How better price risk policy in Brazil could improve agricultural productivity

CPI Staff, February 24, 2015

 

Clarissa Costalonga e Gandour and Pedro Hemsley co-authored this post.

In Brazil’s agricultural sector, fluctuations in crop prices that are not mitigated by insurance or public policy can hinder farmers’ productivity and income, as well as the agriculture sector’s economic growth. For example, a farmer who makes planting decisions under the expectation of high harvest prices, which then fall short, can suffer severe losses. Understanding agricultural price volatility and mitigation is important to improving relevant public policy.

As part of CPI’s series of work on how to improve agricultural productivity while reducing deforestation in Brazil, we recently looked at agricultural price volatility, current policy to mitigate price risks, and what Brazil could do differently.

Our main finding is that current policy in Brazil does not meet farmers’ needs. The policy for price risk mitigation is based on direct government intervention in the market: when prices fall below a threshold, the government takes part of total output and allocates it out of the market. In 2013, the federal budget for price risk mitigation totaled BRL 5.4 billion, with over two fifths of it being destined for government buyouts and storage expenses. However, we find this policy yields only 8.03% of total production value, or BRL 4 billion per year in gains to producers of the four most important crops in Brazil – soybean, sugarcane, maize, and coffee.

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India Needs to Fix Finances to Make Renewable Energy Dreams a Reality

Gireesh Shrimali, February 16, 2015

 

Over the past few years, the government of India has set ambitious targets for wind and solar energy: current targets would see wind and solar capacity grow by 600 percent through 2022, to 60 GW and 100 GW of energy, respectively, from current cumulative installed capacity of about 25 GW. To put those numbers in perspective, 1 GW provides power for 700,000 modern homes; 160 GW would power a sizeable portion of India’s energy needs.

These targets are good for both India’s energy supply and for economic growth – a theme emphasised by US President Barack Obama and Indian Prime Minister Narendra Modi recently in announcing their joint commitment to increasing investment in clean energy and low-carbon economic growth.

However, this task is made difficult by the government’s limited budget, which is constrained by a large fiscal deficit and multiple development priorities.

Further, markets will not provide finance to meet these targets alone. In fact, our analysis shows that the single biggest challenge to scaling up renewable energy is the cost of finance – in particular to debt. Unfavourable debt terms add 24-32 percent to the cost of renewable energy in India, compared to similar projects in the US. Domestic debt is expensive due to unfavourable macroeconomic conditions as well as underdeveloped capital markets, and foreign debt becomes expensive once hedging costs are added.

The good news is that India can address this situation in a way that also saves money for taxpayers, electricity customers, and scales up renewable energy.

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By the Numbers: Tracking Finance for Low-Carbon & Climate-Resilient Development

Barbara Buchner, February 3, 2015

 

Landscape of Climate Finance 2014

 

In December 2015, countries will gather in Paris to finalize a new global agreement to tackle climate change. Decisions about how to unlock finance in support of developing countries’ low-carbon and climate-resilient development will be a central part of the talks, and understanding where the world stands in relation to these goals is a more urgent task than ever.

Climate Policy Initiative’s Global Landscape of Climate Finance 2014 offers a view of where and how climate finance is flowing, drawing together the most comprehensive information available about the scale, key actors, instruments, recipients, and uses of finance supporting climate change mitigation and adaptation outcomes.

Climate finance has fallen, mainly due to reductions in solar PV costs

Overall, the gap between the finance needed to deal with climate change and the finance delivered is growing while total climate finance has fallen for two consecutive years. This could put globally agreed temperature goals at risk and increase the likelihood of costly climate impacts.

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Dear Davos: There Are Ways to Boost Investment in Better, Cleaner Growth

Barbara Buchner, January 22, 2015

 

At the World Economic Forum (WEF) in Davos today, World Bank President Jim Yong Kim called for proper consideration of the risks associated with investing in the high-carbon economy and for more investment in better, cleaner forms of growth.

