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Country risk levels and cost of political risk of international greenhouse gas mitigation projects

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Based on a publically available and widely used commercial country risk indicator, this article shows that greenhouse gas emissions other than land-use change related largely arise in countries which belong to the group of lower commercial investment risk, i.e. which are attractive to external investors. The same correlation is found between GDP of a country and commercial investment risk. Nevertheless, the pattern for population is less clear. The 20 largest emitters out of the lower-risk group of countries cover roughly 70% of global greenhouse gas emissions, whereas the 119 countries that constitute the higher-risk group cover less than 24% of global emissions. The analysis finds that risk premiums ranging from USD 8 to 56 billion per year could mobilize the incremental investment levels found for the two key International Energy Agency 2011 climate policy scenarios (USD 80 and 560 billion annually, respectively) under 2013 conditions. Covering these country risk premiums for the underlying project, investments can provide the conducive financial framework for the dissemination of best practices for the promotion of energy efficiency and renewable energy. Risk premiums can be channelled efficiently and effectively if financial knowledge specific to national and sector circumstances is available in intermediaries trusted by governments and investors.
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Keywords: climate finance; country risk; de-risking; energy efficiency; incremental investment; mitigation; renewable energy; risk premium

Document Type: Research Article

Affiliations: KFW, Competence Center Environment and Climate, Palmengartenstr. 5-9, 60325, Frankfurt, Germany

Publication date: June 1, 2013

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