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Green Infrastructure Finance

A Public-Private Partnership
Approach to Climate Finance
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East Asia and Pacific Region

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 Table of Contents
Introduction......................................................................................................................................................2
Why a New Framework...................................................................................................................................3
The Green Infrastructure Finance Framework: An Overview........................................................................7
Concluding Remarks......................................................................................................................................12

January 2013

Aldo Baietti
[email protected]

www.worldbank.org www.ausaid.gov.au
Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance

Introduction

I
n June 2012, the Green Infrastructure Finance role in monetizing both global and local external-
Framework Report1 was published to address ity benefits. However, the added climate change
the constraints in financing green infrastruc- dimension does not necessarily change how the
ture and to develop a new approach to accelerate financing problem should be resolved. While there
investments in low-emission technologies. This is a need for a credible assessment methodology
publication followed the Leading Initiatives and that can address the unique characteristics of green
Research Report2 that summarized much of the investments, this should not alter the fundamental
past work and identified remaining gaps. The con- principles on which low-emission projects are eval-
clusions of the Research Report formed the basis uated, structured and financed.
for the principles of the financial gap analysis and
green investment climate assessment methodol- Second, many green technologies require sub-
ogy proposed in the Framework. sidy support, but this is not different from many
other infrastructure projects that are implemented
Since publication, the overall approach of the as public-private partnerships (PPPs). Such hybrid
Framework has evolved by sharpening its argu- financing schemes are more common as projects
ment, clarifying its benefits and adding a regula- become more complex and not viable purely on pri-
tory/monitoring, reporting and verification (MRV) vate financing structures. Green technologies must
component, which brings the Framework closer to develop an equitable risk allocation framework that
a workable financing mechanism for green tech- can provide a compelling argument for different
nologies. Moreover, the approach now includes a stakeholders to support these investments through
financing and advisory interface, which clarifies subsidized financing to the extent that this financ-
the principles and concepts of the shared financ- ing is justifiable from a climate change perspective.
ing roles recommended by the methodology. The
Framework attempts to bring clean investments Third, the principle objective of Green Finance
towards a more familiar financing environment is to accelerate investment in green technologies
and to distance them from the charged political by resolving their financing challenges, with car-
debate that has adversely affected the progress in bon reduction as an indirect desired outcome of
international climate change discussions for over a successful implementation. While the distinction
decade. The task has evolved through the follow- between “accelerating investment” and “reducing
ing three concepts. carbon” may be subtle, it is nonetheless important
to underscore that this approach is an investment
First, green technology projects are sufficiently and financing framework, which differs from other
similar to other infrastructure projects and should approaches to Climate Finance. As such, the focus
rely on proven project financing approaches. The is on obstacles that have impeded the financial
key difference is that many green investments closing of green investments. Moreover, the suc-
require financial support to mitigate externali- cessful financial closure of low-emission projects
ties, which private proponents alone have no abil- will improve their contribution to climate change
ity to monetize. Public finance can play a critical by locking new investments into clean technol-
ogy over their lifetime, while displacing low-cost
1
Baietti, A., et al, Green Infrastructure Finance Framework Re- polluting alternatives. This is significant as carbon
port, World Bank, 2012 mitigation initiatives often deal with emissions of
2
Baietti, A., Shlyakhtenko A., La Rocca, R., Patel, U., Green In-
frastructure Finance: Leading Initiatives and Research, World pre-existing assets rather than introducing new
Bank, 2012 clean investments.

