Instruments for leveraging private climate finance

Contract-based

* Public-Private Partnership.

Private equity and debt are provided to build, design operate public infrastructure. The public sector rents the facility back. “Build now, pay later.”

* Power purchase agreements IFI arranges or incentivises advanced purchase of electricity at a fixed price

* Carbon price support

An Emissions Reduction Purchase Agreement (ERPA) involves the purchase of future credits at agreed price. An Emissions Reduction Underwriting Mechanism is proposed as a form of price guarantee, with IFIs stepping in to prop up the price of credits below a certain level.

Loans

* Credit Lines with performance incentives: A promise of lending up to a maximum amount. Donors may offer performance bonuses or interest rate reductions related to financial or emissions reduction performance.

* Interest rate subsidies: A loan is taken out with a commercial bank, for which the public institution paus some of the interest. In essence, a concessional loan but with lending decisions made by a private bank

Swaps

* Currency swap: A mechanism to exchange debt denominated in different currencies (eg. Liberian dollars for US dollars)

* Interest rate swap: Allow for the exchange of different types of debt. The simplest version is a contract to exchange debt with a fixed interest rate for debt with a floating (variable) rate.

Guarantees and insurance

Partial Credit Guarantees cover only a portion of scheduled repayments of private loans or bonds against all risks. (they often cover the later scheduled repayments of a loan)

Partial Risk Guarantees cover debt service defaults on loans for private- sector projects that are caused by government failures to meet contractual obligations. – eg failure to honour power purchase agreements.

Catastrophe Bonds – a form of insurance against “natural” disasters

Weather-risk / production insurance – a form of hedging to protect against crop failure

Swaps

Currency swaps – A mechanism to exchange debt denominated in different currencies (eg. Indian rupees for US dollars

Interest rate swaps allow for the exchange of different types of debt. At their simplest, these can be contracts to exchange debt with a fixed interest rate for debt with a floating (variable) rate.