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.
- 1. Understanding the situation
- 1.1 Understanding current flows
- 1.2 Assessing financing needs
- 1.3 Assessing capacity
- 1.4 Identifying and overcoming barriers
- 2. Planning and coordinating
- 2.1 Institutions and governance
- 2.2 National finance strategies
- 2.3 Investment plans
- 2.4 National climate funds
- 2.5 Green investment banks
- 4. Using public finance
- 4.1 Managing national finance
- 4.2 International climate finance
- 4.3 Climate finance readiness
- 4.4 The Green Climate Fund
- 4.5 Direct access
- 5. Designing financial instruments
- 5.1 General resources
- 5.2 Sources of private finance
- 5.3 Risk mitigation
- 5.4 Guarantees
- 5.5 Feed-in tariffs and auctions
- 5.6 Taxes and tax incentives
- 5.7 Carbon pricing
Various types of guarantee can be used to address different types of risk related to green projects. In some cases, guarantees may cover risks related to the lack of collateral and the credit risk perception on the part of lenders (credit guarantees, also called partial credit guarantees). In other cases, guarantees can cover uncertainty around the amount of cash flow that projects may be able to generate from their performance (performance risk guarantees). The basic principle of a credit guarantee scheme is that a third party (the guarantor) shares the credit risk of a project with the lender and takes all or part of the losses incurred by the lender in the event of default by the borrower. The objective of the guarantee is thus to lower the residual credit risk for the lender. This is why guarantee schemes are often used to unlock cases where a market is underserved by the financial sector because of the real or perceived risks. (Adapted from Guarantees for green markets: Potential and challenges, IDB, 2014.)
This report provides a comprehensive introduction to the topic of publicly backed guarantees and how they can be used to promote investment in renewables and energy efficiency. The executive summary (10 pp) is written for policymakers and gives a high level overview of where and how publicly backed guarantees are used, and recommendations for the design, preparation, and implementation of such programs. Chapter 1 of the report places publicly backed guarantees in the context of the financial system; chapter 2 explores their economic justification; and chapter 3 provides a survey of different types of publicly backed guarantee. Chapters 4–7 provide detailed examples of publicly backed guarantees in use.
This report from the Inter-American Development Bank considers some of the challenges of investing in low carbon markets, explores how guarantees (principally credit guarantees) can respond to those challenges, and provides various examples of guarantees used in Latin America and the Caribbean. Chapter 5 of the report considers the advantages and disadvantages of different types of guarantee (credit and performance guarantees); chapter 6 provides case studies of the use of guarantees.
Publicly backed guarantees as policy instruments to promote clean energy
Publicly backed guarantees as policy instruments to promote clean energy and Guarantees for green markets: Potential and challenges (both in key resources, this subsection) contain country examples within case studies.
The Institute for Industrial Productivity has also produced a case study on the CHUEE Program.
Established in 2006 by the International Finance Corporation and partners, the CHUEE Program provides risk sharing facilities (in the form of a guarantee) and technical assistance to support energy efficiency measures in China. The identified barriers to uptake are difficulties in marketing energy efficiency products and in accessing credit for energy efficiency projects. Access to credit is particularly difficult for small and medium-sized enterprises; in addition, commercial banks lack experience in sustainable financing. CHUEE helps to address these barriers.