Incentives for Private Sector Financing of Sustainable Development

FINANCING AND FUNDS FOR SUSTAINABLE DEVELOPMENT There are three broad classes of policy that are required if the world is to aspire to, and perhaps achieve, sustainable development. The first two involve no significant change in the financing of economic development, although they have implications for financing. The third explicitly addresses the issue of financing. The first two policies are: (a) campaigns, persuasion, and appeal to moral sense about the environment; (b) the removal of those distortions in local, national, and international economies that discriminate against sustainable development. Both must be pursued. It is a matter of judgment as to which is the more important, but the appeal to moral sense is inherently risky. Virtue is almost certainly an acquired social behaviour based on fairly elementary game theoretic precepts: it is in the self interest of all to be virtuous, as several major essays have recently pointed out (Ridley 1996, Frank 1988, Wilson 1993). If appealing to moral sense is intended to go beyond what is mutually advantageous it will surely fail. For many this is an unpalatable conclusion, but it is arguable that opposition to these views has created a stalemate in the public discourse on sustainable development where moralists prevail and the more pragmatically minded are often not heard. Removing distortions is extremely important. Distortions include financial subsidies, failures to tax the rents (profits) of exploit-ABSTRACT Private sector financing of sustainable development will not occur unless the context for investment is one in which the risks associated with investment are acceptable, that is, where markets are liberalised, political governance is secure and democratic, and structural adjustment is occurring. Private sector flows of funds need to be modified to meet the demands of sustainable development, primarily that the technologies transferred to developing countries should be clean. Incentives to the private sector to invest in clean technologies must extend beyond regulatory compliance and " green " image; the incremental costs of clean technologies might be partly met from public funds in the form of " service payments " for environmental benefits received from clean technologies. Joint Implementation provides an outstanding example of how the private sector can secure financial gains through the creation of a market where none previously existed; such " global markets " need to be established before the private sector can appropriate the economic value of non-market benefits.