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Resource guide for NDC finance

Selecting effective financial instruments to support action on climate change

This low emission development strategies (LEDS) Finance Resource Guide presents a curated selection of resources on a range of topics around finance for LEDS and Nationally Determined Contributions (NDCs). It is designed to help LEDS practitioners find high-quality resources that meet their specific needs, avoiding time-consuming searches on the internet. It will be useful to individuals working on, or interested in, LEDS and NDC finance in both developed and developing countries.

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3. Creating an enabling environment

An enabling environment to attract investment is one that has appropriate policy conditions—including laws, targets, and regulations—and the institutional capacity to implement policy. It also has appropriate industry conditions, including engineering expertise and the presence of enabling infrastructure, and a stable financial sector with the capacity to support low carbon energy. (Adapted from Mobilizing climate investment: The role of international climate finance in creating readiness for scaled-up low-carbon energy, WRI, 2013.)

“The broad investment environment is [also] a key determinant of investors’ willingness to invest in developing countries. Factors such as the stability and transparency of the rule of law in a general sense, standards of corporate governance, import tariffs, restrictions on the repatriation of investment returns and the enforceability of contracts are every bit as important as a country’s climate change policy in shaping investors’ appetite to invest.”
(Source: Non-carbon market financing mechanisms for climate change mitigation and adaptation in developing countries: Statement by the Institutional Investors Group on Climate Change (IIGCC), 2009)

This section presents a selection of resources on the topic of enabling environments (also referred to as the ‘investment environment’ or ‘investment grade policy’). The first three are introductory resources that explore the importance of addressing the broader investment environment (alongside specific instruments designed to support investment, the focus of section 5 of this guide). Three more comprehensive resources are then listed, which look in more detail at what countries can do to put in place an ‘investment grade’ enabling environment. A specific resource is included on fossil fuel subsidy reform, as for many countries subsidy reform will be a key part of developing a coherent investment environment for NDC and LEDS finance.

Related resources

Fossil fuel subsidy reform in sub-Saharan Africa: From rhetoric to reality

Organization(s):ODI/New Climate Economy

  • Creating an enabling environment

This working paper, complementing the report above, presents a regional report on sub-Saharan Africa, with more specific guidance on reform of fossil fuel subsidies that could apply to countries in that region.

Fossil fuel subsidy reform: From rhetoric to reality

Organization(s):ODI/New Climate Economy

  • Creating an enabling environment

In order to support governments and other stakeholders that are seeking to understand the potential for fossil fuel subsidy reform, or are planning to undertake or provide financial assistance for wider programs of energy subsidy reform, this report outlines the current scope and scale of subsidies for fossil fuels; the economic, social, and environmental costs of fossil fuel subsidies; emerging evidence of the global benefits of reforming fossil fuel subsidies; potential barriers to subsidy reform; drivers and opportunities for reform; key principles for national level reform; and current opportunities to accelerate reforms on fossil fuel subsidies through international support. The report also contains 15 case studies of fossil fuel reform across developed and developing countries.

Aligning policies for a low carbon economy

Organization(s):OECD/IEA/ITF/NEA

  • Creating an enabling environment

This very detailed and comprehensive report presents a broad diagnosis of the coherence between overall policy and regulatory frameworks, and climate goals. It identifies a number of opportunities for realigning policies to enable an efficient and cost effective shift to a low carbon economy, across four policy domains (investment, taxation, innovation and skills, and trade) and three specific areas that are important for the low carbon transition (electricity, urban mobility, and rural land use). Chapter 2 of the report (especially pp. 54–58) discusses the importance of the enabling environment and of aligning investment policies with climate goals. Chapter 3 discusses taxation policies and subsidies and how they can undermine climate action. Also available in French and German.

Towards a green investment policy framework

Organization(s):OECD

  • Creating an enabling environment

This report aims to advise governments on how to create and improve domestic enabling conditions to shift and scale up private sector investments in green infrastructure, as part of their agenda to finance their transition to a low carbon, climate resilient economy. The target audience are national policymakers and their advisors in developed and developing countries, who are looking to increase private sector participation to finance a transition to low carbon and climate resilient development. Section 3 outlines five key elements of a policy framework to mobilize private sector investment: 1) goal setting and aligning policy goals across and within levels of government; 2) reforming policies to enable investment and strengthen market incentives; 3) establishing specific financial policies that provide transitional support for new green technologies; 4) harnessing and scaling up resources; and 5) establishing practices that promote green business and consumer behavior, such as information and education policies.

