Mobilizing Institutional Investment in Indian Renewables

June 12, 2018 | and


India has been a sweet spot for renewable energy investment exhibiting an 11% compound annual growth rate (CAGR) between 2004 and 2017, and ranked among the top five renewable investment destinations in the FS-UNEP Report. Some major contributing factors have been India’s strong macroeconomic fundamentals, its large and well-diversified renewable market, and India’s ability to offer higher excess returns than several comparable markets like China and the United States.

Excess returns on renewable investments

Mobilizing investments by institutional investors, foreign and domestic, is a requisite for India to meet its clean energy targets.

However, this momentum needs to be accelerated to achieve its ambitious clean energy targets, which include 175 gigawatt (GW) of installed renewable energy by 2022, 40% of the total installed capacity to be renewable by 2030 and 30% of vehicles to be electric by 2030.

One promising opportunity lies in institutional investment, both foreign and domestic, through pension funds, insurance companies, and sovereign wealth funds. These investors mostly seek yield-generating investments in low-risk and long-duration assets which align well with the investment profile of renewable energy. Also, over the course of time, the needs of foreign investors have evolved from seeking small size, high-risk and high-return investments to large size, medium-risk and moderate return investments that are well-matched by the renewable sector offerings.

However, certain sector-specific issues such as off-taker risk, limited availability of listed securities and low credit ratings of renewable energy securities restrict the flow of investments. In order to address these barriers, a recent report by Climate Policy Initiative offers potential solutions to stakeholders, including policymakers and regulators.

Sector-specific barriers and potential solutions

The off-taker risk adds as much as 1.07% of additional risk premium to the cost of debt for renewable energy projects. A long-term solution is to fix the root causes, like the one being tried by the Ujwal DISCOM Assurance Yojana (UDAY). Though UDAY has shown promise in reducing operational inefficiencies and improving financial performance in selected cases, it is still early to measure the effectiveness of the scheme in reducing the off-take risk.

Some other promising short-mid term options include tripartite agreements between the Central government, State governments and the Reserve Bank of India; and a credible payment security mechanism (PSM) either by the corresponding state governments or on a standalone basis. However, both the effected PSM and tripartite agreements are available only for public sector intermediaries – National Thermal Power Corporation (NTPC) and Solar Energy Corporation of India Ltd. (SECI) – between renewable power developers and state DISCOMs. There is need to extend these arrangements to producers who sell power directly to state DISCOMs, which ensures the most judicious use of the public capital employed.

Another key reason for low investment levels from domestic institutional investors in the renewable energy sector is lack of investable securities (listed and liquid) since most developers are borrowing and not issuing securities. Indian policymakers have been aware of the need for these vehicles, and they have been gradually created, both for debt (green bonds and infrastructure debt funds) as well as equity (infrastructure investment trust) financial vehicles. However, green bond issuances (at corporate, not project level), no renewable energy specialized Infrastructure Debt Funds (IDFs), and Infrastructure Investment Trusts (InvITs) are indicators that investors are still trying to get comfortable with these vehicles.

In this context, one potential solution is to incentivize banks and Non-Banking Financial Companies (NBFCs) like Indian Renewable Energy Development Agency (IREDA), to securitize their renewable energy project loan portfolio. The government can cover costs related to securitization of renewable energy loan pools (transaction cost) and subsidize partial guarantee fees on bonds issued through securitization structures.

The third major barrier restricting the flow of investments is limited renewable securities with AA domestic rating – the minimum rating required by institutional investors to invest. Though there is a specific solution, in the form of a partial credit guarantee (PCG) offered by India Infrastructure Finance Company Limited (IIFCL), this is not considered successful yet, with only two renewable energy issuances so far, and those in 2016. One of the key issues with these credit-enhanced bonds is that though these are priced appropriately in the market, the net benefit compared to bank debt does not justify transaction costs. As an example, with PCG, the benefit is a maximum of 1.50%. With cost of PCG at least 0.5% and cost of transaction at least 0.5%, the net benefit of at most 0.5% does not justify the hassle of a bond issuance. Initial subsidization of guarantees and transaction fees may encourage issuers to actively pursue PCG-backed bonds in the renewable energy sector.

Need for regulators to espouse investors to go green

Apart from addressing the aforementioned sector-specific barriers, there is a clear need for insurance regulators to introduce certain guidelines to insurance companies pertaining to climate risk management framework and carbon footprint disclosure. Introductions of such regulations will allow them to actively assess their portfolio exposure to sectors likely to be adversely affected by climate change in the coming year. This will give them a head start to gradually diversify their current investments from such high carbon sectors and ultimately accelerate finances into low carbon infrastructure sectors, including the renewable energy sector.

Another step in the right direction would be to mandate all companies to provide green ratings on their financial securities. These ratings will allow investors who evaluate environmental aspects in their investment decision-making to make more informed decisions around securities. To introduce such a mandate, the government can initially provide incentives to companies or rating agencies to introduce green ratings.

In conclusion, there is an immediate need for policymakers to implement the aforementioned solutions in order to create an investment environment that lowers risk perceptions of investors in the renewable energy sector. These solutions complemented with evolving regulations and the disclosure landscape will be key to scale-up institutional investment in India.


A version of this blog first appeared on Green Growth Knowledge Platform (GGKP), a global network of international organizations and experts that identifies and addresses major knowledge gaps in green growth theory and practice. 

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Solar Municipal Bonds: Unlocking India’s Energy Potential

June 7, 2018 | and


India has topped the charts across the world in bad air quality. A recent study by the World Health Organisation (WHO) shows that 14 out of the 15 most-polluting cities in the world are in India. New Delhi, the capital of India and the second most polluted city in the world, can serve as an apt example to reveal the grave situation where breathing in open air is equivalent to smoking three packs of cigarette in a day. While car exhaust is a major culprit, fossil fuel-based power plants also play a large role in this situation.

Switching from fossil fuel based power plants to clean energy power from sources like wind and solar can play a key role in combating air pollution and climate change. Clean energy, especially distributed solar power, is also critical to solving the issue of energy access to millions of unpowered homes in India.

To address this twin challenge of air pollution and climate change, India has set aggressive targets of 40 GW of rooftop solar by 2022 which would require an investment of ~USD 40 billion in next 4 years. This would be a significant undertaking given that the current rooftop solar capacity installation stands at ~1.8 GW. Moreover, India is likely to install only ~13 GW of rooftop solar by 2022, considering the current rate of annual capacity addition. This is merely 33% of the set target.

