Exploring the potential of new financial instruments for climate change

A major and sustained increase in investment is needed for the EU to move towards a low-carbon economy. With limited additional financing expected from the public purse, attention is turning to ways to unlock the investment potential of the private sector, including through new financial instruments. In discussions on the future EU budget such instruments are being promoted as a means of attracting additional public and private financing at a time of fiscal constraint. If well designed and targeted, these instruments could offer significant opportunities for bridging the climate financing gap. However, expectations should be realistic. The use of such instruments is still a niche area in the EU and there seems to be a discrepancy between what stakeholders expect and what these instruments can actually deliver. While efforts are needed to increase the scale of spending on climate change, overall spending should not undermine EU climate objectives; policy and regulatory signals are needed to ensure these instruments do not lock in carbon-intensive technologies and infrastructures.

A new report by IEEP on ‘Mobilising private investment for climate change action in the EU: The role of new financial instruments’ contributes to ongoing discussions on the use of new financial instruments. It examines practical experiences in the use of such instruments, the Commission’s proposals for new financial instruments in the post-2013 EU budget, and potential opportunities and caveats for their use. Our analysis concludes that the current political and regulatory framework conditions are not suited to creating significant new impetus for climate-related funding through these instruments. This is even more the case because the budget underpinning these instruments, in particular those relevant for climate purposes, is rather small. However, there is a perceptible change in thinking and with further efforts this could lead to a ramping-up of such instruments to create more leverage for climate-related investments.

Contacts: Sirini Withana and Axel Volkery