Principles for investment grade policy and projects

Organization(s):CMCI

  • Creating an enabling environment

This document sets out five operational principles for creation of an ‘investment grade’ policy environment, as developed by the Capital Markets Climate Initiative. These principles are aimed at policymakers from developed and developing countries, to help address the issue of how to use public policy and public sector capital to leverage private sector capital into investment in climate change. The purpose is to help policymakers assess and plan national policy that will lead to long term capital investment in climate change solutions. Chapter 3 of the document sets out the five principles that cover dialogue, policy framework, price signals, economic drivers, and government programs. Annex 2 provides detailed case studies on experiences of developed and developing countries in managing their investment environment. Annex 3 provides more detail on key aspects of the investment grade principles.

Unlocking finance for clean energy: The need for ‘investment grade’ policy

Organization(s):Chatham House

  • Creating an enabling environment

This briefing paper looks at what policy needs to deliver to provide the conditions for scaled up investment in renewable energy, drawing on work with leading mainstream financiers. It covers some of the fundamental issues at the heart of investment decisions, and the importance of policy design and clear evidence that governments are serious about their policy goals and achieving them. This paper contributed to a major body of work taken on by the Capital Markets Climate Initiative in the UK (see following resource).

Mobilizing climate investment: The role of international climate finance in creating readiness for scaled-up low-carbon energy

Organization(s):WRI

  • Creating an enabling environment

This report provides guidelines to help countries develop an effective enabling environment for climate investment. Based on in-depth analysis of existing ‘readiness’ activities in six developing countries, it lays out an effective framework for stimulating investment in renewable energy and energy efficiency. The report outlines how government leadership and commitment to policy and institutional reform is essential to inspiring investor confidence. In chapter 2, ‘Creating the conditions for investment’, the report gives detailed guidance on priority policy, institutional, industry, and financial sector conditions that can attract scaled up investment.

Catalyzing climate finance: A guidebook on policy and financing options to support green, low-emission and climate-resilient development

Organization(s):UNDP

  • Introductory resources,
  • Creating an enabling environment,
  • Sources of private finance

This is a useful general resource covering many aspects of financing LEDS, and is relevant across several of the sections covered by this guide. The principal audience for this publication is public development practitioners at national and subnational levels, as well as domestic and international experts involved in assisting governments in catalyzing finance for climate investment and sustainable development. The guide outlines a four-step methodology to assist developing countries in selecting and deploying an optimal mix of public policies and financing instruments to catalyze climate finance in line with national development priorities:

  • Step 1: Identify priority mitigation and adaptation technologies
  • Step 2: Define and assess key barriers to technology diffusion
  • Step 3: Determine appropriate policy mix to catalyze climate capital
  • Step 4: Select financing options to create an enabling policy environment

Country case study

Mobilizing climate investment: The role of international climate finance in creating readiness for scaled-up low-carbon energy

Organization(s):WRI

  • Creating an enabling environment

Chapter 3 of this report (listed above) contains six case studies: energy efficiency in India and Thailand; wind power in South Africa and Mexico; solar water heaters in Tunisia; and geothermal power in Indonesia.

Country case study

Kenya’s National Climate Change Action Plan—Section E: Investment Climate for Climate Investment

Organization(s):Government of Kenya

  • Creating an enabling environment

The purpose of this section of Kenya’s National Climate Change Action Plan is to assess the broader enabling framework and environment for private sector low carbon investment in Kenya, so as to provide recommendations for improvement. It addresses the policy and regulatory environment for renewable energy and energy efficiency, and the existence of government incentives and barriers in that environment. It analyzes the issue of how to access finance and the relevant barriers, and looks at perceived and actual institutional strengths and weaknesses of businesses and financial institutions. Finally, it makes a series of recommendations for improvement, including on potential implementing agencies.