Although rooftop solar is increasingly becoming cost-competitive, it still requires investment upfront to buy and install panels. Rooftop solar is approximately 17% and 27% cheaper than the average industrial and commercial tariff respectively. Despite the falling prices,   high upfront cost of rooftop solar installation, limited access to debt finance, and perceived performance risk restrict rooftop solar adoption.

Our previous research suggests a third party financing model or the “RESCO” model to help address these barriers. However, the success of this model has been limited as only 360 MW (18%) of the total of 1,800 MW have been installed under the RESCO model. This is mainly due to inadequate availability of debt capital for project developers.

So what’s the solution?

A recent study by Climate Policy Initiative (CPI), Indian Council for Research on International Economic Relations (ICRIER), and Stockholm Environment Institute (SEI), creates a case for municipal entities to promote rooftop solar in India by issuing green bonds in capital markets.

The study proposes a transaction structure wherein a special purpose vehicle (SPV) or a corporate municipal entity (CME) owned by the municipal corporation would raise the green bonds and disburse the proceeds of these bonds to SPVs owned by project developers via capital lease arrangements. In our paper, we also provide a detailed roadmap for municipalities to deploy the proposed model. After the installation and payment is complete for rooftop solar, cash flows would funnel back to the initial capital financiers. The proposed transaction structure is a Public Private Partnership (PPP) approach, similar to the Design-Build-Finance and Operate (DBFO) model with financing activity taken care by a public entity such as Municipal Corporations.

Transaction Structure to raise Municipal Bond for Rooftop Solar Financing

Municipal bonds have already been successfully tried in India for other infrastructure projects that serve the public good. For example, Pune Municipal Corporation recently issued a municipal bond for its water sector. With a 7.5% of coupon over 10 years, the 12 times oversubscribed bond showed significant appetite of investors for investing in such instruments. The solar municipal bond would help reduce costs for rooftop solar power at those same rates, by around 10-14%. This is a large financial savings that will ultimately help the electricity consumers by reducing the cost of already-cheaper solar power further.

In addition to reducing the cost of rooftop solar, municipal bonds also have the potential to mobilize significant untapped investment from new sources such as domestic institutional investors which has a potential of USD 56 billion in the green bond market and reached a total issuance size of USD 156 billion in 2017.

Still, financing rooftop solar via municipal bonds would face some barriers. This includes finding municipalities with credit ratings of A+ or more, reluctance of municipal corporations to issue bonds, lack of municipal mandate to promote electricity generation, high transaction costs, etc. which may hamper the uptake of this mechanism. However, the study points to several fixes like credit enhancement mechanisms, first loss capital, and legislative amendments from the central government that could encourage municipal bond issuance for rooftop solar.

These recommendations, and the others we outline in the CPI-SEI-ICRIER study, are a win win for all – for India, it will help reach its rooftop solar targets. For municipal corporations, it will help build organizational capacity to raise municipal bonds for other projects. And for the very cities struggling with clean air, this innovative but proven model can help residents save money on electricity, something that helps everyone breathe easier.


A version of this blog first appeared on Green Growth Knowledge Platform (GGKP), a global network of international organizations and experts that identifies and addresses major knowledge gaps in green growth theory and practice. 

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Blending finance for risk mitigation

April 18, 2018 |


Within developing economies, there are significant opportunities to increase investment in clean energy, however, risk remains a key barrier to climate investment. Blended finance is a critical tool to help nations meet their climate commitments, while also addressing the risks and barriers faced by investors when pursuing these opportunities.

In one of CPI’s early publications on risk – the 2013 Risk Gaps series – we highlighted how risk can prevent renewable energy projects from finding financial investors by jeopardizing their potential returns. At the time, investors in both developed and developing countries were demanding coverage for policy risk (such as retroactive changes to feed-in-tariff in Spain), while financing risks in developing markets were being driven by immature financial institutions, and not sufficiently addressed by financial instruments.

Today – five years later – even though clean energy costs have come down significantly, risks and barriers are still preventing investment in developing countries.

Our recent publication, “Blended Finance in Clean Energy: Experiences and Opportunities” looks at potential markets for high-impact investment opportunities requiring blended finance support – India, South Africa, Mozambique, Cambodia, Mongolia, Uganda, Kenya, and Rwanda – and identifies key barriers to investment using macro-indicators that best define specific risks in the region. Our analysis also evaluates blended finance initiatives in clean energy, diving in-depth into a subset of them, to understand how barriers are currently being addressed and to identity any remaining gaps.

Key barriers and risks in high-impact countries


Note: (*) indicates that in the absence of a quantitative figure to estimate the barrier or risk, the intensity has been qualitatively determined by combining expert judgement with performance of other risks within the same country. N/A indicates data not available

The main takeaway from our research is that, given the steep declines in clean energy costs, the public sector, when implementing blended finance initiatives, needs to shift its focus from covering the “viability gap” between clean energy and competing fossil fuel technologies, to a focus on targeted investment risks and barriers. Our analysis revealed that off-taker risk, currency risk, policy risk, and liquidity and scale risks are still relevant as early stage projects and clean energy companies face barriers in accessing financing. This has important implications for which financial instruments to deploy looking forward – with risk mitigation instruments, such as guarantees, insurance, and local currency hedging and financing, playing a key role.

More specifically, our research found that:

