Only Private Sector Can Meet Finance Demands of Developing Countries

Things are getting hot here in Copenhagen.  It’s not the weather outside, but the debate taking place inside the Bella Center, home of the 15th Conference of the Parties of the UN Framework Convention on Climate Change.  This afternoon, the main session of the talks was suspended, following protests led by African countries, which accused the industrialized countries of trying to wreck the existing Kyoto Protocol.  At the heart of the controversy is the “finance question,” as it’s called here, with the developing countries asking for more than $100 billion to $200 billion annually to pay for their carbon mitigation and climate change adaptation through 2050!

At the National Journal’s “Copenhagen Insider” Blog, Congressman Ed Markey poses the highly relevant question of how much should wealthy countries help poor countries address climate change.  In response to Congressman Markey’s question, I maintain that it is inconceivable that the governments of the industrialized world, including the United States, will come up with sufficient foreign aid to satisfy the demands for financial transfers being made by the developing countries in Copenhagen.  However, governments can — through the right domestic and international policy arrangements — provide key incentives for the private sector to provide the needed finance through foreign direct investments.

For example, if the cap-and-trade systems which are emerging throughout the industrialized world as the favored domestic approach to reducing CO2 and other greenhouse gas emissions are linked together through the existing, common emission-reduction-credit system, namely the Clean Development Mechanism (CDM), then powerful incentives can be created for carbon-friendly private investment in the developing world.

Clearly the CDM, as it currently stands, cannot live up to this promise, but with appropriate reforms there is significant potential.  Of course, problems of limited additionality will inevitably remain.  Therefore, what is needed is for the key emerging economies — China, India, Brazil, Korea, South Korea, South Africa, and Mexico — to take on meaningful emission targets themselves (even if equivalent to business as usual in the short term), and then participate directly in international cap-and-trade, not government-government trading as envisioned in Article 17 of the Kyoto Protocol (which won’t work), but firm-firm trading through linked national and multi-national cap-and-trade systems.

Such private finance stands a much greater chance than government aid of being efficiently employed, that is, targeted to reducing emissions, rather than spent by poor nations on other (possibly meritorious) purposes.  So, all in all, the job can be done, and governments have an important role, but as facilitators, not providers, of finance.  This should be the focus of the discussion here in Copenhagen..

Author: Robert Stavins

Robert N. Stavins is the Albert Pratt Professor of Business and Government, John F. Kennedy School of Government, Harvard University, Director of the Harvard Environmental Economics Program, Director of Graduate Studies for the Doctoral Program in Public Policy and the Doctoral Program in Political Economy and Government, Co-Chair of the Harvard Business School-Kennedy School Joint Degree Programs, and Director of the Harvard Project on Climate Agreements.