This video interview with CPI Senior Director Barbara Buchner provides useful background for those at the WEF calling to make 2015 a year of action on climate change. In it she shares CPI’s analysis on how the world is progressing toward the investment needed to limit emissions and climate change and what current financial flows reveal about how we might unlock further investment.

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Six climate finance themes out of Lima that will shape 2015

Barbara Buchner, December 17, 2014

 

Government representatives from around the world met last week in Lima, Peru to negotiate global emissions reductions as part of the annual UNFCCC Conference of Parties (COP20). Once again, the need to mobilize more investment in a low-carbon, climate-resilient economy was an important point of debate.

Climate Policy Initiative’s analysis is playing a key role informing serious discussion on climate finance and finding solutions to increase the effectiveness and scale of climate finance investments. Here are the themes we saw at this COP that we feel will shape climate finance action and debate over the next year.

Entrance-to-Lima-Cop20

Entrance to Lima COP20

1. Finance is flowing but it’s not enough.

The COP20 High-Level Finance Ministerial began with a presentation of the UNFCCC’s Biennial Assessment and Overview of Climate Finance Flows 2014. This research, which draws on Climate Policy Initiative’s work to track climate finance, tracked between 340 and 650 USD billion in annual investment. As CPI has shown, this figure is far short of the need.

Global Landscape of CLimate Finance needs

Annual climate investment compared to the need

2. Governments voiced support for innovative initiatives that unlock private finance.

CPI’s analysis shows that while public finance often provides the conditions for climate investment to take place, private investors contribute the largest share of finance, year after year, in countries across the world. It also shows that public finance alone will not be enough to meet the investment need. Several government representatives spoke of the need to find innovative ways to unlock increased private investment. Representatives from Denmark, the Netherlands, the UK, and U.S. used their time on the COP plenary floor to voice support for one such initiative – The Global Innovation Lab for Climate Finance – which CPI supports as its Secretariat, advancing innovative financial instruments to drive significant additional investment in developing countries.

3. The Green Climate Fund reached more than $10 billion in commitments – good progress ahead of COP21 in Paris next year.

Following the pledges from Japan, the U.S. and UK over the last weeks, Australia, Belgium, Mexico, Peru, Colombia, Austria, Spain, Norway, and Canada helped the Green Climate Fund reach its $10bn goal at this COP with new pledges. These pledges to help developing nations deal with climate change are good news. They increase the chances for a global climate deal next year in Paris, and if spent wisely, can supplement domestic public resources where they fall short and drive billions in private investment toward low-carbon and climate-resilient growth.

4. Finance for adaptation is becoming a higher priority.

The Green Climate Fund restated its intention to use half of its finance for adaptation purposes. Germany also stepped up on adaptation, committing an additional 50 million euros to the Adaptation Fund. CPI’s work shows that while adaptation finance grew by 12% last year, it still falls short of the need.

 5. Tracking of climate finance continues to improve.

Following on recommendations from the UNFCCC’s Biennial Assessment and Overview of Climate Finance Flows 2014, many countries used their time on the COP20 plenary floor during the Finance Ministerial to talk about the need for an agreed-upon definition of climate finance and improved tracking systems. CPI’s analysis supports this need and shows that climate finance tracking can support countries’ attempts to formulate better policies.

 6. Economic growth and combating climate change can go hand in hand.

Last but not least – there was a growing sense that acting on climate can also spur economic growth at this year’s COP. Many experts have documented that climate change and the resulting extreme weather would have huge social and financial costs to the global economy. This year, the New Climate Economy report showed that measures that reduce climate risk can not only help to avoid a shrinking economy in the future, but can also help grow the economy, today.

 FelipeCalderon-speaks-about-New-Climate-Economy-from-COP20

President Felipe Calderón speaks about the New Climate Economy report from the COP20 plenary floor

Going into 2015, one big-picture lesson is clear – climate finance will continue to be an important focal point for those working to respond to climate change. CPI will continue to work to provide analysis that supports these discussions.