  • Only a few initiatives seem to target commercial risks, including currency risk or off-taker risk, in their design. One example from the Lab, TCX’s Long Term FX Risk Management initiative, which offers long-term risk hedging instruments in countries with underdeveloped capital markets, is an exception, having mobilized EUR 100m of investment with a EUR 30m foreign exchange hedging facility. Another example, GEEREF NeXt, the successor fund to GEEREF, aims to mitigate off-taker risk by engaging early with regulatory bodies in target countries.
  • Relatively few initiatives have reported a guarantee element in their design. An analysis of multilateral institutions indicated that guarantees represent only approximately 5% of their commitments, yet generate approximately 45% of their private sector mobilization. Furthermore, previous CPI research found that, even among the already low-risk instrument offerings, only 10% of risk instruments focused on climate related projects. Several administrative barriers prevent the wide use of guarantees as an instrument for private capital mobilization. For example, development finance institutions typically record guarantees in the same way they do loans for the purposes of risk capital allocation, thus discouraging the use of guarantees over loans. Furthermore, guarantees are not counted as official development assistance (ODA) by the OECD, and thus, many financial institutions are not incentivized to use them. In fact, several bilateral institutions are obliged, by law, to offer only ODA-eligible financial products, therefore excluding all guarantees.
  • Aggregating individual projects and private company investments into liquid assets (e.g., through securitization), is critical to overcome investment hurdles, including liquidity risk, and to access larger pools of capital, but there is little experience to date in emerging markets. However, some initiatives are currently raising financing successfully, including the Solar Energy Investment Trusts, the IFC’s Rooftop Solar Financing Facility in India, and the Green Receivables Fund in Brazil. For non-project-based financing, supporting energy generation companies, including distributed generation start-ups (via early stage blended risk finance) as well as established utilities (via risk mitigation instruments) to access capital markets financing will also help mainstream clean energy finance.
  • There are large gaps in accessing early stage risk financing for project preparation, distributed generation companies, and new technologies.This is particularly true for project preparation during the early stages of mid-to-large scale projects (e.g., over 10 MW). While some grant initiatives, notably the Africa Clean Energy Facility (ACEF) and U.S.- India Clean Energy Finance (USICEF), have focused on addressing gaps at this stage, a financially sustainable solution has not yet been established. However, several initiatives, including Climate Investor One’s Development Fund and a newly endorsed Lab instrument, the Renewable Energy Scale-Up Facility, seek to re-coup some costs by using innovative mechanisms. For technologies involving high upfront commitment combined with significant resource risk, a program developed by IDB combines public loans that are convertible to grants, with private insurance, both aimed at targeting resource risk during the exploration/ drilling phase. New renewable energy technologies, such as energy storage, also face a scarcity of early stage risk finance, including in developed markets. As such, a blended finance initiative in the U.S., the PRIME Coalition, works to deploy philanthropic capital in early stage clean energy technology companies to catalyze private investment, but large gaps remain. Finally, distributed generation also faces scarcity of investment at the earliest stages— including equity and debt—particularly in countries with under-developed financial sectors. ACEF sought to address this barrier as well through grants, while, in India, a group of philanthropies is working to build the India Catalytic Solar Finance Facility, which will use catalytic capital to help non-bank financial companies establish new business lines by co-investing in small and medium sized enterprises that are seeking to scale their clean energy businesses or deploy distributed solar generations.

Many innovators are already building the next generation of blended finance initiatives, increasingly focusing on risk mitigation. CPI’s Climate Finance team remains committed to supporting investors as they improve their understanding of climate risks, and seize the opportunities presented by countries’ transitions to low-carbon and climate-resilient economies.

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Greening institutional investment in India

March 20, 2018 | and


India’s energy demand is increasing, and, to achieve its clean energy target of 175 GW by 2022, finance will be crucial.

One promising opportunity lies with foreign and domestic institutional investors who have $70 trillion and $564 billion assets under management, respectively. These investors are bound by their fiduciary duties meant to maximize financial returns to their beneficiaries, without taking excessive risks, while also meeting their liabilities over the long-run. Renewable energy, though a relatively new technology, is well matched to these needs as it offers high returns as well as meets environmental, social and governance (ESG) considerations in their investment strategies.

However, how can India unlock this opportunity to create a clean energy future?

A recent study by Climate Policy Initiative attempts to answer this question by developing a business case for institutional investors to invest in the Indian renewable energy sector, identifying key barriers to investment, and proposing potential pathways forward.

The changing economics of energy in India
According to the report, the renewable sector is becoming increasingly attractive compared with other energy investment opportunities in India. For instance, the solar tariff has actually become 23% cheaper than coal plants, and coal plants exhibit greater risk in cash flows (i.e. 40%) as compared to wind (i.e., 20%) and solar (i.e.,10%).

In the medium term, these changing economics mean that the existing power portfolio of investors, who are mostly exposed to fossil based investments instead of renewable investments, would underperform due to declining demand for fossil based power. Consequently, it is in the interest of institutional investors to gradually rebalance their portfolio in favour of climate friendly investments, in India and elsewhere.

Is India an attractive renewable energy market for institutional investment?
The study builds a case that India as a market is strong and economically attractive for foreign institutional investors compared to other similar markets across the world.

First, it benefits from strong renewable policy commitments as well as a large market size — ~480 GW expected capacity addition over 2016-40 — that is third only to China and the United States. Second, India is ranked 2nd in Ernst & Young’s renewable energy country attractiveness index, based on five pillars including macroeconomic environment, policy enablement, supply–demand dynamics, project delivery, and technology potential. Third, renewable energy in India provides a financially attractive investment, as measured via excess returns,  the difference between the expected return on capital invested and the weighted average cost of capital. India offers higher excess returns of 3.5% compared with other large markets, such as the US (2.4%) and China (1%). While some markets provide higher excess returns than India—for example, Mexico, Canada, and Chile – these are much smaller markets.

So what’s next?
Institutional investors with long-term investment horizons are mostly seeking yield generating investments in low risk and long duration assets, i.e., traits that align well with the current investment profile of renewable energy; this has changed from small size and high risk-high return investments to large size and medium risk-moderate return investments. Although the expected return from renewable energy projects have come down from 20% to 15% over time, this still matches institutional investors’ overall India market portfolio return requirements.

Renewable energy sector stages with risk-return mapping

However, our study finds there are still some barriers to unlocking this apparent match – including, sector specific risks like off-taker risk and limited listed and highly graded investment opportunities, along with currency risk.

The good news is that with appropriate regulatory and policy changes, the sector can provide a high match with institutional investors’ investment objectives.

For example, the central and state agencies could address the off-take risk through a transparent and credible payment security mechanism. Regulators could consider developing incentives to encourage banks and Non-Banking Financial Companies (NBFCs) to securitize their renewable energy loan portfolios, freeing up capital for more renewable energy projects. And investors themselves can consider developing risk management frameworks to assess and manage climate risk, identifying and investing in forward looking investment opportunities, renewable energy being one, to mitigate climate risk in their portfolio.

These steps, and the others we outline in the study, are a win win for all – for India, it’s a way to get much needed capital in a much needed area. For investors, their long-term portfolios depend on it.

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A recipe for $1 billion in sustainable investment

March 15, 2018 | , and


Climate change threatens catastrophic consequences, especially for the world’s poorest. Recognizing this threat, the 2015 adoption of both the Paris Agreement and the UN Sustainable Development Goals signaled unprecedented global political will for action on climate change. While limiting global temperature rise to 2 degrees Celsius, as targeted by the Paris Agreement, will avoid the most disastrous of these consequences, achieving this goal will require trillions of dollars of new investment in low-carbon climate-resilient drivers of economic growth.

Based on IFC estimates, developing countries alone will need $1.5 trillion in climate investment annually through 2030. Therefore, recognizing the importance of private investment to meeting the climate challenge, in 2013 the German, U.K., and U.S. governments met to consider ways to coordinate their public capital towards more effectively mobilizing private investment. Out of this meeting, the Lab was born, with a mission to identify, develop, and launch innovative and transformative climate finance solutions to drive billions of dollars to the low-carbon, climate-resilient economy.

