Climate change is one of the biggest macroeconomic and financial policy challenges for IMF member countries in the coming decades. The recent rise in fuel and food prices and subsequent social upheavals demonstrate the importance of investing in green energy and building resilience. Overcoming the climate crisis will require massive global investment. Estimates of these investments range from 3 to 6 trillion. dollars a year by 2050. The current levels of nearly $630 billion are only a fraction of what is really needed, and very little is going to developing countries. That is why we need a major shift towards the use of public and, in particular, private funding. With assets of 210 trillion. dollars for industry groups, which is almost double the gross domestic product of the entire world, policymakers and investors are betting on how to direct most of their assets to climate change mitigation and adaptation projects.

But what’s stopping more money from pouring into climate projects outside of advanced economies? Incentives are at the heart of the problem. Investors have many alternatives to generate income, including fossil fuels in the absence of high emission allowance prices. And at present, green projects in emerging markets and developing countries simply do not justify the investment risks. For example, investments in both mitigation and adaptation often involve high upfront costs, multiple technical challenges, long time horizons and untested business models. Add to this meager data the risks associated with exchange rate fluctuations, macroeconomic conditions, an unpredictable business environment and the possibility of political unrest. As a result, many opportunities for climate change adaptation projects cannot provide sufficient resources. Those that do are more likely to attract a small group of specialist investors who demand high returns in a growing and relatively illiquid asset class, with leverage being the primary vehicle.

* Ms. Kristalina Georgieva is the Director General of the IMF.

** Tobias Adrian is Director of the IMF’s Capital Markets and Monetary Policy Department.

The article was published on the blog of the International Monetary Fund.