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Tracking climate finance can support better policy in developed and developing countries

Jane Wilkinson, December 12, 2014

 

Climate finance tracking is one of the topics under discussion at the international climate negotiations taking place in Lima this week. Our work on tracking climate finance for countries like Germany and Indonesia and in upcoming reports for organizations has demonstrated the benefits of mapping climate finance flows. This video shares some of the insights from the recent Landscape of Public Climate Finance in Indonesia we carried out with the Ministry of Finance in Indonesia and describes how it is supporting Indonesian policymakers to develop more effective tracking systems and policies.

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3 Reasons for Measured Optimism about Climate Finance

Barbara Buchner, December 4, 2014

 

A version of this blog first appeared on Responding to Climate Change: http://www.rtcc.org/2014/11/21/three-reasons-to-be-optimistic-about-climate-finance-flows/

This year’s UN climate talks opened in Lima earlier this week and for those who hope the world can avoid dangerous climate change, some major recent announcements have given cause to celebrate. Last month, the world’s two largest emitters – the U.S. and China – reached a deal to tackle emissions. Then, the U.S., Japanese, and UK governments joined others by pledging billions to the Green Climate Fund to help developing nations deal with climate change. These political announcements are clearly timed to inject momentum into the negotiations taking place in Lima. But key questions remain unanswered: What do these financial pledges mean in terms of existing investment in a low-carbon economy future? How should money be spent? And are we on the right track?

At Climate Policy Initiative, our analysis of global climate finance flows helps to identify who is investing in climate action on the ground, how, and whether investments are keeping up what is needed to transform the global economy. We have just released the latest edition of our Global Landscape of Climate Finance report. It shows global climate finance has fallen for the second year running and we are falling further behind the level of investment needed to keep global temperature rise below two degree Celsius – but reveals some positive news as well.

Firstly, that nations around the world are investing in a low-carbon future in line with national interests. Last year, climate finance investments were split almost equally between developed and developing countries, with USD 164 billion and USD 165 billion respectively. With almost three-quarters of total investments being made in their country of origin, the majority of climate finance investments are motivated by self-interest—either for governments or businesses. Motivations include increasing economic productivity and profit, meeting growing energy demand, improving energy security, reducing health costs associated with pollution, and managing climate risk including investment risks.

Secondly, that getting domestic policy settings right offers the best opportunity to unlock new investment. When policy certainty and public resources balance risks and rewards effectively, private money follows. In 2013, private investments made up 58% of global climate finance with the vast majority (90%) of these being made at home where the risk to reward ratio is perceived relatively favorably. Addressing the needs of domestic investors offers the greatest potential to unlock investment at the necessary scale. This is not to say that international and domestic public policies, support and finance don’t have complementary roles to play. It is significant, for instance, that almost all of the developed to developing country finance we capture in our inventory of climate finance flows came from public actors. But ultimately, it is getting domestic policy frameworks right, with international support where appropriate, that will drive most of the necessary investment from domestic and international sources.

Thirdly, that despite a fall in overall investment, money is going further than ever. While investment fell for the second year running, this is largely because of decreased private investment resulting from falling costs of solar PV and other renewable energy technologies. In some cases, deployment of these technologies is staying steady or even growing, even though finance is shrinking. In 2013, investment in solar fell by 14% but deployment increased by 30%. Technological innovation is reducing costs and because of this renewable energy investments in some markets are cheaper than the fossil fuel alternatives, particularly in Latin America. Achieving more output for less input is one of the basic foundations of economic growth, so this is great news. From solar PV, to energy efficiency and agricultural productivity, growing numbers of low-carbon investments are competing with or cheaper than their high-carbon counterparts. This despite a highly uneven playing field in which global subsidies to fossil fuels continue to dwarf support for renewables and where carbon prices do not reflect the true costs of emitting CO2.

So what do our findings mean for the recent China/U.S. deal and Green Climate Fund pledges? Increasing political pressure on other countries to keep pace in terms of their domestic action and international commitments is an encouraging sign as the deadline nears for finalizing a new global climate agreement in Paris just one year from now. Reaching a global accord offers the best prospect for tackling climate change. But we must recognize that international agreements are themselves, guided by collective national interests. There is clear recognition that international public resources should complement and supplement national resources where these are insufficient. But if we are to bridge the investment gap they should also be focused on finding ways to lower costs, boost returns and reduce risks for private actors. Public finance alone will not be enough to meet the climate finance challenge.