We are proud to announce that the Lab reached a huge milestone last week – the 26 ideas and companies that have been selected, developed, and endorsed by the Lab since its launch in 2014 have now mobilized over $1 billion in sustainable investment.

In the last four years, the Lab has grown into a robust public-private partnership of over 60 expert Lab member institutions, and has spanned four programs – the Global Lab, India Lab, Brasil Lab, and the Fire Awards. It is supported by nine funders: the German Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety (BMUB), the UK Department for Business, Energy & Industrial Strategy (BEIS), the U.S. Department of State, the Netherlands Ministry for Foreign Affairs, Bloomberg Philanthropies, the David and Lucile Packard Foundation, Oak Foundation, the Rockefeller Foundation, and Shakti Sustainable Energy Foundation. The Lab has been endorsed by the governments of the G7, India, and Brazil, and was recently named in the “Top 11 Best Bets” out of nearly 2,000 submissions to the Macarthur Foundation’s 100&Change competition.

The solutions developed and endorsed by the Lab are tackling some of the most persistent barriers to sustainable investment, and bringing finance for sustainable development into the regions and sectors that need it most.

Public and private investors in Lab instruments


Take for example Energy Savings Insurance (ESI), which this week helped the Lab cross the $1 billion line with the announcement of support from the Green Climate Fund to expand the already successful model into Paraguay and Argentina. ESI started as a seed of an idea at the Inter-American Development Bank (IDB), a Lab Member, who was interested in addressing barriers to energy efficiency investments in Latin America. Energy efficiency upgrades can save money for small- and medium-sized businesses (SMEs) in developing countries while reducing greenhouse gas emissions. However, the sector is starved of investment as both SMEs and local banks often lack the expertise and confidence to invest in capital intensive energy efficiency measures. Energy Savings Insurance guarantees the financial performance of energy efficiency savings projects, paying out if the projected value of energy savings is not met. The product is currently launched in seven countries in Latin America, with two more on the way with the latest support from the GCF, IDB, Agencia Financiera de Desarrollo (AFD) in Paraguay, and Banco de Inversión y Comercio Exterior S.A.(BICE) in Argentina. By 2030, ESI has potential to catalyze over USD $10 billion in energy efficiency investments.

The Water Financing Facility is another idea brought to the Lab as a concept – proposed by the Dutch government as a way to bring crucial private finance into the water sector in developing countries. While water infrastructure is a key aspect of building climate resilience in many regions, it is typically regarded as an unfavorable investment due to high perceptions of risk from investors. To address these risks, the Facility issues investment-grade resilient water bonds to domestic institutional investors to support countries’ national water and climate priorities, building infrastructure that improves access to safe and affordable water both today and into the future while providing consistent returns for investors. Early investments have helped set up the Facility, which is anticipating its first bond issuance this year.

We have identified three key ingredients that have allowed us to get this far. First, the Lab is a collaboration of the public and private sectors. As most ideas at the beginning need support from both public and private actors to get off the ground, access to key stakeholders in both sectors allows for the informed selection of viable ideas; the stress-testing and refinement of these ideas with potential investors and implementing partners, which allows us to address the needs of investors from very early on; and the right network to help take ideas forward and get to market quickly.

Second, the Lab focuses on four key criteria in selecting and endorsing transformative ideas: innovation, actionability, financial sustainability, and catalytic potential. Ideas must address key market barriers in innovative ways. They must have a clear and feasible pathway to implementation identified, and be able to phase out public funding over time. Finally, they must be able to catalyze a larger market for climate solutions.

Third and above all, we focus on mobilizing finance – ideas must be of interest to Lab members in both the public and private sectors and offer concrete opportunities for investment. To date, Lab Members have invested more than $230 million in ideas that have come out of the Lab.

Even as the Lab has been successful thus far, we know there is plenty more to do to turn this first billion into the trillions necessary to shift to the global pathways laid out in the Paris Agreement. As certain sectors, such as renewable energy, become more mainstream, the sustainable investment community must continue pushing to focus on incubating ideas in the most difficult sectors and regions to catalyze new markets. To that end, the Lab’s new 2018 class of instruments focuses on sustainable transit, mini-grids for rural development, and climate resilient land use.

As we move into our next four years, the Lab is looking forward to increasing collaboration in climate finance to drive billions more towards a low-carbon, climate resilient economy.

Climate Policy Initiative serves as Secretariat of the Lab. Our first impact report covering 2014-2017 is available here.

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Perubahan Iklim dan Risiko Investasi

March 5, 2018 |


Konferensi perubahan iklim Perserikatan Bangsa-Bangsa (PBB)  belum lama usai. Salah satu pesan penting untuk dunia usaha adalah pentingnya keterbukaan informasi mengenai risiko usaha akibat perubahan iklim. Investor juga didorong untuk mengukur sejauh mana portofolio investasi mereka terpapar risiko perubahan iklim. Ini disuarakan di beberapa forum di luar ruang perundingan dimana pemerintah, swasta dan masyarakat sipil membahas solusi konkret menghadapi perubahan iklim, tantangan terbesar umat manusia abad ini.

Pesan tersebut sejalan dengan Peraturan Pemerintah tentang Instrumen Ekonomi Lingkungan Hidup (PP-IELH) yang dikeluarkan oleh Pemerintah awal November ini. Ketentuan yang relevan ada di Pasal 18, yaitu dunia usaha diminta untuk menginternalisasi biaya lingkungan hidup dengan memasukkan biaya pencemaran dan/atau kerusakan lingkungan hidup dalam perhitungan biaya produksi atau biaya suatu usaha dan/atau kegiatan.

Sedangkan risiko perubahan iklim terhadap dunia usaha dapat dilihat dalam tiga dimensi (CPI, 2015). Pertama, risiko akibat dampak perubahan iklim secara fisik terhadap operasi usaha. Meningkatnya intensitas dan frekuensi kejadian cuaca ekstrem yang menyebabkan banjir, longsor dan kebakaran, serta kenaikan suhu dan kenaikan permukaan air laut, jelas mengganggu dan meningkatkan risiko usaha.

Dimensi kedua dan ketiga berkaitan dengan komitmen dunia untuk merespon perubahan iklim, yaitu munculnya kebijakan dan peraturan baru dan berkembangnya pasar dan kegiatan ekonomi yang lain. Kedua hal tersebut berpeluang menyebabkan penilaian ulang aset. Perusahaan yang mengandalkan sumber daya fosil, termasuk batubara, atau yang berproduksi dengan menggunduli hutan yang berakibat meningkatnya emisi karbon, akan dinilai memiliki risiko lebih tinggi. Nilai aset perusahaan seperti ini berpotensi menurun karena para investor akan menghindarinya atas alasan kepatuhan (compliance), reputasi dan juga peluang bisnis baru yang lebih ramah lingkungan (Peihani, 2017).

