This article was published by the Center for American Progress

The Green Climate Fund created at the United Nations Framework Convention on Climate Change, or UNFCCC, meeting in Durban, South Africa, last week will go a long way toward reducing ever-increasing emissions in developing countries by broadly distributing investment risks and encouraging an increased flow of private capital into the fight against climate change. Thanks to the American delegation at the conference, the fund has the right design in place to support projects effectively around the globe that will help avoid the most catastrophic effects of climate change and help developed countries meet their pledges for the climate finance needed in the years to come.

In fact, the only way developed countries will fulfill their pledge made in Copenhagen in 2009—to mobilize $100 billion per year in adaptation and mitigation funding by 2020—is through a sophisticated Green Climate Fund that uses public money to leverage large amounts of private capital. Negotiators at Durban succeeded in making this fund a reality, and their work is a critical step forward in battling climate change.

This international action to bring private investors to the table in solving the climate problem is regrettably in marked contrast to the United States, where policymakers continue to thwart efforts to build the clean energy economy.

Before getting into how the fund should work, it’s important to understand why it’s necessary in the first place. After all, individual developed countries could simply make financial pledges on their own—just like they each made carbon reduction pledges in Copenhagen, Denmark, at the U.N. conference in 2009. This would not work, however, because the fund is about pooling risk, as well as capital.

Investments in climate change mitigation and adaptation can be very large—as much as several billion dollars. If a country is operating on its own, it can only afford to finance a limited number of projects each year. This will limit its ability to adequately diversify its portfolio, and it will prevent the country from effectively managing its risk. Instead of predictable returns, the country’s investment performance will vary wildly every year. In addition to the serious implications for budgeting and management, the public perception of such a program would be disastrous.