examples include improving energy efficiency while eliminating ozone depleting substances in industrial chillers; reducing air pollution in cities to address both global and local environmental issues; or pursuing mitigation and adaptation goals simultaneously by restoring coastal mangrove forests. Such projects reflect the interconnectedness of natural systems in a sustainable world and can help attract wider financial resources.

Linking up. The integration of carbon finance with other financing sources is essential to accelerate the deployment of low-carbon technologies. For instance, the GEF may fund policy work and provide risk coverage; low-interest loans from the Clean Technology Fund along with regular lending and equity may finance physical investments; and carbon credits may create an income stream that sustains a project’s long-term financial viability. In combination, these instruments are a powerful force to transform the market for climate-friendly solutions.

Responding strategically. Because the East Asia and Pacific region is highly vulnerable to the impacts of natural disasters, responding quickly and strategically when disaster strikes is vital. When floods, tsunamis or earthquakes take their toll, governments work with international development partners to help assess the extent of damage and work on long-term reconstruction plans that aim to “build back, better” what was destroyed. The Global Facility for Disaster Reduction and Recovery (GFDRR)—a partnership of 24 countries and international organizations coordinated by the World Bank—supports long-term risk reduction and rapidly provides resources to assist countries in sustainable recovery and reconstruction planning, such as recently in Samoa, Tonga, Indonesia and the Philippines.

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The Bank allocated about $500 million to climate change projects and programs in EAP in fiscal year 2008. Projects in China got the largest share, with an emphasis on energy efficiency and renewable energy. China also accounted for most of the region’s carbon finance commitments, followed by Indonesia, the Philippines, Malaysia and Thailand, with an overall focus on energy efficiency in power and industry, industrial gas emissions reduction, waste management, and reforestation.

The Bank manages Climate Investment Funds—to which donors have pledged over US$6.1 billion—jointly with regional development banks such as the Asian Development Bank. These funds include the recently launched $5.2 billion Clean Technology Fund, which provides low-interest loans to support investments in large-scale mitigation projects in energy efficiency, power generation and transport; and the Strategic Climate Fund, which provides dedicated funding to scale up activities or pilot new development approaches such as the Pilot Programs for Climate Resilience.

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width="3" Continue reading: Inventing Climate-Smart Technologies

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