Mainstreaming energy efficiency in International Finance Institutions could lower cost of meeting green growth goals
One of the many topics of discussion on the agenda for this weekend’s discussions at the G20 leader’s summit will be on how to kickstart the global economy. Leaders should take a serious look at energy efficiency as a means of increasing productivity and boosting growth.
Improving energy efficiency is one of the most important tasks to limit global temperature rise to two degrees. The IEA suggests that we have to invest $8.1 trillion dollars in energy efficiency in industry, transport, and buildings globally by 2030 (IEA, 2016) to meet emissions reductions targets, an annual investment need of $540 billion. In 2015, global investments in buildings, transport, and industry amounted to $221 billion. Thus, the global finance community has to close a gap of $300 billion to ensure we meet our climate target.
A recent report from the G20 Energy Efficiency Finance Task Group (EEFTG) drew on analysis from Climate Policy Initiative (CPI) and South Pole Group (SPG). The CPI and SPG report looked at the energy-related lending activities of International Finance Institutions (IFIs) such as the Asian Development Bank, European Investment Bank, Inter-American Development Bank, KfW, Overseas Private Investment Corporation, and World Bank to determine how their current energy lending portfolios align with a zero-carbon development pathway.
By reviewing $47 billion in energy-related commitments to developing countries from 2012 to 2014 we found that 70% energy-related lending activities of these institutions have a positive or neutral impact on CO2 emissions. 11% and 13% of commitments were made to energy policy and cross-sector projects whose impacts we did not determine on a portfolio level. 4% of commitments were made in fossil fuel energy projects that negatively impact CO2 emissions or support a long-term lock-in of a high emissions scenario such as investments in coal mining.
Energy efficiency activities across all reviewed IFIs amounted to $6.6 billion (14%) of reviewed energy–related investment was committed energy efficiency projects. This is an average of $2.2 billion energy efficiency investment annually, which is a significant amount for six finance institutions. However, there is a clear need to increase energy efficiency financing activities:
- Only 0.8% of IFI non-energy commitments are in energy efficiency. Of $193 billion reviewed non-energy commitments, $1.6 billion are in energy efficiency projects.
- Actual investments in energy efficiency technologies and services are less than $6.6 billion. 76% of energy-efficiency-related investments are in renewable energy and transmission and distribution projects that include energy efficiency, which means that it is likely that only a small part of the commitments to these projects actually went to energy efficiency specifically.
To mobilize additional finance for energy efficiency and ensure that IFIs create investment portfolios that are aligned to a zero-carbon development pathway we highlight the following data needs:
- Expand reporting on energy efficiency investment data. The MDB Joint Report on Climate Finance provides exact numbers on energy efficiency but only captures finance flows from a set of MDBs and countries, and does not provide a sectoral split. The OECD CRS database includes information on EE in project titles or project descriptions rather than via a marker or individual reporting column. Expanding the tracking of energy efficiency finance will help identify investment gaps and best practice, and will create accountability. Increased transparency will lead to increased peer pressure to increase EE investment activities.
- Establish specific definitions, guidelines, and strategies for energy efficiency by sector. The diversity of energy efficiency applications and strategies across different sectors make them difficult to mainstream. Our report provides an example of energy efficiency safeguard questions for the building sector that can be used to mainstream EE across different departments, sectors, and projects. We also found that the understanding of energy efficiency interventions differs across institutions. Establishing a common framework of definitions around energy efficiency activities by sector would give IFIs more confidence to invest and provide further transparency for donors.
- Further investigate the long-term and economy-wide impact of supporting energy efficiency measures in fossil fuel power plants and vehicles to avoid lock-ins into CO2-intensive growth pathways. Not all energy efficiency projects necessarily have a positive long-term impact on carbon emissions. Anecdotal evidence suggests spillover effects from energy efficiency upgrades of power plants when old parts of are not scrapped but are sold on secondary markets in developing countries. Further, energy efficiency upgrades can extend the overall lifetime of fossil fuel power plants and transportation infrastructure which will lock-in high carbon development pathways.