Towards a private-public synergy in financing climate change mitigation projects

Funding for greenhouse gas mitigation projects in developing countries is crucial for addressing the global climate change problem. By examining current climate change-related financial mechanisms and their limitations, this paper indicates that their roles are limited in affecting developing countries' future emissions, and argues for the necessity of stronger private sector engagement in financing mitigation projects. In this regard, the clean development mechanism (CDM), one of the flexibility mechanisms incorporated into the Kyoto Protocol, could offer great potential in helping mobilize foreign direct investment towards climate mitigation, by providing commercial incentives for the private sector to invest in mitigation projects and internalizing externalities associated with mitigation projects. However, due to additional risks and barriers involved in CDM projects, we believe that appropriate public-private linkage would be necessary in order to bring the CDM into full play. To this end, we suggest that public funds could be used to complement private investment via the CDM, thus enhancing market functions of such an investment. Moreover, in so doing, we think that it would be necessary to examine a host of factors, such as risk sharing, private sector investment behaviour, types of technologies to be transferred, and co-ordination with the commonly practiced trade and investment rules. (C) 2001 Elsevier Science Ltd. All rights reserved.