The Paris Agreement commits countries to holding global temperature rise well below 2 degrees and to pursue efforts to limit it to 1.5 °C. Significant investments are needed to meet this target and accelerate the transition towards a low-carbon, climate-resilient future. In this video-lecture for the International Center for Climate Governance (ICCG), Dr. Barbara Buchner, Climate Policy Initiative’s Executive Director of Climate Finance explains how to scale up financing for climate action and how to translate countries’ nationally determined contributions (NDCs) into real investment plans.
April 22, 2016 | Amira Hankin
Today, delegates gather at the United Nations to sign the historic agreement to tackle climate change. Dr. Barbara Buchner, Climate Policy Initiative’s Executive Director of Climate Finance discusses next steps, pointing to three areas in particular where nations and investors should focus.
April 18, 2016 | Ben Broche
After Paris – The need to move from talk to action
The Paris Agreement reached by 194 countries at the COP21 Climate Summit in December 2015 marks a historic turning point in a 20-year conversation about how to tackle climate change. Up to this point, there have been examples of incremental progress, though the overarching policy ambition necessary to curb climate change have been slow to come. The need to act is urgent in order to keep global temperature rise to ‘well below 2 degrees C,’ the stated goal of the Paris Agreement.
How to finance the transition to a low-carbon and climate-resilient world is a challenging question, especially for developing countries, which often lack the policy and financial capacity needed to spur the necessary investment.
Since 2009, developed countries have been working to scale up climate finance for developing nations, with a goal to mobilize USD 100 billion per year from multiple sources. The good news is that investment is growing – especially in key emerging economies such as China. According to the Global Landscape of Climate Finance, 2015 saw the largest amount of climate-related investment to date, with USD 391 billion of finance flowing to mitigation and adaption globally. In the lead up to Paris, the OECD, in collaboration with CPI found that countries are well on their way to achieving this goal, with an average of USD 57 billion of mobilized climate finance flowing from developed to developing countries in 2013-14.
While progress is certainly being made, the IEA estimates that approximately USD 16.5 trillion will be required from 2015-2030 to re-orient global systems to a scenario consistent with a sub 2-degree future. The need to pick up the pace and move from talk to the most concrete of actions is what defines the post-Paris world. The challenge of bridging this gap is profound, and will require concerted efforts from private and public actors, households around the world, and civil society. It will require an understanding of the actual barriers faced by all types and classes of investors, and the use of public policies and finance to minimize these. This in turn necessitates political will, robust technical analysis, and above all, innovation.
Crowdsourcing Innovation for Climate Finance
The Global Innovation Lab for Climate Finance (The Lab) supports efforts to leverage investment flows to the developing world to speed up the transition to a low-carbon future by identifying, developing and piloting new financial instruments and public-private partnerships designed to overcome barriers, maximize impact, and attract private sector capital. The Lab crowd-sources ideas from the global climate finance community, including private and public investors, financial institutions, technical experts, and policy makers. Then, incorporating the guidance of a diverse set of advisors and external experts, the Lab develops, stress-tests, and refines the best of these ideas into innovative, instruments with financial backing for concrete pilots on the ground.
The approach is simple – solving the climate finance challenge, and addressing climate change on a broader level, will require bold collaboration and innovation that spans actors and sectors. Successful pilots can be scaled to incorporate larger investments, new investors, other sectors and geographies.
The objectives laid out in the Paris Agreement are visionary but not overambitious as they build on trends already happening in reality. The agreement’s guiding star is the science-based goal of limiting temperature rise to ‘below 2 degrees Celsius’. In combination with the mention of 1.5 degrees Celsius, this goal sends a clear signal, giving governments and businesses an incentive to escalate efforts to decarbonise their economies, supply chains and business models. Even more importantly for business, this deal has teeth. It includes a mechanism to ramp up action every five years, starting in 2018, and importantly, does not allow backsliding.
A strong signal steering investors away from fossil fuels, towards sustainable growth
For business and investors, it means the direction of travel is clear and with appropriate support it is time to seize the opportunities on offer. “This is one of the greatest wealth opportunities in human history,” says Jigar Shah of Generate Capital. The Paris Agreement also signals that investment in fossil fuels is no longer a low-risk enterprise – or, as Anthony Hobley, CEO of The Carbon Tracker Initiative, puts it, “[it] tells markets the fossil fuel era is over.”
The Agreement also builds the case for both public and private actors to explore low-carbon and climate-resilient options. For developing countries and emerging economies and their partners, the clear message is that growth without sustainability is off the table, whereas sustainable growth is a win for climate and development. As Hillary Clinton, former United States Secretary of State, says, “We don’t have to choose between economic growth and protecting our planet – we can do both.”