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 Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance

Why a New Framework

M
any interventions have been taken to and regulatory arrangements and procedures. CDM,
increase investments in green projects. however, is perhaps the only fully contained financ-
Feed-in Tariffs (FiTs) as well as other finan- ing and regulatory framework that provides finan-
cial incentives for solar, hydro, biomass and wind cial support to curb the effects of climate change by
energy have been introduced in many countries. funding individual investment projects.
A number of international programs with signifi-
cant funding have also been established to sup- CDM establishes the rules for eligibility, proce-
port clean infrastructure investments. This includes, dures for analysis and carbon financing as well as
most notably, the Clean Technology Fund (CTF), the regulatory, monitoring and verification over-
Global Environment Facility (GEF), and the Clean sight. Despite its innovative approach and certain
Development Mechanism (CDM) created by the success, a number of limitations must be over-
Kyoto Protocol. come if CDM is to have a greater role in acceler-
ating investment in clean technologies. Some of
For example, the latter, under the principle these limitations include:
of shared responsibility, channels funding from
GHG emitting entities in developed countries to ■■ Nearly two thirds of the CO2 reductions from the
carbon-reducing activities in less developed coun- one billion CDM CERs came from low capital-to-
tries. Each eligible project earns certified emission output projects that cut HFCs, PFCs, SF and N2O.
reductions (CERs), payable at a market price for However, many of these industrial gases could
each ton of carbon it reduces. Governments in have been eliminated through other mechanisms
many developing countries recognized the oppor- without the need for substantial subsidies. In ad-
tunity to implement carbon mitigation projects dition, a number of these projects have earned fi-
while minimizing their own financial burden. nancial windfall profits, making the practice con-
troversial. In contrast, CDM has eliminated just
A substantial number of projects have been 20 million tons of CO2 per year from clean tech-
implemented in the CDM’s 11-year history. By nology investments. This CO2 reduction is under-
September 2012, the CDM achieved a major mile- whelming, especially given that it is approximate-
stone when the total CER units reached one billion ly equivalent to eliminating only one large coal
with a total value of US$8 billion to US$10 billion. power plant per year for the entire group of 154
CTF and GEF have also made significant contribu- countries that have participated in the program.
tions to investment levels and many other finan- Conversely, the same group of countries (with the
cial and policy interventions at the country level exception of some of the smaller ones3) nearly dou-
have spurred investment incentives. Unfortunately, bled their CO2 emissions during 2001-2010 from
as the Research Report highlights, “while invest- 9.2 billion metric tons to 17.2 billion metric ton
ment trends in clean technologies have improved, per year. Essentially, non-Annex 1 countries4 saw
the pace of these investments is still substantially an average annual increase in energy related CO2
insufficient in order to curb the effects of climate
3
Excludes new nations like South Sudan and small countries,
change.” Investments have not kept pace with the
such as Andorra, Palau, Marshall Islands, Micronesia, Tuvalu, San
need and the funding gap is growing. Marino, and others.
4
Annex I countries is the group of countries included in Annex I (as
amended in 1998) to the United Nations Framework Convention
Various levels of integration of the sources of on Climate Change (UNFCCC), including all the OECD countries
concessional financing with regulatory frameworks and economies in transition. Under Articles 4.2 (a) and 4.2 (b)
have been implemented. CTF and GEF are two of the Convention, Annex I countries committed themselves to
returning individually or jointly to their 1990 levels of greenhouse
important sources of concessional financing that gas emissions. By default, the other countries that signed the
function primarily within other existing financing Kyoto Protocol are referred to as Non-Annex I countries.

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Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance

Figure 1. Total CO2 Emission from Energy Sources – Non-Annex I Countries

million metric tons

18,000
1,478 17,245

16,000 631
976
623
14,000 671
781
1,406
12,000
818
10,000 626
9,236

8,000

6,000
2001_Tot 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010_Tot

Source: US Energy Information Agency (EIA)

