Graphic Spotlight: Who benefits from Indonesia’s palm oil revenues?

Elysha Rom-Povolo, January 27, 2016

 

The fiscal system may inadvertently increase deforestation

Indonesia’s palm oil sector has been making headlines recently because of the sector’s connection with fires from peatland conversion. Late last year, President Joko “Jokowi” Widodo announced a shift in peatland management, with policies designed to halt agricultural expansion into peat forests while facilitating the rehabilitation of already degraded peatlands.

Given the economic importance of palm oil, Indonesian policy makers, industry, and communities are looking for ways to grow the sector’s productivity without contributing to this deforestation and emissions.

Indonesia-palm-oil-revenue-distributionCPI analysts recently looked at how fiscal incentives for palm oil – and land use more broadly – could be adjusted to contribute to a more efficient and sustainable sector.

This graphic, produced by Tim Varga and Angela Falconer, shows that of the nearly one billion USD the Indonesian government collects annually in tax revenues from palm oil, less than 15% goes to the regions that produce the crop.

Read More

Businesses Lead on Climate Change: The Road from Paris to Davos

David Wang, January 22, 2016

 

When asked about last month’s Paris Agreement earlier this week at Davos, UNFCCC executive secretary Christiana Figueres remarked, “The signal is very clear. The signal is toward long-term transformation that is urgent…it is a transformation to decarbonizing the global economy.”

Many of this year’s World Economic Forum (WEF) attendees have already recognized that signal, and after Paris, more have become aware of the opportunities this transformation can bring. Costs of electricity for most renewables — including wind and solar — are now becoming comparable to those of fossil fuels, decreasing drastically over the past five years while costs for coal and natural gas have increased. And now that the Investment Tax Credit (ITC) and Production Tax Credit (PTC) have been extended, the US renewables industry finally has the policy stability it needs to securely finance a pipeline of projects without the risk of the tax benefits going away at the end of the year.

These factors and others have spurred private investors into pouring $243 billion in renewable energy in 2014, up 26 percent from the previous year. As climate exposure begins to pose serious fiduciary and business risks for investors, more and more financial leaders — including Blackrock, Citi, and Bank of America — are recognizing the risks and opportunities surrounding our current energy production and adjusting their portfolios accordingly. Tools, investment vehicles, and other products exist in the market to help businesses realize such exposure and make the necessary decisions to capture them.

Landscape_Figure5-transparent

Breakdown of total private investment by actor, 2012-2014 in USD billion

However, more can and needs to be done to effectively transition to a low-carbon economy. One area of opportunity is in unlocking additional international, cross-border finance. The majority of climate investment (74%) originates and is spent in the same place, illustrating limited cross-border investments. Domestic policy frameworks in many countries, as well as innovative financial interventions can help business scale up overseas investments, and help emerging markets embark on a path of sustainable growth.

The Paris Agreement demonstrated the recognition by the global community that action on climate change and economic growth can occur simultaneously, and the business leaders at the WEF this week are instrumental to keeping this momentum. Only by working in tandem can we realize a rapid transformation to a low-carbon economy, and it is evident from Davos that many are already on board.

Read More

Reforming fiscal policies to remedy land use woes

Jane Wilkinson, January 11, 2016

 

This post was originally published by the Jakarta Post.

President Joko “Jokowi” Widodo’s administration has been busy this year, announcing several new policy packages to strengthen the economy in a few months. Then in November the President declared a radical shift in peatland management, with policies designed to halt agricultural expansion into peat forests while facilitating the rehabilitation of already degraded peatlands.

In December, Indonesia made a commitment at the Paris climate change negotiations to reduce emissions by 29 percent by 2030.

This tension between economic growth and environmental protection requires skillful balancing across Indonesia’s economy and particularly, in the expanding agriculture sector.

The proposed economic packages offer tried and true approaches to encouraging business growth. But they lack consideration of how fiscal adjustments could encourage environmental protection while encouraging growth.

Our analysis shows big potential, uncovering inefficiencies in fiscal policies in the land use sector, and suggesting that reforms in this area may be a win-win for better, cleaner growth.

For example, currently, 93.5 percent of all government revenue related to land use comes from levies based on production volume instead of land size.

The more you produce, the more you pay, and there are neither penalties nor rewards to use less land. Only for the land and building tax and a few state taxes are levied in proportion to land used — the more land in play, the more tax you pay.

However, even these taxes create little correlation between the value of the land and the amount paid. So, for now, with land undertaxed, businesses have every reason to use more land to increase production, rather than improving the productivity of land already in play.