Beberapa perkembangan terkini di tingkat global penting untuk dicermati. Kini muncul berbagai inisiatif oleh dunia usaha internasional untuk menghadapi risiko perubahan iklim. Salah satunya adalah Investor Platform on Climate Change yang mewadahi berbagai kelompok investor global dengan komitmen untuk mengukur dan mengungkapkan jejak karbon dari portofolio investasinya dan menganalisis dampak dari perubahan iklim terhadap keberlangsungan kegiatan usahanya.

Peluang dan tantangan

Komitmen oleh kelompok lembaga keuangan tersebut juga mulai diaplikasikan oleh perusahaan dan organisasi non-keuangan. Beberapa perusahaan global mulai mengidentifikasi dan mengukur jumlah emisi yang dihasilkan dari kegiatan usaha dan perusahaan yang bergerak di bidang energi meninjau kembali kepemilikan cadangan bahan bakar fosil.

Dengan mengukur jumlah emisi, pelaku usaha akan memiliki dasar untuk kemudian menganalisis berbagai upaya yang dapat dilakukan untuk mengurangi emisi dari kegiatan usaha serta menghitung biaya yang diperlukan. Selain itu, informasi ini akan sangat bermanfaat bagi para investor seperti pemegang saham dan kreditur, khususnya dalam mengestimasi dampak jangka panjang dari investasi yang dilakukan.

Hal lain yang juga mulai dilakukan oleh beberapa perusahaan dunia adalah melakukan valuasi atau penilaian biaya lingkungan secara internal. Salah satu bentuknya adalah menilai berapa harga akibat emisi karbon secara internal (internal carbon pricing), yang merupakan satu langkah lebih maju dibandingkan dengan ‘sekedar’ mengukur jumlah emisi karbon yang dihasilkan oleh suatu usaha.

Hasil penilaian karbon ini dapat memberikan indikasi awal bagi pelaku usaha terkait dengan potensi penyusutan nilai aset dan nilai usahanya di masa depan sehingga pelaku usaha dapat mengambil langkah-langkah strategis untuk memitigasi risiko tersebut. Data Climate Disclosure Project menunjukkan jumlah pelaku usaha global yang telah melakukan penilaian karbon secara internal terus meningkat secara signifikan, dari 150 perusahaan pada tahun 2014 menjadi 1,300 perusahaan pada tahun 2017 ini.

Untuk menerjemahkan Pasal 18 dalam PP-IELH ke dalam peraturan yang lebih teknis, setidaknya ada dua hal yang perlu diperhatikan Pemerintah. Pertama, dalam mendorong pelaku usaha menginternalisasi biaya lingkungan hidup, pemerintah perlu mengkaji dampaknya terhadap inflasi. Sebagian besar aktivitas perekonomian kita saat ini menghasilkan cukup banyak dampak negatif terhadap lingkungan dan dampak tersebut belum tercermin pada harga-harga produk yang kita beli dan konsumsi sehari-hari.

Kedua, Pemerintah perlu membangun mekanisme penerapan kebijakan yang memudahkan dunia usaha. Metode untuk menghitung biaya lingkungan banyak ragamnya dan menghasilkan nilai yang berbeda-beda. Untuk itu, implementasi Pasal 18 PP-IELH ini perlu dilakukan secara konsisten dan bertahap agar di satu sisi dampaknya terhadap perekonomian tetap dapat terjaga, dan di sisi lain tetap memberikan sinyal yang jelas kepada dunia usaha, investor dan konsumen.

Kebijakan awal yang dapat dilakukan oleh pembuat kebijakan adalah dengan menambah persyaratan keterbukaan informasi terkait risiko perubahan iklim pada perusahaan-perusahaan tertentu seperti Badan Usaha Milik Negara (BUMN), institusi keuangan dan perusahaan terbuka. Contohnya adalah informasi mengenai jejak karbon, risiko terkait perubahan iklim dan upaya-upaya mitigasi yang semuanya merupakan informasi material bagi investor dan konsumen dalam mengambil keputusan. Ini berpotensi bisa mempercepat kesiapan dunia usaha dalam menghadapi tuntutan perubahan supaya terus menjadi lebih berkelanjutan.

Bagi investor, informasi terkait perubahan iklim akan menjadi informasi tambahan dalam pengambilan keputusan terkait alokasi portofolio dan dalam menentukan strategi investasi. Selain itu, kebijakan ini juga dapat mendorong terciptanya produk-produk keuangan baru bagi investor ritel, misalnya reksadana yang memfokuskan investasinya pada perusahaan yang berkontribusi positif terhadap lingkungan hidup.

Nah, pelaku usaha tidak perlu menunggu sampai semua peraturan teknis selesai dibuat. Melihat tren global, para pelaku usaha sebaiknya mulai mempersiapkan diri dengan langkah-langkah penghitungan dan penilaian biaya emisi karbon karena mengurangi risiko merupakan langkah paling bijaksana menghadapi berbagai ketidakpastian yang muncul akibat perubahan iklim.

Tulisan ini telah dimuat di tabloid Kontan pada tanggal 30 November 2017. Tulisan ini juga dapat diakses melalui tautan ini

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Menjaga Momentum Pendanaan di Konferensi Perubahan Iklim 2017

February 26, 2018 |


Dunia sepakat batasi pemanasan global tidak lebih dari dua derajat Celcius dan beradaptasi terhadap dampak perubahan iklim. Bagaimana soal pendanaannya yang tak sedikit itu? Opini Suzanty Sitorus.

Pertemuan puncak negara-negara Pihak UNFCCC 2017 (COP 23) dilaksanakan di akhir tahun, seperti di tahun-tahun sebelumnya. Ini merupakan saat yang tepat juga untuk melakukan refleksi tentang berbagai tantangan dan hasil sepanjang tahun yang berpengaruh terhadap target-target yang harus dicapai pada tahun 2020 dan persiapan pelaksanaan Kesepakatan Paris yang akan dimulai di tahun 2020. Dunia telah bersepakat untuk bersama-sama membatasi pemanasan global tidak lebih dari dua derajat Celcius dan beradaptasi terhadap dampak perubahan iklim.

