2000 Volume 9 Issue 1 Pages 95-113
This paper presents an overview of the current situation of financial mechanism options for climate change mitigation projects with a focus on developing countries in the Asian region. Looking at broader financial flows to the region and the importance of corporate Foreign Direct Investment, it points out the limitation of current financial mechanisms and argues for a need for the private sector engagement in financing mitigation projects.
In this sense, the Clean Development Mechanism, one of the flexibility mechanisms agreed to be introduced by Kyoto Protocol of the United Nations Framework Convention on Climate Change could offer great potential in helping mobilize FDI in relative sector towards climate friendlier sustainable development, by giving market-based incentives to the private sector and internalizing a part of externalities associated with mitigation projects. However, due to additional risks and barriers involved in CDM projects, appropriate public-private linkage would be necessary.
Assuming the CDM becomes functional, in order to construct a wider and more efficient options for climate change related financial mechanisms, it would be necessary to take a holistic approach, making the best use of market enhancing functions of various public funds to complement private investment via the CDM. In doing so, relevant parties should examine a host of factors such as private sector investment behavior, risk sharing, areas where the private sector is difficult to address and coordination with existing trade and investment rules etc.