Read More

Instruments of Change: Raising Investments for India’s Climate Commitments

Gireesh Shrimali, December 18, 2015

 

The international climate agreement that emerged from the Paris negotiations this past weekend marks a historical turning point for the whole world, but particularly for India.

As a part of the global climate deal, national governments have shared plans for their countries’ action on climate change, and India’s contribution is ambitious — promising that renewable energy will be 40% of the country’s expected electricity generation capacity in 2030, along with a 35% reduction in carbon intensity by 2030 from 2005 levels.

India has also set one of the most ambitious renewable energy targets of all ¬- 100GW of solar power by 2022. This is more than half of the amount of solar power deployed worldwide at the end of 2014, and more than 20 times India’s current solar deployment. Additionally, India has also set a wind power target of 60GW by 2022, up from 25GW currently.

At the same time, Prime Minister Modi’s administration is likely to significantly increase the production of domestic coal. This is because one of the nation’s top priorities is to rapidly deploy energy in order to meet the needs of its growing economy and to provide electricity to the 400 million Indians who currently lack it.

Recognising the harmful air pollution and greenhouse gas emissions that an increase in coal production will bring, Prime Minister Modi stated during the Paris negotiations a willingness to further move away from coal if there were more finances available for renewable energy.

However, India faces two key challenges around funding for renewable energy and other green infrastructure: a shortage of available financing, and financing at unattractive terms — such as high cost of debt, short tenor and variable interest rates — which can add up to 30% to the cost of renewable energy in India, compared to the US or EU.

Public-private collaboration will be essential to raising the finance needed for India’s cleaner growth. While the right domestic policies will be key to facilitating finance, greatly scaling up investment from the private sector will be the only way to mobilise the full amount of capital needed to meet India’s renewable energy targets.

In order to scale up private investment, India needs financial instruments for renewable energy and other green infrastructure that are a better match with investors’ needs.

For example, one source of investment that has great potential but requires innovative finance instruments to facilitate it is foreign investment. Over the next five years, India expects over $160 billion of investment from international developers and banks to finance renewable energy projects. However, foreign investors are wary of investing in infrastructure in India due to the risk of extreme and unexpected currency devaluation.

Because currency exchange rates can be volatile, when a renewable energy project is financed by a foreign loan, it requires a currency hedge to protect against the risk of currency devaluation. Currently, market-based currency hedging in India is too expensive, making foreign financing just as expensive as domestic financing. An innovative instrument that can reduce the currency hedging cost could mobilise more foreign capital and spur investment in renewable energy.

A new public-private initiative in India, the India Innovation Lab for Green Finance, aims to identify, develop, and accelerate these innovative solutions to drive more investment for green growth in India.

The India Lab brings together experts (from the government, financial institutions, renewable energy, and infrastructure development) to select and help launch this next wave of cutting-edge finance instruments. Since its launch on 12 November, the India Lab has received the endorsement of the Ministry of New and Renewable Energy, and was supported in a joint announcement on energy and climate by Prime Minister Modi and UK Prime Minister David Cameron, during Prime Minister Modi’s visit to the UK in November.

The India Lab is currently seeking ideas for innovative finance instruments for renewable energy (including utility scale, distributed, and off-grid), energy efficiency, urbanisation, and other channels for green growth that can overcome barriers and risks and scale up more capital from new investors. Interested parties can visit www.greenfinancelab.in/ideas to learn more.

The new global climate agreement represents a moment of opportunity, for both India and the rest of the world, to capture the momentum and excitement that has come with the hope for a more climate-resilient future, and channel it into real work and real action.

There has never been a better, or more important, time to scale up finance for renewable energy projects and other green infrastructure that can support cleaner economic growth in India.

The India Innovation Lab for Green Finance can help India achieve its vision for a cleaner and more prosperous future by driving needed private investment to its green infrastructure targets. Let’s get to work — now.

A version of this first appeared in the Huffington Post.

Read More

The Paris Agreement is a signal to unlock trillions in climate finance

Barbara Buchner, December 14, 2015

 

The objectives laid out in the Paris Agreement are visionary but not overambitious as they build on trends already happening in reality. The agreement’s guiding star is the science-based goal of limiting temperature rise to ‘below 2 degrees Celsius’. In combination with the mention of 1.5 degrees Celsius, this goal sends a clear signal, giving governments and businesses an incentive to escalate efforts to decarbonise their economies, supply chains and business models. Even more importantly for business, this deal has teeth. It includes a mechanism to ramp up action every five years, starting in 2018, and importantly, does not allow backsliding.