emissions of approximately 7.18% per year. CDM is particularly constraining on renewable energy
lowered this from 7.32%—a barely discernible (RE) projects that are also disadvantaged by their
reduction; relatively high up-front capital costs. If a proj-
ect genuinely requires a subsidy, support should
■■ Essentially, CDM has been financing primar-
be provided either at the financing stage or be
ily “end-of-pipe” mitigation of pre-existing
guaranteed in order to make an otherwise unvi-
assets instead of creating a shift by favoring
able project bankable. Nevertheless, CDM does
clean technologies (such as renewables) in new
not address this problem directly, and while the
investment decisions. Addressing the exist-
cash stream of CDM benefits could conceivably
ing base of investments is commendable, but
be securitized as an upfront payment, such at-
ultimately ameliorating the effects of climate
tempts have not been successful because their
change will only occur if new investments will
guarantee cannot be anchored to a reliable reg-
flow to low-emission projects rather than to
ulatory and pricing framework;
polluting alternatives. This means not only ex-
panding programs for energy efficiency invest- ■■ CDM operates under an international frame-
ments in pre-existing assets, but also increasing work of the United Nations Framework Con-
the installed capacity of new renewable ener- vention on Climate Change (UNFCCC) and this
gy (RE) technologies; presents a particular legal problem because
parties must rely on commercial contracts to
■■ Another problem is how and when the carbon
resolve disputes. This can be expensive in the
funds are received. CDM funding to projects re-
event of non-compliance, thus making the out-
lies purely on the per ton carbon price which is
put-based approach to payment the only prac-
only paid after actual carbon benefits are pro-
tical way to reduce risk. Moreover, the project
duced. Moreover, the price is determined by a
validation and registration process is bureau-
political market that is volatile and unreliable
cratic, and verification can be very costly as it
for long-term contracts. Both issues create sig-
utilizes highly paid international experts;
nificant uncertainty in resolving the up-front
financing burden for clean investments. CDM ■■ The volatility of the carbon markets has also
financial support occurs only after the project is been a significant deterrent to the extent that
operational, and therefore project sponsors can- an entire financial industry has evolved with
not rely on it for the initial capitalization. This the aim of creating some degree of stability in

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 Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance

the system. However, these efforts also come ■■ More importantly, financial subsidies should
at a significant transaction cost, raising ques- be sufficient to make projects bankable, not
tions as to whether investment financing, par- more or less. Even from an environmental
ticularly payments for curbing environmental policy perspective, where subsidies represent
externalities or subsidies (from project point of
payments for public goods, private projects
view), could be channeled more efficiently;
should not be supported beyond reasonable
■■ Another key problem is the eligibility of proj- rates of return. Using the approach of com-
ects. CDM works on the principle of “addition- petitive bidding for the least subsidy required
ality”, which means that the project would can provide additional assurances that spon-
not have happened without the aid of carbon sors receive only the necessary subsidy. In con-
finance support. However, demonstrating a
trast, CDM, depending on the carbon market
project’s additionality has been very challeng-
price, can greatly exaggerate the returns of
ing. This is illustrated by the fact that the ma-
jority of the projects that were denied regis- a given project or totally exclude other proj-
tration (more than 70%) have been rejected ects that are justifiable from a climate change
on the grounds of additionality. Yet, some perspective. The graph below illustrates this
of such projects were likely justifiable from latter point, where carbon finance support at
a climate change perspective. While projects any given unit price does not always reflect
should not be subsidized unnecessarily, eligi- the need or justifiable benefits.
bility criteria should be rigorous enough to re-
flect a country’s investment conditions, which The following chart summarizes some of the
can vary considerably, especially where bene- main differences between CDM and the Green
fits significantly outweigh costs; Finance Framework.

Figure 2. How CDM Can Exclude Justifiable Projects and Reward Others More than Needed5
Monetary Value

Total Revenue Requirement

Associated Value of Social Benefits
C, C1,2 Total Revenue With Subsidy at Given Carbon Prices

C2

C1
C

Green Technologies & Mitigation Measures

Source: Authors

Figure 2 illustrates the total revenue requirement for various green technologies and other mitigation initiatives, such as the destruction
5

of industrial gasses (red bars). The C, C1 and C2 lines represent the levels of total revenue each of these investments would achieve. The
blue bars represent corresponding value of monetizable social benefits of each activity. The case to the far right of the graph shows, as
an example that at the C subsidy support, the project would already surpass its total revenue requirement thus earning a higher than re-
quired risk adjusted rate of return. Assuming the price/ton increases to C1, the total value of profits would be more than double the revenue
requirement and create a windfall situation. The project just to the left, on the other hand would only be viable at C1 and above that line.
Therefore, at any given carbon price, there would be a group of projects that would receive more than needed subsidies (to the right of
the chart), while others would be unviable (toward the left of the chart). This is of particular concern when also factoring the total value of
social benefits of each project in comparison to their total financial requirements. Projects should merit investment consideration when the
monetizable value of the global and local externalities is equal or exceed the financing gap.

