Towards a multi-sovereign guarantee mechanism for low carbon investments and climate resilience in developing countries

Jean-Charles Hourcade, Dipak Dasgupta, Heleen De Coninck, Yannick Glemarec, Emilio La Rovere, Yannick Lola Vallejo, Linda Murasawa, Maria Netto Schneider, Harald Winkler

The latest 2023 IPCC Report on Climate Change states that climate finance for both mitigation and adaptation must increase in this decade, by a factor of three to four compared with its current levels (IPCC SYR, C.7), This gap is biggest in developing countries, especially those that are already struggling with debt, poor credit ratings and burdens of the recent macroeconomic shocks in the world economy. There is sufficient global capital, public and private, to close this gap if we succeed in reducing the regional and sectoral mismatches between where the global pool of savings is currently directed and where it should be directed. It thus urges to reduce the barriers to this redirection both within and outside the global financial system.

There exists a diversity of national policy instruments to reduce these barriers. However, in  the context of narrowing fiscal space for governments to finance directly climate action, there is an increasing recognition that these should be combined with an ‘increased use of public guarantees to reduce risks and leverage private flows at lower cost’ (IPCC, SYR C.7.3) especially in mitigation. However, public guarantees are not a miracle solution, as their public cost and leverage effect depend entirely on their design, their core objective and the context in which they are applied.

We argue that a multi-sovereign guarantee architecture (MSGA) is urgently needed to unlock the wider use of guarantees and maximize their cost-effectiveness in de-risking low-carbon initiatives, mobilizing private finance, and scaling up cross-border capital transfers in support of nationally determined contributions (NDCs) to the Paris-Agreement. We set out some basic principles and suggest an institutional learning process to facilitate its fast emergence.

We also examine how a MSGA could overcome the drawbacks of too strict a disconnect between rising adaptation and loss and damage financing needs and the scaling-up of mitigation investments. It can do so (not automatically) by the higher public resource availability for adaptation and losses&damages resulting from the crowding-in of private investment  for mitigation.

In addition it could be extended at short notice to projects delivering joint benefits in terms of adaptation and thereby become a prototype for mobilizing more private funding for adaptation as well.

In addition to contributing to poverty alleviation and enabling countries to meet their Sustainable Development Goals, the MSGA by closing the infrastructure gap in all countries with low-carbon options would yield critical ‘gains of cooperation’ advantage. Public spending and policies on climate are increasingly veering towards national jobs and strategic search for accelerating climate mitigation within country borders, and restricting the use of public guarantees to within these borders. This has the ‘downside’ of rising protectionist frictions, perceived as ‘arbitrary’ and ‘punitive’ (COP 28 art 154 and 175), and of a widening circle of distrust. A MSGA will counterbalance this by the gains from international financial and industrial cooperation in terms of jobs, strengthening of global value-chains and contribution to the reform of the multilateral financial architecture called for by COP 28 (art 95).

Why are Public Guarantees required to tackle the root causes of the climate investment gap?

This and other questions are debated throughout this paper, read more.