The Green Climate Fund (GCF) received a lot of attention last week, with pledges announced at the Pacific Rim conference, the G20, and most recently, the GCF Pledging Conference.  The Fund, which is managed by the World Bank, has been hailed as a “new international fund that aims to squeeze more from public dollars by attracting private investment in clean energy technologies and climate resiliency projects, such as storm surge barriers and more durable buildings.”  But how does it accomplish this goal?

The GCF includes a unit, called the Private Sector Facility (PSF), whose sole mission is to seek out private money for investment in the clean energy and resiliency sectors. According to Gilbert Metcalf,  an economics professor at Tufts University and a former U.S. Treasury official, the PSF could use a mix of loans, partial-risk guarantees, and venture capital dollars that would make it less risky and expensive to invest in fledgling technology projects in developing economies.  Professor Metcalf serves on the Green Climate Fund’s advisory board, which is comprised of representatives of 24 nations, of which the United States is a permanent member.  GCF activities include more than 190 participating countries.

An example of a risk-reduction financing technique that the GCF could use, according to Professor Metcalf, is a public-private investment in Oaxaca, Mexico in 2009, where climate financing was used to reduce investment and regulatory risks on several wind farm projects. “It helped provide a proof of concept that this really could work, and private investors followed with subsequent wind projects in Mexico,” he said. The Green Climate Fund would aim to do the same on a much broader scale.

At COP15 in Copenhagen in 2009, the U.S. announced that developed countries would raise $100 billion per year in public and private aid from 2020 onward to capitalize the GCF.   Interestingly, the GCF builds on an earlier U.N. program, the Climate Investment Funds (CIF), which was a temporary program that raised $7.6 billion in 2008, including $2 billion from the George W. Bush administration. Over the past four fiscal years, Congress has approved nearly $1.4 billion for the CIF.