Many investors are already on board
CPI’s Global Landscape for Climate Finance estimated USD 391 billion in primary investment flows in 2014, up 18% from the previous year. Private investment surged 26% from 2013, reaching 62% of total global investment in climate action driven largely by falling renewable technology costs supported by government measures.
The Paris Agreement means that these investors and project developers who have already started transitioning their business models can now have the confidence to continue shifting their assets, in order to avoid stranding their own portfolios.
From ambition to action: the critical role of national policy
However, right now the bulk of climate investment (74%) originates and is spent in the same place, whether in developed or developing countries. This indicates there is still work to do to scale up finance that crosses borders, and our research indicates that policy frameworks and enabling environments are the first prerequisite. As Felipe Calderon, former President of Mexico, says, “The next step is for governments to turn their commitments into national policy.”
Building confidence for the next five years through enhanced transparency
Developed countries must continue to take the lead in implementing the world’s first universal binding climate agreement. Building confidence that commitments outlined in the agreement are being met is key, and transparency is critical to this goal. Transparency on progress toward the commitment to continue to mobilize at least USD 100 billion per year from 2020 onwards is a case in point, and here work remains to be done. The OECD Report done in collaboration with CPI on progress toward the USD 100 billion was the first serious attempt to estimate public and private finance mobilized by developed countries’ interventions in developing countries by applying a transparent accounting framework. CPI welcomes the fact the Paris Agreement puts efforts to increase consensus and transparency on this and other climate finance issues at the centre of its work plan going forward.
Such transparency can help ensure confidence that finance is flowing from north to south, and to the right technologies, and that private investors are being mobilised in line with country interests. As countries move from negotiations to implementation, CPI stands ready to support their efforts.
This weekend, world leaders signed on to a new climate deal that aims to limit global temperature rise to well below two degrees, continue $100 billion a year in climate finance, and ramp up action every five years.
I’ve been present at the climate negotiations since the beginning, and I will leave Paris tomorrow optimistic for the future, but not for the reasons you might expect.
While the deal itself is a big step forward, the larger leap has been the recognition, all over the world, that action on climate change and economic growth can – and should – go hand-in-hand. The Paris agreements have recognized that the substantial gaps between the costs of clean and fossil energy have collapsed, and that returns increase when we produce food by using less land better. The spread of market driven activities consistent with these realizations will provide the foundations on which the Paris commitments will deepen.
The deal this week wouldn’t have been possible if nations and businesses weren’t already moving in this direction. The plans for climate action that countries committed to ahead of Paris were already enough to cover a large portion of needed emissions reduction. And while analysts pointed out that the sum total of the plans pre-Paris wouldn’t be enough to limit warming from dangerous levels, they still show that there is significant momentum.
Businesses, too, stepped up this year. High-worth individuals, family offices, and foundations committed to financial support to help move new clean energy solutions to viability, and heads of large companies, including Richard Branson and Paul Polman, called for zero emissions by 2050.
Why have nations and businesses changed their tune?
September 29, 2015 | Jessica Brown
At the Sustainable Development Summit in New York last week, the question of progress toward existing climate finance targets was once again a key point of debate. While mobilizing the USD 100 billion per year that developed countries have agreed to provide to developing countries by 2020 will not meet the climate challenge by itself, it is currently the primary political benchmark for assessing progress on climate finance.
Improving understanding of different stakeholders’ perspectives on what counts towards the USD 100 billion commitment could improve the chances of reaching an agreement. That’s why Climate Policy Initiative’s latest paper, written with Overseas Development Institute (ODI), and World Resources Institute (WRI), aims to untangle the key issues arising in debates about “what counts”, and provide an approach to classifying climate finance in politically relevant ways that can facilitate discussion.
The paper takes no position on what should count towards the $100 billion. It leaves interested parties to draw their own conclusions. We feel it can help at this point in the lead up to Paris because:
- It distills the debate into five main issues and defines and explores each in depth. They are: 1) Motivation; 2) Concessionality / source (an imperfect but useful conflation); 3) Causality; 4) Geographic origin; and 5) Recipient.
- It represents each issue in “onion diagrams” organizing different categories into concentric circles according to political consensus. The closer to the center a category is, the more notional consensus there is among stakeholders that it should count toward the goal.
The paper ends by pulling all five variables together into diagrams like the one below that summarize the debate and help interested parties define and discuss what they feel should count.
This paper does not attach quantitative estimates to the various categories of flows. This was a deliberate decision. While quantifying flows associated with the various layers and rings of each “onion” diagram is an essential step for future work, we hope that, by encouraging stakeholders to discuss the principles behind their views before focusing on the numbers, this paper may help to de-politicize these debates and support deeper reflection on underlying assumptions and preferences.
