Tag Archives: Climate investment

India needs a bailout – Can we make it green?

April 3, 2020 | and

 

This post originally appeared in Economic Times. 

Three weeks of lockdown due to the Coronavirus pandemic and India’s economy will take a beating that could be worse than the lukewarm condition it was already at over the last few years. Estimates show that the lockdown could bring the country’s growth down to 2.5% from 4.5% projected earlier. While health spending must come first, all kinds of industries will need bailouts from the government – airlines, hospitality and energy among them.

This comes at a time when many industries were already challenged. In the months leading up to this crisis, air pollution over Indian cities had hit record levels. Financial markets were struggling with a liquidity crisis. The power sector was also in trouble.

Yet, in the midst of this economic darkness, Delhi’s air has never been cleaner and skies haven’t been more blue. Even urban balconies are seeing sunbirds. Traffic has come to a halt, sidewalks are clean and the new green of springtime is everywhere. Greenhouse gas emissions have no doubt fallen.

But this is not the sort of environmental clean-up people are looking for. Climate action and reducing pollution must come from economic growth, not the loss of it. Reviving the sectors hardest hit by the economic downturn will need direction – rather than straight out cash injections. Perhaps this is our one opportunity to give it that direction – to orient these industries and their markets – towards a green, efficient and inclusive future?

As we tackle this crisis and focus on reflating economies, short term stimulus packages should be directed at the poor – the government of India is already on track with its 1.7 trillion rupee relief package and the Prime Minister’s fund is still in developmental stages. But to recover from recession and also get back on track to high growth, a much bigger recovery package is needed. A long-term stimulus should have incentives for the kind of economy we want – green, clean, inclusive, and efficient. In this way, taxpayer funded economic stimulus policies can function both to re-energize the economy, creating new opportunities and employment, and at the same time look to the next set of challenges.

This is not a new idea but was proven implementable during the US bailout of GM and Chrysler in 2008. The bailout required these firms to produce more energy-efficient fleets. While the auto industry at first balked at these new standards, it was what was needed to make changes in a struggling sector. U.S. auto manufacturing ultimately came out more competitive for it, especially in the field of electric cars. India can apply the same idea to industries at the cusp of a green transition.

There are similar opportunities in many sectors for catalysing such a change, including transportation.

The automotive industry is expecting a big bailout from the government. The auto industry crisis of decreased sales can be used as an offset to increase demand and boost electric vehicles penetration across India. As a starting point, we could create conditional bailout packages requiring delivery companies to shift to electric vehicles, followed closely by simply mandating that public sector agencies and taxi/bus fleets use only electric vehicles. The associated support infrastructure is already emerging – supported massively through government subsidies.

The power sector is another industry deeply affected by the current crisis. Since renewable energy is already cheaper than fossil fuels, any direct assistance here is not needed. Instead, the need is for India to make investments in addressing the structural issues that are holding back the further penetration of renewable energy. One measure could be that relief monies include deep incentives for battery storage, accelerated optimization of battery usage between the vehicles industry and grids, enabling and incentivizing demand response solutions, and earmarking funds to accelerate a further liberalization of energy markets. A structured bailout package could buy down the closure of aging coal plants – but only on condition that they are replaced with renewable-plus-battery combinations.

These ideas are not just good for the environment, but they are good business for India long-term. But how to finance them when there is so much competition for India’s limited funds?

There is also good news here: Even in the middle of the Corona crisis and a very volatile market, State Bank of India raised $100 million in green bonds, its third iteration of such bonds. This transaction reinforces the fact that investors still bet on sovereign backed issuances. Perhaps now is a good time to commit to raising green bonds wherever possible – to fuel sectors that need liquidity, but by indirectly requiring them to move towards greener assets. We could use stimulus funds for both, creating demand and also reducing the cost of issuing green bonds.

And finally, any bailout package must be inclusive. 62% of India’s employment is casual, 85% of that is concentrated in two sectors and on an average earn less Rs 300/day. It is nobody’s guess that daily wage labourers will be worst hit by the Corona crisis. Even regular employment will experience major job and income losses with the prolonged reduction in new hiring. The question is how to bring employment back. If the bottom 80% are disproportionately hit, and they do not benefit, through job reinstatements, any kind of greening package will begin to look removed from reality. Incentives for green and efficient must therefore focus on green job creation and inclusion, serving as a reminder that national funds are being directed towards the economy we want.

Historically we have observed that an economic recession pushes climate change discussions to the margins. However, that was the past – when renewable power was not cheaper than coal, when our air was not grey, and when climate change was not a global crisis.

We are standing at the crossroads of history where our actions will have long-term consequences. It is thus an opportune moment in economic history to reset our growth pathways and truly direct financial capital to funding the kinds of things that will give us the blue skies, clean air, and green power and jobs that we deserve.

