2011 Stadelmann_Game-changer or Complement (079)

<p>Policy makers are increasingly considering finance facilitating tools because they realised that - beyond the question of incremental costs - low-carbon technologies face a finance supply problem; even projects with considerable return expectation have problems to access finance because of high risks and limited liquidity of financial flows in developing countries. In such cases, public equity and debt have several functions. First, they can “signal” to private actors that risk-averse public institutions are investing in specific low-carbon technologies. Second, public finance instruments can cover risks that would otherwise impede private investments. Third, in cases of lending to financial intermediaries, such as banks, public finance can increase the capital flow in the case of less advanced financial markets. Through all these functions, public finance facilitating instruments can leverage private capital, both debt and equity. The just described benefits have yielded hope that finance-facilitating tools can leverage the hundreds of billions of private low-carbon investment needed in developing countries. However, such tools may also face severe challenges, such as the diversity of risks, insufficient low-carbon investment opportunities, substitutability of direct payment tools and free-riding. We have explored these challenges by reviewing the literature and conducting expert interviews.</p>