A strong signal steering investors away from fossil fuels, towards sustainable growth

For business and investors, it means the direction of travel is clear and with appropriate support it is time to seize the opportunities on offer. “This is one of the greatest wealth opportunities in human history,” says Jigar Shah of Generate Capital. The Paris Agreement also signals that investment in fossil fuels is no longer a low-risk enterprise – or, as Anthony Hobley, CEO of The Carbon Tracker Initiative, puts it, “[it] tells markets the fossil fuel era is over.”

The Agreement also builds the case for both public and private actors to explore low-carbon and climate-resilient options. For developing countries and emerging economies and their partners, the clear message is that growth without sustainability is off the table, whereas sustainable growth is a win for climate and development. As Hillary Clinton, former United States Secretary of State, says, “We don’t have to choose between economic growth and protecting our planet – we can do both.”

Many investors are already on board

CPI’s Global Landscape for Climate Finance estimated USD 391 billion in primary investment flows in 2014, up 18% from the previous year. Private investment surged 26% from 2013, reaching 62% of total global investment in climate action driven largely by falling renewable technology costs supported by government measures.

The Paris Agreement means that these investors and project developers who have already started transitioning their business models can now have the confidence to continue shifting their assets, in order to avoid stranding their own portfolios.

From ambition to action: the critical role of national policy

However, right now the bulk of climate investment (74%) originates and is spent in the same place, whether in developed or developing countries. This indicates there is still work to do to scale up finance that crosses borders, and our research indicates that policy frameworks and enabling environments are the first prerequisite. As Felipe Calderon, former President of Mexico, says, “The next step is for governments to turn their commitments into national policy.”

Building confidence for the next five years through enhanced transparency

Developed countries must continue to take the lead in implementing the world’s first universal binding climate agreement. Building confidence that commitments outlined in the agreement are being met is key, and transparency is critical to this goal. Transparency on progress toward the commitment to continue to mobilize at least USD 100 billion per year from 2020 onwards is a case in point, and here work remains to be done. The OECD Report done in collaboration with CPI on progress toward the USD 100 billion was the first serious attempt to estimate public and private finance mobilized by developed countries’ interventions in developing countries by applying a transparent accounting framework. CPI welcomes the fact the Paris Agreement puts efforts to increase consensus and transparency on this and other climate finance issues at the centre of its work plan going forward.

Such transparency can help ensure confidence that finance is flowing from north to south, and to the right technologies, and that private investors are being mobilised in line with country interests. As countries move from negotiations to implementation, CPI stands ready to support their efforts.

Read More

COP21: A good deal for climate and for growth

Thomas C. Heller, December 13, 2015

 

COP21-good-deal-for-growth

This weekend, world leaders signed on to a new climate deal that aims to limit global temperature rise to well below two degrees, continue $100 billion a year in climate finance, and ramp up action every five years.

I’ve been present at the climate negotiations since the beginning, and I will leave Paris tomorrow optimistic for the future, but not for the reasons you might expect.

While the deal itself is a big step forward, the larger leap has been the recognition, all over the world, that action on climate change and economic growth can – and should – go hand-in-hand.  The Paris agreements have recognized that the substantial gaps between the costs of clean and fossil energy have collapsed, and that returns increase when we produce food by using less land better. The spread of market driven activities consistent with these realizations will provide the foundations on which the Paris commitments will deepen.

The deal this week wouldn’t have been possible if nations and businesses weren’t already moving in this direction. The plans for climate action that countries committed to ahead of Paris were already enough to cover a large portion of needed emissions reduction. And while analysts pointed out that the sum total of the plans pre-Paris wouldn’t be enough to limit warming from dangerous levels, they still show that there is significant momentum.

Businesses, too, stepped up this year. High-worth individuals, family offices, and foundations committed to financial support to help move new clean energy solutions to viability, and heads of large companies, including Richard Branson and Paul Polman, called for zero emissions by 2050.

Why have nations and businesses changed their tune?

Read More

How the Current Haze Disaster has Rekindled Hope for Indonesia’s Peatlands

Jane Wilkinson, November 25, 2015

 

This year’s forest and peat fires in Indonesia have reached unprecedented scale. The Global Fire Emissions Database[i] estimates that by 16 November, more than 122,000 forest and peat fires will have emitted 1.75 billion metric tons of CO2 equivalent. The World Resources Institute (WRI) calculated that as of 16 October, emissions from fires had exceeded those of the total US economy – more than 15 million tons CO2 per day – on 26 separate occasions, noting that the U.S. economy is 60 times larger than Indonesia’s.