 

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Bailouts for a Better World

April 1, 2020 | , and

 

A deep economic crisis is expected in the wake of the COVID-19 pandemic health crisis. We applaud the quick action of governments in supporting health workers and institutions, the business sector, and different communities. However, if taxpayer-funded bailouts are not implemented properly we can worsen another crisis: global climate change.

We cannot afford to miss a rare opportunity to enact stimulus policies that can restore economic activity and reduce the risks of climate change. Without enacting climate-friendly incentives or considering the jobs of the future, we risk accumulating financial and environmental debts that will burden our children, who will wonder why we did nothing to change these prospects when we had the chance.

It is not a radical idea.

The bailout of GM and Chrysler during the 2008 financial crisis attached rules requiring the production of more energy-efficient fleets. Turns out, it was the impetus needed to make significant changes in a sector that was already struggling to keep up with foreign competitors. US auto manufacturing emerged more innovative and more competitive, including in the field of electric cars.

Similar opportunities are lurking in many sectors now, including air transportation.

Aviation alone is responsible for 2% of global carbon emissions. There are some industry-led measures in place to reduce these emissions, including the support of biofuels and carbon credits, but they are far from enough to address the industry’s impact on global climate change.

The airline sector is being hit hard, and the shock is likely to persist.  In addition to the short-term impact of travel bans and thousands of cancelled trips, conferences and events, there will be long-term changes as people adjust to virtual meetings, work from home, and other newly-found travel-reduction behavior afforded by digital technologies.

Helping the airlines and other important industries is absolutely necessary to prevent a much worse loss of jobs if nothing is done. However, financial assistance must include climate-impact measures, which will also support the industry’s long-term health and competitiveness.

Measures that would link airline bailouts to limits on carbon emissions is currently out of the US stimulus package. However, other nations can decide to bring the two objectives together when they roll out their own stimulus plans.

One measure could be a carbon tax on jet fuel earmarked to compensate the government in case of losses from loans provided by the bailout, and to retrain airline staff for jobs in new, climate-friendly sectors with strong growth potential. With just a modest impact on air tickets, this could ensure that public money will be available for forward-looking policies that help families now and in coming years.

Oil and gas is another industry to watch. Its global capitalization has been declining and is now deeply affected by the crisis.  The recent crash in oil prices has anticipated what used to be just a possible scenario for 2030. Billions of dollars in fossil fuel assets are poised to be stranded. It would be foolish to just channel fiscal resources and stimulate investments in assets that will be further impacted by economic transformations we know are coming.

The overall picture of the stimulus package matters, but so does its form. For example, financial support could be linked to regulation in the form of conditional loans or equity, affecting public policy goals by taking ownership interests. Ultimately, the goal should be a better integration of public policy goals into decision-making.  This can be achieved by using stimulus funds to transition to clean energy sources, which are competitive, create good jobs and further the goal of energy security. Bold regulatory change is also crucial.

The US should take this moment to create a national market for electricity, under federal regulation in line with the natural gas sector, reducing a serious handicap of renewable energies vis-a-vis fossil fuels.  It would save taxpayer money and could create an economic boom.  The targets in the green deal recently proposed by the EU are a perfect vehicle to sustain the continental economy. The possibilities in Asia are boundless.

The global economy will not be the same after this shock.

The world just achieved something that people thought was impossible: deep cuts in greenhouse gas emissions. China, the world’s largest carbon emitter, reduced emissions by an estimated 25% last month.  Trying to revert to previous patterns when global demand comes back would be an unimaginable lost opportunity.

Joaquim Vieira Ferreira Levy, former CFO and President of the World Bank and the Brazilian Development Bank—BNDES, respectively

Tom Heller, Director, Sustainable Finance Initiative, Stanford University, and Chairman of the Board, Climate Policy Initiative

Barbara Buchner, Global Managing Director, Climate Policy Initiative

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Are we getting climate finance all wrong?

July 22, 2018 |

 

This post originally appeared on Climate Home.

By Jessica Brown and Ilmi Granoff

It’s widely accepted that by the year 2050, the world needs to be approaching net-zero carbon if the goals of the Paris climate deal are to survive.

This long term rallying point, laid down by experts, has been followed by political commitments from countriescities, and businessesBut much of the thinking on financing this ambition remains stuck in the short term.

Meeting these goals will require enormous progress on energy efficiency, decarbonisation of electricity and fuels, electrification of most transport fleets, building, and industry energy needs.

It will also need massive investments in electricity generating capacity, grid infrastructure, and storage, as well as in both zero-emissions and carbon negative solutions including nuclear energy, carbon capture and storage, soil carbon sequestration, and afforestation and reforestation.

