The essential role of the public sector in unlocking private climate flows

In order to meet international climate goals, the private sector needs to drive investments that align to a net-zero economy by 2050. There is an increased urgency for raising ambition for climate investments, and private finance is needed to support this effort.

The global community is still not on track to achieve the goals that have been agreed on climate finance. It is estimated that an increase in climate finance of 590 percent per year is needed to meet climate goals by 2030.

There are still key financial and technological barriers to leveraging climate finance flows. Reducing climate investment risk and setting an appropriate enabling environment are important factors to incentivize private investments. This means that the role of the public sector to help mobilize these investments will be essential.

Why is the public sector a key player in private climate investments?

The public sector, which includes governments and agencies, has powerful tools to leverage resources for private investors. For instance, it can support policies that help make climate investments commercially viable. Since climate technologies can be capital intensive, governments can modify regulations to reduce the cost of financing. Subsidies to low carbon investments or taxes to fossil fuels are also useful incentives for the private sector to take advantage of these opportunities. These policies can shape markets in ways that are urgently needed to catalyze private investments into low carbon projects.

Public institutions can also help through direct mobilization of finance. For instance, grants, loans, and guarantees can be used to help private actors find better risk-return scenarios on climate investments. In this case, concessional finance and preferential interest rates can be used to incentivize investments and reduce high costs. For instance, international climate funds can offer below-market interest rates that public institutions can access. Those institutions can then co-finance projects with private investors, offering more accessible investment profiles for technologies that are still expensive to implement or that have limited market share.

The public sector is also a key player in setting the enabling environment for private climate flows.

One of the key barriers to investment in climate projects is the lack of capacities or knowledge in low-carbon technologies and in the reasons why mitigation and adaptation investments are needed. This is where pilot and demonstration projects with climate components are helpful, allowing private actors to better understand the nature and technicalities of these investments. Public funds are used to support research and feasibility studies that are necessary to make the business case of climate investments.

The following figure shows examples of public sector support to private climate finance:

Source: OECD, 2017

The way forward for climate investments

The current landscape of climate finance is still led by public international funds. Nevertheless, the role of the private sector is growing and is now calculated to represent 49 percent of global climate flows. As mentioned above, lowering investment barriers and setting an enabling environment for private investments is key in climate finance.

The investment opportunity for private investors is growing and the momentum is here. The role of the public sector in setting the scene through diverse policy and financial tools is crucial to achieve climate goals by 2030.