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Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance

The figure below reflects the key differences between the CDM approach and the Green Finance
Framework.

Figure 3. Key Differences between CDM and Green Finance

Features Green Finance Framework CDM

Outcome Promotion of long-term investments in Promotion of greenhouse gas (GHG) reduction and
low-carbon infrastructure. sustainable development.
Authority Enhancement of existing country-based legal UNFCCC protocols.
and regulatory PPP framework.
Financing Up-front structured financing. Projects cannot Output-based financing, usually regarded as a
Approach close without all financing being in place. sweetener.
Subsidy Mix of concessional public financing utilized to Highly dependent on carbon price.
Support close the financial viability gap can be funded
from multiple sources.
Additionality No additionality issues. Projects are not viable One of the ways for the projects to prove
or financially attractive without gap financing additionality is to demonstrate that they are not
and cannot go to closure. viable in the absence of carbon benefit. Yet they
need to reach closing before any benefits are
received.
Double None. Only the amount of subsidy benefits Potential for double counting in the event several
Counting needed to close the gap is subscribed. In many financing sources are syndicated.
(Paying) cases the GHG value of the benefits can be
greater than the subsidy that is needed, leav-
ing a residual amount to be used for other
purposes.
Source: Authors

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 Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance

The Green Infrastructure Finance

Framework: An Overview

T
he Green Infrastructure Finance Framework alternatives. The approach is integrated into the
is an attempt to re-evaluate how green proj- existing policy, regulatory, and institutional envi-
ects can be assessed, structured and financed ronment and provides a way to allocate responsi-
with the aim of positioning these investments as bility to respective stakeholders without creating
viable and attractive opportunities to polluting additional economic distortions.

Figure 4. Components of the Green Infrastructure Finance Framework

Monetizing GHG Benefits

(Internationally Sourced)

Regional Carbon Markets

Policy Environment
Specialized Green Funds
Assessment
of Country’s Green Bilateral Donor Aid
Financing & Advisory Interface

Investment Climate
Concessional Export Financing

Modified CDM
Viability
Gap
Financial
Analysis
Advisory
of Green Monetizing Local Benefits &
Projects Rebalancing Distortions
Regulatory & Institutional (Domestically Sourced)
Framework
FiTs
Anchored on
Country’s PPP Framework
and MRV Component Specialized Green Funds

Direct Subsidies

Fiscal and Tax Incentives

Country Specific Carbon Finance

Source: Authors

The “Viability Gap Analysis” methodology bridges ideas and concepts between environmen-
is the core of the Framework. This methodology tal economics and project finance practices to
presents a simple but elegant way to structure monetize environmental economic benefits and
scarce public concessional financing to leverage rebalance the distortions in order to close the
market interest in “greening” infrastructure. It financial viability gap of green technologies.

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Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance

The methodology starts with determining community focuses on the global externalities
the financial viability gap of a privately financed benefits of the given investment. The outcome is a
green investment that competes against the low- hybrid public-private partnership financing struc-
est cost polluting alternative. This gap is then ture that can reduce additional distortions in the
compared to a series of monetizable economic economy as it justifiably allocates funding respon-
benefits the project generates, including environ- sibilities and costs to those stakeholders that actu-
mental benefits and avoided distortions created ally receive the benefits. Most importantly, this
by a host government, for example, through fossil approach makes clean investment a profitable
fuel subsidies. and attractive proposition that earns the appro-
priate risk-adjusted rate of return.
The environmental benefits and avoided dis-
tortions are assessed to determine whether, if The methodology is illustrated conceptually in
monetized, they can close the gap either indi- the chart below. A clean energy investment such
vidually or in combination, with public financ- as a wind or solar project is evaluated financially
ing responsibilities allocated commensurately. against its least-cost polluting alternative (e.g.
The national government addresses the distor- coal) to estimate a financial viability gap in net
tions and local benefits, while the international present value (NPV) terms.