But, despite rapidly increasing clarity on the array of climate solutions needed, the investment implications of achieving midcentury decarbonisation are less understood beyond the need to “scale-up”.

Given the fundamental role finance plays in all facets of the global economy, it’s time to ask: How does a focus on 2050 change how we spend money today?

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Improved and integrated private disclosure data can help broader tracking efforts

November 8, 2016 |

 

As part of efforts to limit the increase in the global average temperature to well below 2°C, the Paris Agreement states that countries participating in the international climate negotiations shall make ‘finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’.

CPI’s Global Landscape of Climate Finance and San Giorgio Group Case Studies have highlighted the important role of public resources and policies in influencing growth pathways. However, while data collection at the international level has improved in recent years (for example through the OECD DAC system), many governments and public organizations still lack a comprehensive system to track and report domestic climate-related expenditures and international climate finance.

In terms of collecting and publically reporting information about its climate finance investments, the private sector lags even further behind.

Integrated private disclosure data - Finance captured by Global Landscape of Climate Finance 2015 and data gaps

This is problematic for governments and investors alike. Exposure to climate risks will have widespread effects on the value of assets and therefore, the ability of pension funds and insurance companies to pay out to their beneficiaries. Costs of compliance with standards or policies, risks of stranded assets, changing agricultural and commodity prices, increased scarcity of essential resources like water, disruptions in business supply chains, and damage to infrastructure and other assets will all impact companies’ and investors’ financial performance, as well as countries’ economic growth.

Investors are gaining more clarity on the exposure of their financial assets to climate change risk through companies’ increasing disclosure of environmental, social, and governance (ESG) data. To date, demand for companies to disclose the climate risks they face has mainly been driven by disclosure initiatives and pressure from investors, with mandates from financial regulators and exchanges increasing in importance.

However, as CPI analysis has shown, there is little consistency in the quality and scope of information disclosed. Definitions are applied in different ways and many metrics are preliminary. Last December, the Sustainability Accounting Standards Board (SASB) reported that 93% of listed U.S. companies face some degree of climate risk but only 12% have disclosed it.

The challenge in the medium-term is to harmonize and improve definitions and metrics to provide investors and policymakers with comparable and reliable data with which to compare performance and formulate investment policies. Forthcoming recommendations on how to standardise such disclosures from the Taskforce on Climate-Related Financial Disclosures are due in December could provide some guidance. In the short-term, increased transparency is a good start.

Green bonds provide a case in point. Concerns about where finance raised from these bonds goes have led a number of different organizations to develop different assurance solutions. However, recent trends show issuers may be choosing transparency as the least cost option.

In 2015, 72% of green bond market by value sought an independent review. In the third quarter of this year, less than half did so, with issuers themselves opting instead to disclose how the proceeds of bonds will be used, and their process for selecting green projects.

Investors in the market seem broadly satisfied with this for now but this could change.

French investors now face their own for disclosure requirements both on how they are managing climate risk and how they are contributing to “energy and ecological transitions.” A French law, the first to introduce mandatory carbon reporting by investors, requires investors with a balance sheet of €500 million or more to submit their first reports on how they are approaching these issues by June 2017.

What remains less clear is whether such disclosure will provide enough comparable and reliable detail on the kind, location and performance of assets (e.g. in terms of emissions reductions, increased energy productivity, or increased resilience to adverse weather conditions) to provide more comprehensive overviews of how finance is accommodating climate change impacts and opportunities.

While some questions remain, increased transparency will certainly support investors and regulators’ efforts to mainstream ESG investment, and to move from understanding to managing climate risk, thus optimizing climate-related investment opportunities.

Increased transparency will also open new opportunities for financial product and service providers to refine existing and create new green investment products that reduce capital costs for the organizations driving energy and land use transitions.

Integrated private disclosure data - Investment framework for managing climate risks and opportunities

Greater clarity on public and private finance flowing to climate-relevant sectors where little reliable information is currently available can also improve policymakers’ understanding of how public and private interests and capabilities interact, enabling them to refine support frameworks to ensure effective spending and to maximise the economic benefits of transitions in energy and land use.

CPI remains committed to supporting investors to improve their understanding of climate risks and highlighting how to make the most of the opportunities presented by countries’ transitions to low-carbon and climate-resilient economies.

Since 2010, CPI has supported decision makers from the public and private sectors, at international, national and local levels, to define and track how climate finance is flowing from sources and actors, through a range of financial instruments, to recipients and end uses. Providing decision makers with robust and comprehensive information helps them to assess progress against real investment goals and needs. It also improves understanding of how public policy, finance and support interact with, and drive climate-relevant investment from diverse private actors, and where opportunities exist to achieve greater scale and impact.

This blog is part of a series on climate finance tracking challenges. Read more here.