Indonesia-Peat-Fires

Photo by Julius Lawalata, World Resources Institute

Put another way, in just three weeks, emissions from fires in Sumatra and Kalimantan exceeded the annual emissions of Europe’s largest economy, Germany.[ii] The fires have caused environmental havoc, a surge in respiratory illnesses and other health impacts, and economic losses around the region. After mounting international pressure, President Widodo announced radical new caps on peat use: an end to licensing for concessions on peat lands, a review of existing licensing, recognition of high carbon value lands, and the creation of a program to restore the carbon-rich forests and peatlands. The government is reportedly exploring the establishment of a new Peat-land Management Agency to spearhead efforts.

This is not the first time moratorium-like measures have been announced in Indonesia. Success will lie in the extent of implementation and especially, in enforcement. But there is very real potential here for Indonesia to transform the way peat is used, particularly in the agricultural sector—with international assistance. Indonesia’s peatlands and tropical peat swamp forests, store more carbon than any other terrestrial ecosystem and are important reservoirs of biodiversity and ecosystem services such as water filtration. There is global significance in the efforts to find ways to rehabilitate peat forests degraded due to deforestation and inefficient agricultural practices.

Read More

Making Climate Finance Count – Increasing Transparency in the Lead Up to COP 21

Barbara Buchner, November 23, 2015

 

As 2015 draws to a close, there is a strong hope that the Paris climate summit could represent a turning point in the global fight against climate change. To support discussions, Climate Policy Initiative (CPI) recently published two reports.

Earlier this week, we released our Global Landscape of Climate Finance 2015, the most comprehensive information available about which sources and financial instruments are driving investments, and how much climate finance is flowing globally. This report sheds light on global progress towards the level of low-carbon and climate-resilient investment needed to constrain greenhouse gas (GHG) emissions to levels consistent with the 2°C global temperature goal and to adapt to an already changing climate. It also illuminates how different types of public support are addressing different needs, and how they are interacting with private sources of finance. Such understanding can position policy makers and investors to more effectively manage the risks and seize the opportunities associated with climate change.

We found that global climate finance flows reached at least US$391 billion in 2014 as a result of a steady increase in public finance and record private investment in renewable energy technologies. Public actors and intermediaries committed US$148 billion, or 38% of total climate finance flows. Private finance increased by nearly US$50 billion in 2014 and resulted in a record amount of new renewable energy deployment, particularly in China. About 74% of total climate finance flows, and up to 92% of private investments were raised and spent within the same country, confirming the strong domestic preference of investors identified in previous years’ Landscape reports and highlighting the importance of getting domestic frameworks for attracting investment right.

This global outlook provides a complementary, big picture perspective to a recent report prepared by the Organisation for Economic Co-operation and Development (OECD) in collaboration with CPI to provide an up-to-date aggregate estimate of mobilized climate finance and an indication of the progress towards developed countries’ commitment under the UNFCCC to mobilize US$100 billion annually for climate action in developing countries by 2020. While US$100 billion will not meet the climate challenge by itself, it is currently the primary political benchmark for assessing progress on climate finance and an important starting point for getting us on a low-carbon, climate-resilient pathway.

Our estimates indicate that climate finance reached US$62 billion in 2014 and US$52 billion in 2013, equivalent to an annual average over the two years of US$57 billion. Bilateral public climate finance represents a significant proportion of this aggregate, provisionally estimated at US$22.8 billion on average per year in 2013-14, an increase of over 50% over levels reported in 2011-2012. Multilateral climate finance attributable to developed countries is estimated at US$17.9 billion in 2013-2014. The remaining finance consists of preliminary and partial estimates of export credits and of private finance mobilized by bilateral and multilateral finance attributable to developed countries.

The OECD report makes a significant contribution to informing international discussions and enhancing transparency on climate finance ahead of COP 21 in Paris in two ways. It provides a robust number including preliminary estimates of mobilized private finance for the first time and does so based on a transparent methodology. This represents real progress. In 2011, when we began gathering data for our Global Landscape of Climate Finance reports there was very little in the way of common methodologies and definitions. Since then, we have worked with the OECD, a group of Multilateral Development Banks, the International Development Finance Club and the UNFCCC Standing Committee on Finance and others, to develop definitions and methodologies that have helped to close data gaps, improve comparability and increase understanding of climate finance.

Ultimately, of course, it is up to international negotiators to decide what should and should not count towards the US$100 billion commitment and how best to approach the wider climate challenge. Our hope is that the lessons learned from our recent climate finance reports can help to further improve the transparency and comprehensiveness of climate finance measurement and reporting to develop tracking systems that ultimately help governments to spend money wisely.

A proper measurement, tracking, and reporting system is a critical building block to ensure finance is used efficiently and targeted where it is needed the most. By shedding light on the intersection between public policy, finance and private investment, we will continue to help decision makers from developed, developing and emerging economies optimize the use of their resources.