Figure 5. Illustration of the Financial Gap Analysis Methodology

60 Financial Costs and Benefits Monetizable Monetizable Environmental

Distortions Benefits

50

40
PV US$ millions

Financial
21
Viability Gap
30 21

38
44
20
12

23
10
5

0
Costs Revenue Policy Local Global
Distortions Externalities Externalities

Source: Authors

Three different economic benefits and costs fossil fuels) and the local externalities (e.g. local
are then calculated for their monetizable values pollution caused by the coal alternative) would
to assess whether the three combined or individu- be the responsibility of the host government,
ally can potentially close the gap. In this case, the whereas the net global externality (e.g. GHG ben-
NPV values of the environmental benefits and dis- efits of the RE project against coal) would be the
tortions offset the values of the viability gap. The responsibility of the international community.
value to offset the distortions (e.g. a subsidy to Each party would internally monetize these values

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 Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance

to determine a final financial structuring in com- Figure 6. Green Investment Climate Assessment
bination with the private finance contribution Framework
and would utilize a combination of instruments
equal to the NPV value required for their respec-
tive responsibility.
Natural Resource
The financial measures to be enacted and the Endowments

actual value that each party would be able to

commit can form the basis of a wide-ranging dia-
logue. This can include: (i) the overall stage of eco-
nomic development of a country and its budgetary Green Doing
resources; (ii) the country’s current policy and Policies and Business
Incentives Environment
incentive framework and emphasis towards green-
ing its economy as opposed to promoting fossil fuel
use; and (iii) other considerations such as general
donor aid strategy, export promotion strategy of
clean technologies owners and their governments, Development and
and bilateral agreements or exporting offsets to Competitiveness Strategy

emerging regional carbon markets. In the case

illustrated, the gap could be closed entirely from
GHG benefits or through a lower international cli-
mate finance contribution with additional sup- Source: Authors
port from the national government.
The overall green investment climate assess-
Accelerating green investments must also ment of countries provides a general under-
focus on the right policy environment in a given standing of the attractiveness, prevailing trends,
country context. As such, the second part of the strengths, and other aspects affecting the ability of
Framework relates to creating effective policies the country to leverage its green growth potential.
and financial incentives in order to create invest- The core component of the green investment cli-
ment opportunities, while reducing the related mate – Green Investment Policies and Incentives –
risks. The approach calls for assessing the “green (see Figure 7) includes four main parts: (i) policies
investment climate” of a given country in order and legislation; (ii) financial and economic instru-
to develop country-specific recommendations for ments; (iii) programs and institutions; and (iv) the
policy and incentive programs as well as other regulatory environment.
measures which can be introduced to further pro-
mote green growth in an economy. As indicated, the CDM regulatory framework
is limited in supporting new investments to reach
The assessment has to include not only the its green growth potential. Successful growth in
green policy and incentives environment but also these investments requires a credible and effi-
the country’s overall natural resource endowment cient regulatory framework of enforceable con-
of fossil and renewable energy, the industrial tracts that will ensure that financially supported
development strategy in addition to general busi- projects actually achieve their service obligations
ness indicators and other considerations, such as and environmental benefits. Thus, the third ele-
electricity prices, the capacity of the financial sec- ment of the Green Infrastructure Framework is a
tor to mobilize long-term domestic financing, as regulatory component integrated with the exist-
well as their overall regulatory and legal capacity ing country regulatory framework. The main ele-
to implement PPPs (see Figure 6). ment of such a regulatory framework should be

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Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance

Figure 7. Components of Green Policies and Incentives

Policies, specific legislation and information availability-related initiatives that have been introduced to
Policies and Legislation implement policy objectives

Incentives typically enacted Financial instruments, schemes Markets

Financial and Economic to reduce tax liabilities of and subsidy arrangements that have been created
Instruments companies engaged in green to make green investments to value and trade
projects and subsidies more attractive carbon

