Last Sunday, the Intergovernmental Panel on Climate Change (IPCC) released the final version of the Summary for Policymakers for its working group dedicated to the assessment of the options for mitigating climate change. This is the first time an IPCC assessment report features a chapter dedicated to investment and finance. We are thrilled to see that the results draw heavily on CPI Climate Finance pioneering work in the field.

To demystify the term ‘climate finance’ and better understand the magnitude and type of climate financing available, CPI has provided an overview of the climate finance landscape for the past three years. Three particular objectives have guided our work:

(1)  identifying the main dimensions of climate finance,
(2)  highlighting issues and gaps in the tracking of flows, and
(3)  pointing to remedies when needed.

The third edition of this study, the Global Landscape of Climate Finance 2013 is the most comprehensive look at climate investment to-date.

$356-363 bn. went to climate finance projects in 2012…

The Summary for Policymakers indicates that “published assessments of all current annual financial flows whose expected effect is to reduce net GHG emissions and/or to enhance resilience to climate change and climate variability show USD 343 to 385 billion per year globally.” These numbers are taken from the 2012 edition of the Global Landscape of Climate Finance and are relative to the year 2011. We updated these numbers in the 2013 edition and found that climate investment plateaued at an average $359 billion in 2012, far short of even the most conservative estimates of the investment need.

… most of which is provided by the private sector…

In the 2013 edition of the Global Landscape of Climate Finance, we found that the private sector provided the lion’s share of finance, $224 billion (two-thirds of the total). Public sources provided the remainder and were, in fact, the engine behind international climate finance flows, enabling private finance through incentives, low-cost loans, risk coverage mechanisms, direct project investment, and technical support.

… but is directed to a limited set of final uses.

There is a strong domestic bias for climate finance: 76% of climate finance originated in the country in which it was used highlighting investors’ preference for familiar environments, perceived to be lower risk. We also found that, of the total climate finance, 94% went to support mitigation projects. Renewable energy generation attracted $265 billion, energy efficiency $32 billion, while $40 billion went to other mitigation measures (including sustainable transports, agriculture, forestry, land use and livestock management).

Methodological challenges…

The lack of “widely agreed definition of what constitutes climate finance” is another key conclusion of our climate finance reports that was echoed by the IPCC. Inadequate data quality and a lack of data on actual investment flows in certain sectors render tracking climate finance even more difficult (demand-side investment and transportation notably). Notwithstanding improvements in our understanding of climate finance, the picture remains patchy.

… and systemic challenges

Transforming global energy systems is a requirement to changing our emissions pathway. Governments and private sector participants face the unprecedented investment challenge of scaling-up committed capital and changing investment uses to low carbon technologies. For our current decade, the IEA estimates that, in order to get closer to a 2 degrees Celsius scenario, $1.9 trillion is required annually for green energy infrastructure investment only and no more than $0.5 trillion annually is allowed for brown energy infrastructure investment.

In short, we are already off track for this scenario. Governments and private sector participants are on track for some technologies (renewable energy notably) but lagging behind for others (CCS investment falling down or nuclear investment not taking off). Likewise, we find that fossil fuel power generation investment is far from being contained – with so far, three times the allowed investment amount to get closer to two degrees Celsius temperature change.

The way forward

In order to push the frontier in better understanding climate finance, more work from CPI’s Climate Finance program will be coming out this year including:

• the 2014 update of the Global Landscape of Climate Finance planned for this fall;
• our contribution to the New Climate Economy report this summer that will feature a systematic comparison of investment needs in energy systems with actual investment amounts to better understand whether government and private sector participants are on track;
• and a series of briefs released throughout the year dedicated to definitional issues, and other analytical and methodological aspects.