Salah satu tantangan terbesar adalah perkembangan politik dan ekonomi, domestik dan internasional, yang memicu dinamika pelaksanaan kesepakatan global tersebut. Meskipun sudah tercapai kesepakatan, kemungkinan perubahan komitmen selalu terbuka. Keputusan Presiden Donald Trump tentang penarikan diri Amerika Serikat dari Kesepakatan Paris dan hasil pemilihan umum di berbagai negara-negara kunci memercikkan keraguan akan efektivitas pembahasan persiapan teknis untuk Kesepakatan Paris selama tahun 2017 hingga 2019. Perubahan komitmen semacam itu juga dikhawatirkan menimbulkan efek psikologis bagi aktor politik, bisnis, dan masyarakat di berbagai negara sehingga enggan berkontribusi untuk penanganan perubahan iklim.

Aliran pendanaan iklim di tingkat global

Dalam konteks ini, para juru runding yang akan menghadiri COP 23 dan juga publik internasional dapat memetik pelajaran dari laporan yang diluncurkan oleh Climate Policy Initiative (CPI) minggu ini tentang aliran pendanaan iklim di tingkat global. Laporan Lanskap Pendanaan Iklim Global 2017 merupakan yang paling komprehensif dengan data dari tahun 2015 dan 2016 yang juga menyajikan untuk pertama kalinya tren lima tahun tentang bagaimana, dimana dan dari mana pendanaan berasal. Laporan ini juga mengidentifikasi kesenjangan dan peluang untuk meningkatkan investasi.

Lanskap Pendanaan 2017 tersebut mengindikasikan bahwa dua tahun sejak dicapainya Kesepakatan Paris, masyarakat global masih menghadapi tantangan yang signifikan dalam memobilisasi investasi yang dibutuhkan untuk memenuhi Kesepakatan Paris. Pemerintah sedang memusatkan perhatian pada cara-cara yang efektif untuk membiayai pelaksanaan Nationally Determined Contribution(NDC)—kontribusi yang dijanjikan oleh setiap negara sebagai bagian dari Kesepakatan Paris. Sementara itu, lembaga-lembaga keuangan publik dan swasta berupaya untuk memanfaatkan sinyal politik yang kuat yang disampaikan oleh Kesepakatan Paris untuk mengembangkannya menjadi peluang investasi hijau.

Berikut beberapa intisari dari Lanskap Pendanaan Iklim Global 2017:

•      Aliran pendanaan iklim mencapai rekor tertinggi sebesar 437 miliar dollar AS pada tahun 2015, diikuti oleh penurunan 12 persen di tahun 2016 menjadi 383 miliar dollar AS, meskipun masih lebih tinggi daripada tahun 2012 dan 2013. Dengan memperhitungkan fluktuasi tahunan, aliran pendanaan rata-rata di tahun 2015/2016 sebesar 12 persen lebih tinggi daripada di tahun 2013/2014.

•      Kenaikan pada tahun 2015 didorong oleh lonjakan investasi untuk energi terbarukan, terutama di China, dan untuk panel surya atap rumah di AS dan Jepang.

•      Meningkatnya investasi oleh sektor swasta menunjukkan pasar yang mulai berkembang untuk energi terbarukan dari angin dan surya, sehingga kebutuhan dukungan pemerintah tidak lagi sebesar sebelumnya. Meskipun demikian, secara umum, investasi pemerintah tetap menjadi landasan bagi investasi swasta dari tahun ke tahun.

•      Selama tahun 2015-2016, 79 persen pendanaan digalang dari negara dimana investasi dilakukan. Tren investasi domestik yang terus meningkat menunjukkan pentingnya kerangka kebijakan dan peraturan yang kuat oleh pemerintah nasional untuk mendukung proyek-proyek mitigasi dan adaptasi perubahan iklim.

•      Peningkatan drastis investasi untuk energi surya dan energi angin lepas pantai memberikan harapan bahwa pergeseran dari energi berbasis fosil ke arah energi terbarukan mulai terjadi dan akan membantu dunia menahan laju pemanasan global. Meskipun demikian, investasi untuk teknologi terbarukan dan sektor lain masih jauh dari kebutuhan yang nilainya sekitar 1 triliun dollar AS per tahun. Sektor lain yang masih sangat membutuhkan investasi antara lain kelistrikan, efisiensi energi industri, transportasi, pertanian, air, pengurangan deforestasi, dan adaptasi.

•      Total investasi untuk bahan bakar berbasis fosil masih jauh lebih besar dibandingkan investasi pro-iklim. Hal tersebut mengurangi efektivitas investasi hijau dan juga meningkatkan risiko dalam sistem keuangan, misalnya aset perusahaan minyak atau batubara akan menjadi “stranded asset”—aset yang mengalami penurunan atau kehilangan nilai secara prematur.

•      Meskipun aliran pendanaan masih jauh dari yang dibutuhkan, laporan mencatat beberapa tren positif yang dapat mempengaruhi prospek peningkatan pendanaan iklim di tahun-tahun mendatang: Beberapa negara mulai menjabarkan rencana NDC mereka sehingga memberikan kejelasan mengenai peluang investasi untuk mewujudkannya; pemerintah dan lembaga keuangan berinisiatif untuk menghijaukan aliran keuangan publik yang ada; diskusi di seluruh industri tentang keterbukaan dalam pelaporan mengenai risiko keuangan yang ditimbulkan oleh perubahan iklim; dan penggunaan lebih luas berbagai jenis pendanaan campuran dan inovatif.

Menanti komitmen pemerintah

Perkembangan positif yang terjadi dalam investasi pro-iklim menegaskan bahwa keteguhan komitmen dan ambisi pemerintah dalam mengatasi perubahan iklim perlu terus dijaga karena hal tersebut menjadi dasar pertimbangan investasi hijau oleh swasta dan masyarakat.

Kebijakan dengan target yang jelas dan ambisius ditambah dengan dukungan insentif akan memicu derasnya investasi oleh swasta dan masyarakat. Sebaliknya, kebijakan yang tidak pro-iklim akan dipahami oleh sektor swasta sebagai risiko untuk investasi hijau. COP 23 di Bonn, Jerman, harus mampu mempertahankan momentum Kesepakatan Paris agar investasi hijau terus meningkat dan makin pesat.

Tulisan ini telah dimuat di rubrik IPTEK, Deutsche Welle, pada tanggal 13 November 2017. Tulisan ini juga dapat diakses melalui tautan ini.

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Blended Finance in Clean Energy: Experiences and Opportunities

January 25, 2018 |


Blended finance is a key tool to help nations meet the United Nations’ Sustainable Development Goals and the goals of the Paris Climate Agreement, while also addressing the risks and barriers faced by investors when pursuing the opportunities these afford. By using a combination of public and philanthropic concessional funding to leverage multiples of private investment, blended finance seeks to deliver both attractive returns to private investors and social and environmental impact to the public, bridging the gap to long-term commercial viability. But, like any tool, its deployment requires knowledge of how best to utilize it to achieve the results sought.