Specific programs that have been implemented in Institutions involved in a country’s

Programs and Institutions order to promote green investments specific programs

Institutions responsible for the

Specifications, standards and verifiable indicators
Regulatory Environment used for regulating green investments
regulatory environment and its relative
corrective measures

Source: Authors

a reliable and efficient system for measuring, be established by performance bonds, third party
reporting and verifying (MRV) environmental guarantees and other forms of security—as with
benefits of the investment that will be supported regular PPPs. An existing substantial body of work
with concessional or subsidized financing, particu- can be immediately implemented to make this
larly if the intention is to issue CERs for up-front approach operational. The in-country regulatory
financing. Third party international contributors authority would be entrusted to implement the
must be assured that remedies can be obtained approach and would have oversight and respon-
if a project does not achieve such reductions in sibility to ensure transparency and compliance.
GHGs, and that those CERs can be backed up by a If necessary, conflicts can be referred to interna-
performance security that can be invoked in the tional arbitration to provide greater assurance
event of default. and reduce third-party risk.

In contrast to the UN-based approach uti- The country-based approach to regulation and
lized by the CDM, the Green Finance Framework MRV offers additional benefits when compared to
is anchored in a country’s existing PPP framework CDM in terms of reduced cost by using certified
of legal and enforceable contracts, procurement local auditors to carry out ex-post reviews. The
rules, and sanctions for non-performance. This MRV component can also be handled on an incre-
Framework can be transformational in acceler- mental basis and with greater cost effectiveness.
ating investment, to the extent that countries This would reduce the need to carry out extensive
develop a credible, efficient and enforceable PPP baseline surveys because each project would be
domestic framework. treated as an incremental contribution towards
reducing GHGs.
The MRV component would be an add-on to
the existing PPP framework and would essentially Finally, the methodology allows for syndica-
form the basis for the proponent’s legally bind- tion of multiple funding sources for each compo-
ing service obligations. Performance security can nent of the gap, helping avoid double counting

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 Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance

as each source can take up its own share of either The advisory needs of the project are similar
local or global benefits that can be earned with to most PPP projects but with more broadening
the implementation of the given investment. For for “market maker” functions for sourcing climate
the GHG benefits, that share can be backed by finance. The financing and advisory interface can
the issuance of certificates at a price acceptable be implemented at the national, regional and
to the paying party. This means that the price of global level depending on the ultimate objective
benefits would not be determined by a single of these funds. Governments seeking to acceler-
financial market, but rather by each paying party ate investments in green technologies can set up
giving its own GHG value to its corresponding a national fund purely for their own economy and
share of total benefits. The Leading Initiatives solicit international support for the GHG conces-
and Research report indicated that the value of sional funding. Alternatively, a regional or global
GHG benefits can differ significantly depending green fund could be established to complement
on who is valuing these benefits. Presently the existing efforts at the regional or national levels.
carbon price in the European Union Emission Significantly, the approach provides the degree of
Trading Scheme is about US$5-6 per ton of CO2. flexibility to take advantage of a wide range of
The global carbon supply/demand balance mod- potential funding initiatives.
els typically predict an equilibrium price for
global atmospheric stabilization at “safe” carbon The gap in a typical project finance struc-
concentration levels of US$20-100 per ton and ture could be closed through a number of public
the marginal abatement cost in energy efficient financing sources coming from both government
OECD economies such as Japan has been esti- and international parties. Governments could
mated to be as high as US$500 per ton of carbon. rebalance distortions through an appropriately
set FiT, increase that FiT to accommodate inter-
This approach enables the syndication of the nalized local externalities and other benefits, or
concessional financing needs of a given project assemble an entirely different mix of funding
and for different groups to collaborate to make and financial incentive arrangements that cov-
such a project bankable by reducing financial ers their commitment to the overall financing.
exposure and overall risk of each party. The UN International GHG sources could consist of a blend
high-level advisory panel concluded that maxi- of GEF subsidies and guarantees, CTF financing,
mum effort must be taken to involve all sources carbon market offsets, and other sources such as
of financing to close the financing gap. This the Green Climate Fund which is currently being
approach succeeds because it relies on a private designed. Alternatively, one party may decide to
finance foundation coupled with public funding fund the entire gap of a given project, depending
support from multiple sources. on their strategic interests, tolerance for risk and
desired financial exposure.

