CDKN aims to help decision-makers select and deploy financial instruments – such as grants, concessional loans, equity and guarantees — to fund climate adaptation and mitigation activities. This guide summarises the barriers to financing mitigation and adaptation activities, as well as discussing factors to consider when selecting and implementing financial instruments. The key financial instruments and modalities considered in this guide are discussed in relation to the Green Climate Fund, but the lessons are applicable to other channels for climate finance.
This Guide concludes that understanding barriers related to mitigation and adaptation at the project level is important to identify those projects where investment subsidies will be most efficient. The purpose of the financial instrument needs to be clearly determined. The choice of financial instrument must be reflected in the governance and operations of the GCF and its partners (including national climate finance institutions). Furthermore, national climate finance institutions need a certain level of expertise to make optimal use of the support. Key messages include:
- Support schemes should not aim to make all projects financially viable, but should support projects that will be beneficial from society’s point of view but which, for some reason, are not attractive to commercial investors.
- Understanding the project-level barriers to investment related to mitigation and adaptation is important, in order to identify the ‘best’ projects and design appropriate financial instruments.
- Subsidies and investments cannot compensate for the absence of supportive policies; investments need a favourable policy environment to be effective.
- Individual financing instruments have a number of parameters that can be adjusted to tackle specific barriers to investment. While there is no one-size-fits-all instrument, certain standards will help to reduce transaction costs when the instrument is used. Depending on the role of the national climate finance institutions, they need a certain level of expertise to make best use of the support.
This policy brief has been prepared as part of the Climate Finance Advisory Service (CFAS).The CFAS offers negotiators, policy makers and advisors in the poorest and most climate vulnerable countries bespoke information and guidance to help them effectively participate in complex global climate finance negotiations. It is an initiative which is delivered by a consortium of experts led by Germanwatch e.V. and funded by the Climate and Development Knowledge Network (CDKN).