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The private sector and climate change in developing countries

Written by Alberto Lemma


By Karen Ellis, Carolin Schramm and Alberto Lemma

Responding to climate change, and achieving low carbon growth and development, will be a major challenge for the international community; one which will require significant public and private sector action and cooperation. 

The private sector has an enormous role to play in this, undertaking the investment and technological innovation that will underpin low carbon growth, providing finance for mitigation and adaptation, adopting lower carbon production processes, and encouraging and facilitating more climate conscious purchasing decisions by consumers. 

Various reports have looked at the role of the private sector, and how the right incentives can be created to maximise their contribution.  For example, the World Business Council for Sustainable Development (WBCSD) study, Towards a Low-carbon Economy, focuses on business experience in technology development and deployment, finance and carbon markets, and makes policy recommendations. Catalysing low-carbon growth in developing economies from UNEP and partners, focuses on the kinds of public finance mechanisms needed to incentivise and scale-up private sector investment for climate solutions.  And Charting a New Low-Carbon Route to Development published by UNDP, discusses options to achieve both climate change mitigation and the investments needed to accelerate poverty reduction and development.

To maximise the private sector contribution to tackling climate change, clear and appropriate incentives need to be created. This would be achieved most effectively through a global deal establishing binding emission reduction commitments, which would create greater clarity about the future carbon price. The nature of the policy incentives adopted to achieve emission reductions will also determine the scale and nature of private sector involvement. 

Business is engaging extensively on this agenda, through a range of international initiatives and fora, including the World Economic Forum’s Task force on Low Carbon Economic Prosperity, which is developing proposals to accelerate private sector investment and innovation in the fight against climate change; The Climate Group, a global coalition of governments and businesses working to tackle climate change and speed up the shift to a low carbon global economy; and the WBCSD.

At national level too, the establishment of a clear policy framework will be important in creating an environment that is conducive to private sector engagement. If governments can clarify the future direction of policy and the key decisions that will be made, for example on energy sourcing and infrastructure development, this will give business greater confidence to undertake the low carbon investments that are needed, in the knowledge that future policy development will be consistent with a positive return on their investment.

Some countries are beginning to do this, although most – especially in the developing world - are still at an early stage. A new ODI study, Policies for low carbon growth, reviews the low carbon and climate resilient growth strategies being developed in a range of countries.  The review suggests that consulting and partnering with the private sector in developing these strategies can help increase the feasibility and market-friendliness of policies that are proposed. This can facilitate greater private sector engagement in achieving low carbon growth and improve the sustainability and scale-up of green investments.

Help from business in identifying and overcoming the barriers to investment will be particularly important. Many of the barriers to low carbon growth, mitigation financing and technological transfer in developing countries are the same as the existing barriers to investment and business activity (e.g. lack of access to finance, high costs of doing business etc.) and policies to tackle these remain crucial.

Most of the low carbon growth plans we have reviewed, particularly those from developing countries, are contingent on large sums of private financing being made available through international carbon markets. Many of the most cost effective mitigation opportunities are in the developing world, and this could allow some developing countries to capitalise on potentially huge new sources of private finance that may be generated through emissions trading schemes or the Clean Development Mechanism. This could represent a real win-win scenario, meeting both environmental and development objectives. However, these carbon markets and international mitigation mechanisms will need to be developed, reformed and scaled up significantly if they are to benefit more developing countries. 

The role of the private sector in tackling climate change and supporting low carbon growth in developing countries is clear, and business is already actively engaged on this agenda.  However, it will be down to policy makers to establish rules of the game that maximise the contribution of the private sector to this objective.  There could be more win-win scenarios here, for the environment, development and for businesses themselves, but only if all parties work together and find innovative and effective solutions to this most pressing of problems.