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Green Infrastructure Finance A Public-Private Partnership Approach to Climate Finance

Concluding Remarks

T
he detrimental effect of climate change understood framework of structured finance with
is growing, yet clean investments are still public finance components, as in many hybrid PPPs.
grossly insufficient making it necessary The methodology allocates financing responsibili-
to rethink the approach to greening the global ties equitably. For example, governments only pay
energy mix. While end-of-pipe treatment of the for the benefits that they specifically gain from a
existing asset base is important and those efforts given project, not for the benefits gained globally.
must continue (particularly for high emitters), an Equally important, a green project is evaluated
effective and easily implementable framework against the low-cost alternative, rendering that
for new investment decisions must be established, project not only profitable but also a financially
particularly in less-developed countries. However, attractive investment choice for the economy.
this will be challenging as green investments are
invariably more risky, costly, and require more The framework of shared responsibility aims
capital up-front. They also face other financing to reduce additional distortions in an economy
challenges—for example, many countries subsi-
by ensuring that the parties paying for the ben-
dize fossil fuels for other development reasons.
efits actually receive the benefits. It also reduces
the financial burden on governments, which has
The need for some level of concessional
been a significant political obstacle in identifying
financing or outright subsidy support is widely
real solutions for accelerating green growth. Most
understood but the approach must be equitable,
importantly, although the selection of viable proj-
non-political and deliver a sufficient level of sup-
ect opportunities does screen for justification, it
port. Current international programs have sought
ultimately leaves the decision to the party valuing
to address some of these constraints but lack ele-
the externality benefit. Therefore, each party can
ments in their framework to utilize public financ-
ing to their maximum effectiveness and to help assign their own value depending on how they
host governments to play a responsible and legiti- internalize the benefits. Moreover, international
mate role in resolving the financing dilemma of sources for concessional finance must be flexible
many green investments. The carbon market his- because low-emission investments need the cor-
torically has not provided stable and predictable rect financial structuring to be bankable.
financing mechanism to support new investments
in clean technologies. Moreover, CDM, that oper- Finally, the concept of anchoring regulation
ates within this market, is not designed to handle in a country’s existing PPP framework to focus on
structured finance requirements that many clean creating the right policy environment will greatly
technology projects need in order to reach finan- facilitate mainstream implementation and reduce
cial closure. costs. This aspect of the Framework is widely
understood by many developing country govern-
The Green Infrastructure Finance Framework ments and can be easily replicated not only in East
places these investments in a commonly Asia, but also in other regions.

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T
he detrimental effects of climate change are growing, yet investments in clean technologies are still grossly
insufficient, making it necessary to re-think how these projects should be evaluated, structured and financed
in order to render them viable and attractive opportunities to polluting alternatives. Existing approaches
lack key features in order to adequately address the key financing challenges of these investments, and do not
utilize public support to its maximum effectiveness. The international community is essential in resolving this
financing challenge, and host governments need to create an environment that levels the playing field for green
investments vis-à-vis their conventional alternatives.

The Green Infrastructure Finance Framework places clean investments in a commonly understood framework
of structured finance with public finance components, as in many hybrid PPPs. The framework includes four
main elements: (i) a viability gap methodology for evaluating, structuring and equitably allocating financing
responsibilities to different private and public parties; (ii) linkage to a country’s PPP’s procurement and regulatory
framework along with an MRV component for ensuring the service obligations of projects; (iii) measures for
addressing the adequacy of the climate for these investments; and (iv) a financing and advisory interface for
allocating a wide variety of public sources of financing in a coherent fashion.

www.worldbank.org www.ausaid.gov.au