Many private investors are ready to act. In September, over 300 institutional investors from around the world representing over $24 trillion in assets called on government leaders to phase out fossil fuel subsidies and implement the kind of carbon pricing policies that will enable them to redirect trillions to investments compatible with fighting climate change. Businesses and citizens are investing, and technological innovation means more and more investments are making economic and environmental sense. Accompanying innovation with policy, appropriately targeted finance and new business models can build the momentum and economies of scale to make the low-carbon transition achievable. The low-carbon transition isn’t just a way of reducing climate risk, it also represents a huge investment opportunity.

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Geothermal: Risks shouldn’t overshadow benefits

Valerio Micale, November 12, 2014

 

Geothermal is competitive. Its low cost per unit of energy generated, when compared with other renewable energies and fossil-fuelled generation make it an attractive option for policy-makers in developing countries to meet growing energy demand.

It is also compatible with energy grid needs. Its high capacity factor and its ability to continuously feed into the energy system makes it particularly suitable for reliable baseload production while its potential flexibility makes it suitable to respond to fluctuating supply from technologies such as wind and solar PV depending on a power grid’s needs.

Geothermal costs compared to other energy technologies Cost comparisons between energy technologies show that geothermal requires high up front investment but can provide low cost power

However, risks in the early exploration and drilling phases, combined with high investment costs, have slowed the scale up of the technology and limited the private investment that is needed if geothermal is to play a bigger role in the energy system. Climate Policy Initiative’s (CPI) recently published analysis of global geothermal markets and financing models finds that public finance plays the most prominent role in financing geothermal. 76-90% of all project investments utilize some aspect of public debt or equity support, as well as support instruments.

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Video: New business models for a low-carbon electricity system in the U.S. and Europe can save billions

CPI Staff, November 10, 2014

 

New finance and business models for a low-carbon electricity system in the U.S. and Europe can save consumers, investors, and taxpayers billions. Watch the video or read the analysis to learn more.

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International public finance supports South Africa’s deployment of concentrated solar power

Anja Rosenberg, August 21, 2014

 

Among emerging economies, South Africa has particular potential for solar power because of the country’s excellent solar resources. While fossil fuel power generation currently provides over 90% of its electricity, South Africa is seeking to reduce its reliance on carbon-intensive coal-based energy.

The Government of South Africa (GoSA) has developed policies to transition to a clean and sustainable energy system. In order to exploit its abundant renewable energy resources, South Africa has adopted an ambitious plan to add 20 GW of new renewable power generation capacity by 2030 (almost 50% of current generation capacity). Of this, 3.3 GW is expected to be from concentrated solar power (CSP). This is approximately equal to the current installed capacity of CSP worldwide.

CSP: A promising technology for low-carbon energy systems
CSP is a promising energy technology for low-carbon energy systems as, in combination with thermal storage, it can store solar energy in the form of heat to deliver clean power when it is most needed. It offers a real chance to act as a viable substitute for coal-based energy. Despite its potential, CSP technology lacks a long deployment track record and still comes with high technology risks, which translate to higher financing and overall costs. This means that most projects need public assistance in the form of low-cost public finance or political support to be bankable.

South Africa’s state-owned electricity utility Eskom is currently planning to install its first CSP power plant in Upington in the Northern Cape region of South Africa. In a recent Climate Policy Initiative (CPI) case study, conducted with support from the Climate Investment Funds Administrative Unit, CPI examined this plant to understand how public support helped advance this project. It also looks at the financial and technological challenges for Eskom and the reasons behind the extended project development time.

Eskom CSP plant in Upington now back on track
Eskom CSP remains one of the most ambitious CSP power tower projects under development anywhere outside of the U.S. with respect to its technology choice, capacity and storage. After several years in development, the project was placed on hold in 2009 during the global recession, largely because reduced access to capital and increased pressure from GoSA to improve the country’s energy security at low cost led Eskom to reassess its investment priorities.

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