Allocating numbers to these flows will, in any case, be a challenge. Poor data quality and availability remain an issue for some variables as do accounting issues that affect how flows of climate finance are being counted by different countries and organizations.
While this paper does not provide definitive solutions on what should count towards the USD 100 billion, it supports deeper reflection on the assumptions and preferences that often underlie international climate finance negotiations. Such reflection may help to de-politicize these debates while fostering better mutual understanding of perspectives.
We also believe the insights highlighted in this paper can also facilitate constructive discussion in other ongoing debates on financing for development, what counts as official development assistance and others. The global community and by extension all countries could benefit from more common understanding.
June 11, 2015 | Jane Wilkinson
On Monday, G7 leaders in Germany reiterated their determination to mobilize USD 100 billion per year in developing countries by 2020, a commitment originally made by developed countries six years ago at the international climate negotiations in Copenhagen. They also announced initiatives to increase to 400 million the number of people in the most vulnerable developing countries covered by insurance against climate impacts by 2020, and to support the development of renewable energy in Africa and other developing countries to reduce energy poverty.
While decisions on what is included in the USD 100 billion will be taken at the international climate negotiations in Paris later this year, the experience of the last six years offers lessons to political leaders at the G7 on what developed country governments could do to ensure the USD 100 billion goal is met on time and how they can ensure the finance mobilized has the maximum possible impact in terms of helping developing countries achieve low-carbon, climate-resilient growth.
Today, flows of climate finance in developing countries have increased but still fall short of this goal. Significant new sources of international climate finance have emerged. Some sources that were expected to play a large role back at the beginning of the decade – like revenues from a global carbon price – haven’t come to fruition. Others are performing above expectations.
In 2013, public climate finance flows from developed to developing countries reached USD 32 billion, 10% of global climate finance captured. Bilateral agencies and development finance institutions chanelled USD 26.5 billion of this. Multilateral development banks and climate funds also played an important role, and with the pledges made to the Green Climate Fund and the new Asian Infrastructure Investment Bank in the process of being set up, these banks and funds will play an increasing role in future. USD 2 billion in renewable energy project investments flowed directly from private investors in OECD countries to developing countries in 2013.
In total, that makes USD 34 billion that we can track. The true figure is undoubtedly higher – data gaps in some sectors make it impossible to see how much private investment is flowing from developed to developing countries – but it is clear that public institutions such as bilateral agencies, bilateral development financial institutions, and multilateral development banks play a pivotal role channeling and mobilizing resources. So what lessons can developed countries – including G7 members – draw from these results and the experience of the last years?
1. As shareholders of development finance institutions, developed countries should require them to integrate climate considerations into all development activities. By ensuring their activities are consistent with climate goals, these institutions could achieve climate co-benefits, policy coherency and better value for money.
2. Countries should consider providing grant finance to build technical capacity and to encourage investment in climate resilience, in particular. In countries and markets where private investors are not yet investing, grant finance plays an important role by helping governments to develop the policy frameworks that enable private investments, by demonstrating the benefits of climate-resilient investments, and by building private actors’ capacity to evaluate and make those investments. Experience shows that predictable regulatory and economic frameworks are essential to mobilizing private investment which provides the majority of climate finance globally. This is particularly true for adaptation policies, which tend to lag behind those for mitigation.
3. Public institutions should provide risk instruments to attract private investment. Bilateral and multilateral development financial institutions and export credit agencies have expanded the coverage of risk mitigation instruments such as guarantees, political risk insurance, foreign exchange risk coverage, and insurance so that they are now lowering the risks, reducing the costs, and improving the returns of climate investments. However, these instruments are still used more often for high-carbon rather than climate-friendly investments. This should change. Evidence shows that where investors can balance risks and returns, private finance will follow.
4. Both the public and private sector must continue to improve understanding of how public and private interests can be aligned to most effectively mobilize finance for climate investments. A number of initiatives are working to track private climate investments and to better understand the connection between public and mobilized private finance. This should further improve understanding of how public and private interests can be aligned to most effectively mobilize finance for climate investments, and how effective policies and instruments are in balancing risks and returns of climate investments.
The capital exists to achieve a wider global transition to a low-carbon and climate-resilient future. Mobilizing it will, however, require public, private, international, and domestic financial resources to shift from a high-carbon to a low-carbon economy. Whether scaling up finance to meet the USD 100 billion commitment, or for wider low-carbon investment needs, success will depend on the willingness of governments around the world to show strong leadership to align policies, pricing signals, and financial instruments to chart a path towards a low-carbon and climate-resilient future. It will not necessarily be easy, but it is possible. A prosperous future depends on it.
February 3, 2015 | Barbara Buchner
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.