Fortunately, a rich foundation of experience in blended finance already exists, notably in the clean energy sector, where public, philanthropic, and private sector organizations have been innovating for many years, including through the Global Innovation Lab for Climate Finance (the Lab), for which CPI acts as Secretariat. CPI’s recently released publication for the Business & Sustainable Development Commission’s Blended Finance Taskforce, “Blended Finance in Clean Energy: Experiences and Opportunities,” synthesizes this vast knowledge base and proposes a path forward.

Here are a few notable findings from the report:

Seek the sweet spot: Aligning the impact goals of public and philanthropic sector funding with the requirements of private investors to generate returns that reflect the risks taken can be difficult to achieve, especially in developing economies or for new technologies. Blended finance needs to find the “sweet spot” – those countries that are still considered “risky” for investors, but have implemented policies conducive to private sector and clean energy investment, and that also have significant potential to achieve social and environmental impact goals. Our report identifies the top regions, countries, and energy sub-sectors that are the best fit for blended finance.

The greatest opportunities for impact are in Sub-Saharan Africa, and South and East Asia.

As an example of such an approach, Climate Investor One, an instrument from the 2014-15 Lab cycle, managed by Climate Fund Managers and supported by the Netherlands’ FMO, is a lifecycle financing facility for renewable energy projects. It focuses on the development, construction, and re-financing of projects in multiple countries that are sub-investment grade, thereby diversifying risk, reducing transaction costs, and deploying targeted concessional capital to countries that need it, all while delivering competitive returns to investors. The instrument has already raised more than USD 400mn from institutional investors and public finance institutions.

Blend risk, not just finance: Despite impressive reductions in the cost of clean energy, investors continue to face a wide variety of barriers that prevent investment, especially in developing economies. By analyzing 75 existing blended finance initiatives, we found a gap between the investment risks and barriers addressed by earlier blended finance initiatives – which were largely focused on reducing the cost of clean energy – and those cited today by the largest classes of investors – institutional investors and commercial banks – as most important to address going forward. Investors today are concerned with the lack of liquidity and small scale of many clean energy investments, as well as risks from volatile currencies and off-takers who lack credit-worthiness. Many are also concerned with the uncertainties present in early-stage businesses, such as start-up off-grid companies or grid-connected projects that face policy and permitting uncertainty before they even advance to construction. This means that risk mitigation instruments such as guarantees, hedging, and insurance are more important today, as are initiatives that absorb early stage risks and those that focus on aggregating and securitizing investments. 

Another Lab instrument, the Long-Term FX Risk Management facility managed by TCX, has helped extend local currency financing for renewable energy by offering currency hedging solutions when commercial solutions are not available. Backed by a EUR 30mn concessional investment from the German government, the instrument mobilized another EUR 100mn in investments. Its currency hedging solutions have enabled M-KOPA, a Kenyan solar home systems provider, to connect nearly 500,000 homes in Kenya, Tanzania, and Uganda to solar power by matching the currency of the company’s loans with the currency of its cash flows.

Choose innovation and scale. Blended finance is still a relatively young market, offering opportunities for both new innovations as well as replicating, scaling, and mainstreaming ideas that are proven to work. Understanding whether to develop new solutions or to adapt existing ones requires local, market-specific knowledge and analysis, in addition to support from multi-stakeholder networks to identify strong initiatives and create connections among various national and international market players.

To give a sense as to how this could work, take Energy Savings Insurance, an energy efficiency instrument that was pioneered by the Inter-American Development Bank with the support of the Lab, as an example. After first being piloted in two countries in Latin America, this tool has mobilized at least USD 100mn in investment from public and commercial bank lenders to be replicated in 10 countries across three continents. The most recent implementations are being undertaken by the French Development Agency, another Lab member, which is replicating the early successes in countries outside the IDB’s territory.

Bring the whole toolbox. As a tool, blended finance is a means to an end, not an end in and of itself. For the results of blended finance efforts to be sustainable in the long run, the parallel deployment of other tools is required, such as continued policy and investment environment reforms and technical advisory services to build capacity on the ground. Systematic data gathering of technology and business model track records is also needed to develop a robust, quantitative case for investors, and lead to the demonstration effect that many initiatives cite as their rationale.

Many innovators are already taking these lessons to heart and building the next generation of blended finance initiatives. We’ve come a long way in understanding what it takes to succeed in blended finance, but there’s much more to be done to reach the aspirations of the global goals.

To read the full “Blended Finance in Clean Energy: Experiences and Opportunities,” report, please click here.

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Climate finance developments in 2017, and what to watch for in 2018

January 4, 2018 |


As world leaders sought to strengthen efforts to combat climate change in 2017, climate finance remained a prominent theme of international discussions between developed and developing countries – both as a tool for renewed collaboration, and as a potential point of friction.

COP23 premise and key climate finance themes

In November, leaders gathered for the 23rd annual Conference of the Parties (COP23) global climate negotiations in Bonn, Germany. At the outset, negotiators hoped to focus efforts on operationalizing the Paris Agreement, including progressing the implementation guidelines (known as the Paris Agreement Rulebook) and defining the 2018 global stocktake process (known as the Talanoa Dialogue Approach in recognition of the Fijian COP presidency).

Amidst these goals, several key climate finance themes loomed large over the COP, and resonated in discussions throughout the year:

  • “Loss & Damage” and increasing investments for climate resilience and adaptation. In a year of extreme, record-breaking weather disasters in developed and developing countries alike, ongoing conversations about compensation to the countries that will suffer disproportionate economic losses and damages from climate change remained important. Related, high-profile discussions around private and public sector investments needed for adaptation, current levels of adaptation investment, and how to close the finance gap also remained crucial.
  • The “$100 billion by 2020” pledge, the Green Climate Fund, and maintaining international momentum. Since 2009, when developed countries first committed to jointly mobilize “USD 100 billion a year by 2020 to address the needs of developing countries,” defining how the world will achieve this goal has remained complex. Rising nationalism around the world, and the decision from the U.S. to renege on Green Climate Fund and Paris Agreement commitments make the need to strengthen international cooperation even more urgent.

COP23 progress

While a lot of work remains, leaders at COP23 made significant progress on several key themes within the ongoing climate finance discourse.

The decision that the Adaptation Fundshall serve the Paris Agreement” helps to reiterate the continued importance of adaptation finance as a means of creating a low-carbon, climate-resilient sustainable future in both developed and developing countries.