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Get in touch with CPI’s lead analyst working on private capital markets.

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Uncertain Future of the Climate Investment Funds Makes Achieving Climate Finance Goals Tougher

June 14, 2016 | and

 

On June 15th and 16th members of the Joint Trust Fund Committee of the Climate Investment Funds (CIF) meet in Oaxaca, Mexico, to discuss, among other issues, the strategic direction of the fund. One topic to be discussed is the CIF’s “sunset” clause, which was conceived at the fund’s establishment and requires it to conclude its operations once a new financial architecture – now embodied by the Green Climate Fund (GCF) – is effective.

Now that the GCF is operational, some feel that the “sunset” clause should be activated. In any case, the CIF does not currently have sufficient resources to finance the projects in its pipeline or those of new pilot countries.

Contributing governments are certainly in a tough position. They are faced with the question of whether or not to re-up their financial commitment to the CIF, but have recently pledged significant resources to the GCF – over $10 billion in total – and their budgets for climate aid are under pressure as resources are diverted to address other immediate needs such as the European migration crisis.

The lack of clarity regarding the future of the CIF is having a real impact. The dearth of financial resources for the CIF and uncertainty regarding whether new resources will be made available is disrupting recipient countries’ project pipelines and delaying the development of investment plans for new CIF pilot countries. This is also creating doubt within the multilateral development banks (MDBs) regarding how much and what type of concessional finance they will have access to. This is important because of the role concessional finance plays in overcoming investment barriers and helping MDBs to mobilize internal resources to meet their climate finance commitments.

As the CIF Joint Trust Fund Committee meets this week and makes major decisions on the fund’s future direction, it is worth reflecting on what role the CIF has played within the global climate finance architecture and what unique elements it has brought to the table. A study recently published by CPI – The Role of the Climate Investment Funds in Meeting Investment Needs – can help inform this reflection. The report highlights climate-relevant investment needs and assesses the CIF’s distinctive role in bridging investment gaps compared to other multilateral climate funds.

It concludes that the CIF should be kept in operation to maintain progress towards meeting international climate finance targets, particularly while the GCF gets up to speed and in light of key temporal and structural differences that exist between the two funds. The CIF has played a particularly important role in financing climate action because of a few distinctive features. These include:

  • The CIF’s programmatic approach. In partnership with the MDBs – the CIF’s implementing entities – the fund involves recipient countries’ private and public stakeholders in the development and implementation of policy reforms and investments aligned with countries’ climate strategies. It starts with countries being informed of the indicative amount of resources they are eligible for, followed by the development and endorsement of the investment plans and finally approval of projects. This approach, which has provided a certain level of predictability to both the recipients and implementing partners, represents a role model for the development and implementation of countries’ Intended National Determined Contributions (INDCs). Translating INDCs into concrete investments will similarly require the mobilization of multiple stakeholders under coherent strategic investment plans and the development of supportive policy and governance frameworks.
  • The range of financial instruments available through the CIF and the fund’s risk appetite. Although some have yet to be fully utilized, the range of financial instruments offered by the CIF has proven to be particularly well-suited to foster the piloting of first-of-a-kind approaches and business models, and to take on market risks that others are not willing to take. A survey of developing countries and their climate finance priorities indicates that flexibility in financing terms and types of financial instruments provided is of “critical” importance to advance climate objectives.
  • The CIF’s focus on private sector engagement in mitigation, forestry and adaptation. The CIF has allocated more finance to drive private sector investment in these sectors than any other multilateral climate fund. It has also been the first to develop dedicated approaches to achieve this end, such as the private sector set-asides for forestry and adaptation, and is one of the only multilateral climate funds that offer concessional loans for these activities, as opposed to just grants. Building on this experience, the CIF holds the potential to further enhance private sector engagement in these areas going forward.

The CIF has experience and a functional structure in place, which can help to maintain momentum and bridge major climate investment gaps. Other climate funds have notable strengths, but do not necessarily offer the same capabilities as the CIF.

While the establishment of the GCF is intended to fill investment gaps, questions remain regarding the extent to which the fund will be able to deliver the scale and type of support recipient countries need in the short to medium-term as it gets up to speed.

As decision makers shape the international climate finance architecture and make choices about which funds and approaches they choose to support, they should consider the unique and positive features of existing funding mechanisms and how these features can help effectively address countries’ current and future investment needs.

Given the real scarcity of resources available, there is no easy answer. If they decide to keep the CIF alive, it may be worth exploring and taking decisions on alternative funding modalities to maintain at least certain elements of the CIF operational and mitigate a potential loss in the momentum it has created.

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

February 3, 2015 |

 

Landscape of Climate Finance 2014

 

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

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

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

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

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

January 22, 2015 |

 

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

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

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