Melekh, Yaroslav; Dutra Saraiva, Joisa Campanher; Rickman, Jamie; Grubb, Michael; Bokpin, Godfred; Caiado Coelho Beltrao Couto, Lilia; (2024) Activating positive financial tipping points for zero-carbon investments in lower-income countries: a twin-track approach catalysed with international guarantees. T20 Brasil: Rio de Janeiro, Brazil.

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Abstract

This policy brief explores the possibility of employing a twin-track approach to blended finance for low-carbon investments, by combining targeted concessional finance with risk-sharing guarantees in lower-income countries. It underscores the need for international public finance to play a more catalytic role in leveraging private finance, using a menu of financial instruments to ensure capital efficiency and free up public resources to vulnerable countries and sectors. Delivering SDGs and the Paris goals requires climate finance to turn ‘billions to trillions’. However, we highlight significant disparities in current international flows, with most public and private climate finance directed to upper-middle-income countries. Other developing countries struggle to access it due to high perceived risks and consequent lack of investment track record in zero-carbon assets, leading to a vicious circle of climate investment trap. We propose to target positive financial tipping points that increase the probability of investments in lower-income countries, using a two-stage approach to foster the maturation of zero-carbon technology and associated financial learning. Concessional finance should target sizeable investment pipelines in the early stages of technology penetration to achieve a threshold of cumulative capacity in each country, build capabilities and identify key risks and opportunities. Beyond this, risk-sharing mechanisms, using guarantees, have large potential and high leverage factors for attracting private finance. We identified a significant gap in deploying guarantees: MDBs’ low incentives, limited financial acumen across most development agencies, and other guarantee facilities that are not targeted to the task of low-carbon development. We propose a menu of possible dedicated guarantee-providing institutions for zero-carbon investments through establishing a multilateral guarantee facility or special guarantee provider, including the potential of sovereign wealth funds.

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