Loss and damage remained contentious and didn’t make it into the agenda for 2018 efforts to solidify the Paris Rulebook; however, there will be an “expert dialogue” during mid-2018 intersessional meetings where finance discussions can resume. In addition, InsuResilience Global Partnership, a private sector initative that aims to extend insurance access to 400 million people living in climate vulnerable countries by 2020, launched. The UNFCCC also released its own Clearing House for Risk Transfer platform, to provide to both connect insurers and vulnerable populations, and to provide technical assistance to countries seeking to implement new risk solutions.

Efforts to bolster cooperation in the face of U.S. obstruction and decrease barriers to fulfilling climate finance pledges also had significant success. Syria and Nicaragua, the lone Paris Agreement holdouts, both signed, and the U.S. “We Are Still In” coalition reiterated U.S. commitment to meeting climate goals. Leaders from California established new channels for international cooperation with the EU and China on carbon markets, and former New York City Mayor Michael Bloomberg and others in the so-called “shadow delegation” strengthened ties to the international community, and suggested an established role for sub-national actors in future negotiations.

Macron summit premise & key announcements

Following COP23, French President Emmanuel Macron held the One Planet Summit, marking the 2-year anniversary of the Paris Agreement. This event gathered heads of state, investors, and other leaders to mark the progress made since Paris, and generate ambition towards 2020 climate goals. It produced a number of key announcements that continued to build on progress from the COP, while engaging investors, corporations, and governments to redirect finance from dirty investments towards low-carbon, climate-resilient activities.

  • The World Bank announced that it would end oil and gas exploration and production projects, and increase transparency on greenhouse gas emissions from the rest of its portfolio.
  • 225 investors and asset managers representing more than USD 26 trillion in assets. launched Climate Action 100+ to engage the world’s largest corporate greenhouse gas emitters on climate-related financial disclosure.
  • 237 companies with a combined market cap greater than USD 6 trillion, pledged to support greater climate-related financial disclosure through the TCFD.
  • ING announced its decision to accelerate the reduction of financing for coal power generation, and to eliminate it by 2025.
  • French insurance multinational AXA announced both divestment of more than EUR 2 billion of coal holdings and oil sands, and tripling its green investments to more than EUR 3 billion.

What to watch for in 2018

In 2018, it will be essential to build upon the progress coming out of COP23 and the Macron Summit. Countries must continue to work towards the ”$100 billion by 2020” goal, however, they must also engage the private sector in order to build on current momentum, and “shift the trillions” in assets from high-carbon to low-carbon pathways as effectively as possible.

There are several key climate finance developments to track in the coming year:

  • UNFCCC’s Standing Committee on Finance will publish its next Biennial Assessment and Overview of Climate Finance Flows in 2018, which can help countries glean greater insight on the how, where, and from whom finance is flowing toward low-carbon and climate-resilient actions globally, and how it can be scaled-up.
  • Further advancements in climate-related financial disclosures for public companies and improved portfolio transparency of climate impacts among international development finance institutions can help investors and shareholders understand embedded risks more effectively, and help to shift assets towards low-carbon, climate-resilient growth.
  • Expanding roles of subnational actors – for example, California’s upcoming Global Climate Action Summit – can continue to overcome political barriers, facilitate collaboration between governments and private sector actors, and can help to mobilize needed investments.

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California’s cap and trade program leads the way on US climate action

November 28, 2017 | and


In recent weeks, California has continued to cement its leadership role in American climate policy – most recently at the COP23 climate conference in Bonn, Germany. In partnership with other states, cities, indigenous communities, businesses and investors, faith organizations, and numerous other institutions, California has led the U.S. “We Are Still In” coalition representing more than 130 million Americans and more than $6.2 trillion of the U.S. economy.

California Governor Jerry Brown recently announced plans to boost technical and political cooperation on carbon markets with the leaders of the EU and China. This announcement follows enormous legislative progress, compromise, and policy innovation in recent years in California to provide long-term certainty and stability to California’s cap and trade program and broader climate policy regime. This legislative progress includes:

  • SB 350, which strengthens energy efficiency standards for buildings and increases California’s renewable portfolio standard to 50% by 2030
  • SB 32, which legislatively reiterates and extends previous emissions goals to 40% below 1990 levels by 2030
  • AB 398, which legislatively extends the cap and trade program to 2030

AB 398 – the extension of cap and trade through 2030 – is an enormous boon to one of the world’s most effective, large-scale, economy-wide carbon pricing regimes, and an important fortification of California’s climate policy infrastructure.

Prior to the extension, cap and trade revenues were used for high-speed rail and numerous other climate finance projects throughout the state, with 25% of revenues specifically earmarked to support projects in disadvantaged communities. However, California Air Resources Board (CARB) allowance auctions in early 2017 reflected legal and policy uncertainty about the future of cap and trade, and failed to sell out.

The passage of AB 398, with a legislative supermajority, puts to rest past concerns about legal challenges from the fossil fuel industry on the basis of California’s Proposition 13 or Proposition 26 rules regarding new taxes or fees. This decisive victory for carbon-pricing prompted record-breaking sellouts of allowances in the recent August and November auctions, totaling close to $2 billion in revenue generated, sold at clearing prices well above the price floor in both auctions. Analysis from Energy Innovation suggests that the cap and trade extension will generate at least an additional $1.3 billion in revenue for the Greenhous Gas Reduction Fund between now and 2020, and an additional $26 billion in new revenue from 2021-2030.

To achieve this level of support, AB 398 involved key compromises on compliance measures and on how revenues are spent, to assuage concerns from both environmental justice advocates and from traditional industry opponents of cap and trade policy. The key agreements of AB 398 are:

  • It increases the allocation for local climate finance for investments in disadvantaged communities to 35%.
  • It decreases the fraction of compliance that can come from offsets.
  • A companion measure AB 617 increases regulation of local air quality to prevent pollution hotspots in vulnerable communities.
  • And statewide ballot measure ACA1 goes before voters in 2018 proposing a constitutional amendment that would set a higher (two-thirds) legislative threshold for how future cap and trade revenues are spent.

California’s cap and trade extension is not a panacea, and no legislation in an economy and a political landscape as large and complex as California can be perfect. Future challenges to reaching 2030 goals (like allowance oversupply) remain. And California’s climate policy regime will have to remain dynamic and innovative in order to continue to lead, and to make good on stated goals.

But the extension of California’s cap and trade program remains an important legislative step forward, giving markets the stability they need to function while achieving success in pursuit of aggressive emissions reductions.

Climate Policy Initiative’s California Carbon Dashboard continues to provide the latest news, prices, and information to understand California’s cap and trade program and suite of climate policies. You can learn more at

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