This article was originally published on Climate Change Policy & Practice, a knowledge management project of the International Institute for Sustainable Development (IISD). See: http://climate-l.iisd.org/

Read More

Changing land use patterns in Brazil

Juliano Assunção, October 29, 2015

 

As the demand for food and climate change risk both increase, a new study explores paths to more efficient land use in the country.

As Brazilian President Dilma Rousseff promised to reduce Brazil’s greenhouse gas emissions by 43 per cent by 2030. Brazil became the first major developing country to pledge an absolute reduction in emissions over the next fifteen years. Since the country is an agricultural leader with abundant natural resources, it clearly has many challenges ahead. One of the questions that arises is whether it is possible to simultaneously promote economic growth and improve ecosystem protection within Brazil’s rural landscape.

Read More

Institutional Investors Can Help India Meet Its Climate Action Pledge

Gireesh Shrimali, October 8, 2015

 

Earlier this month, India announced its pledge for action on climate change beyond 2020, ahead of the United Nations summit on climate change negotiations this December in Paris. India’s pledge, called an INDC (Intended Nationally Determined Contribution), has been much anticipated, since it is the last to be announced of the countries which are major contributors to climate change. It promises that renewable energy will be 40% of the country’s expected energy mix in 2030, along with a 35% reduction in greenhouse gas emissions by 2030 from 2005 levels.

India’s INDC is laudable and an important step forward that will be good for both the climate and for the nation’s economic growth and energy supply. However, it is also very ambitious, given that the amount of renewable energy needed will be a significant jump from India’s current supply of less than 5GW of solar power and less than 25GW of wind power.

Cost-effective financing will be critical to India achieving its INDC. The growth of renewable energy in India has been dampened by both a lack of financing, and financing at unattractive terms. In particular, the high cost, short tenor and variable interest rates of debt have made renewable energy in India approximately 30% more expensive than in the US or EU.

Achieving India’s INDC is going to require mobilising a lot more financing, at more attractive terms. There are several avenues the government could explore for a more cost-effective and realistic pathway to the INDC.

India-wind-turbines

Photo credit: Yahoo

One promising avenue is institutional investors in India,such as domestic insurance companies and pension funds.

Renewable energy in India has traditionally relied on domestic commercial banks for debt financing. However, the typical tenor of bank loans is around 10 years, whereas most renewable energy projects require longer term financing that matches their project life cycles of 20 to 25 years.

Compared to commercial banks, institutional investors not only invest over longer terms, but also accept lower returns in exchange for lower risks, providing a better match with the low risk, low return profiles of renewable energy projects.

Analysis by Climate Policy Initiative shows that domestic institutional investors may have the capacity to finance $15 billion of operational renewable projects up to 2019. This is a significant share of the $100 billion of investment in infrastructure needed to meet India’s previous target of 175GW of renewable energy by 2022.

However, one key barrier stands in the way: institutional investors are restricted to investing in projects above a certain credit rating threshold, which is AA or above in the case of India. Most renewable energy projects fall below this threshold.

Enabling institutional investment will require financial instruments that can raise the credit rating of renewable energy projects. Two promising instruments may be able to do this: infrastructure debt funds by non-banking financing companies, which are pooled investment vehicles designed to facilitate investment across infrastructure sectors, including renewable energy, and renewable energy project bonds with partial credit guarantees, which are a form of credit enhancement where the borrower’s debt obligations are guaranteed by a guarantor with a strong credit rating.

While both instruments currently face structural and regulatory barriers that have impeded their use as investment vehicles, the government can address these with appropriate policy changes.

Another potential source of more financing for renewable energy is foreign institutional investors. However, foreign investors face a key risk. Because currency exchange rates can be volatile, when a renewable energy project is financed by a foreign loan, it requires a currency hedge to protect against the risk of currency devaluation.

Market-based currency hedging in India is too expensive, making foreign financing just as expensive as domestic financing. Reducing the cost of foreign financing by reducing the currency hedging cost can mobilise foreign capital and spur investments in renewable energy.

One way to do this could be through currency hedging sponsored by the Indian government. Recent analysis by Climate Policy Initiative shows that government-sponsored currency hedging, if designed appropriately, could reduce hedging costs by nearly 50%, lowering the cost of renewable energy by nearly 20%.

As India embarks on its ambitious journey towards reaching its INDC, attracting institutional investors through improved policy, such as credit enhancement for renewable energy projects and smartly designed government-sponsored currency hedging for foreign investment, could prove key in providing the critical low-cost, long-term financing needed for renewable energy growth.

A version of this blog first appeared in the Huffington Post.

Read More