Financing a transition to a low-carbon world – one that can keep a global temperature rise under 2°C this century – requires the determined and timely deployment of smart public policies able to unlock ever greener investment flows.
The G7 summit hosted by Germany this year has two significant roles to play as countries prepare for the United Nations climate conference in Paris, France, and a new universal agreement.
The first is helping to orchestrate the build-up to the $100 billion a year that the international community has agreed to provide developing countries as support towards their climate-friendly development ambitions.
The second is to contribute to the global framework that will green capital at levels high enough to transform the economy, estimated by many at an annual $1 trillion over the next 10 to 15 years.
Fortunately, this does not require starting from ground zero: the Standing Committee on Finance, linked to the United Nations Framework Convention on Climate Change (UNFCCC), published its first assessment during the last UN climate change conference in Lima, Peru. The assessment puts the lower range of global total climate finance flows at $340 billion a year for the period 2011-12, with the upper end at $650 billion, and possibly higher.
Of that, perhaps $35 billion to $50 billion was flowing North to South. Neither the support to developing countries nor the total climate flows are high enough yet to achieve the necessary transformation, but the trends are going in the right direction.
In recent years, the level of funding flowing into a greener global economy has been rising: this is nowhere more evident than in the renewable energy sector. Bloomberg New Energy Finance, in collaboration with the UN Environment Programme and the Frankfurt School of Finance and Management, showed that new investment in clean energy jumped by 17 per cent in 2014 to $270 billion. The increase happened during a time of low oil prices, underlining that renewable energy has come of age as a result of lower costs. Perhaps investors are equally convinced that coal, oil, gas and other high-carbon investments are now becoming more speculative than solar, wind and other renewables.
The geographical spread is also cause for celebration. In 2014, renewables rapidly expanded into new markets in developing countries, where investments jumped by 36 per cent to $131.3 billion. China with $83.3 billion, Brazil ($7.6 billion), India ($7.4 billion) and South Africa ($5.5 billion) were all in the top 10 investing countries. More than $1 billion each was invested in Indonesia, Chile, Mexico, Kenya and Turkey.
Investments are also increasing in other areas of green infrastructure, ranging from energy efficiency and sustainable transport to information and communications technologies needed, for example, for smart grids.
Since 2008, around $7 billion in Climate Investment Funds, coordinated by the multilateral development banks and other partners, has been supporting developing and middle-income countries in areas ranging from clean energy to forestry.
Under the UNFCCC, an array of funds and mechanisms such as the Clean Development Mechanism and the Adaptation Fund have been established to kick-start the transformation. Finance is also flowing from the Global Environment Facility and via bilateral aid, including support between developing countries engaged in South-South cooperation.
In 2015, the Green Climate Fund was operationalised and capitalised initially to the tune of just over $10 billion. The early investment of some of these funds can assist in de-risking private-sector investments while building confidence in the Paris agreement and its future pathways.
Other promising signs include new instruments variously called Green or Climate Bonds – the market here has grown from around $800 million in 2007 to more than $35 billion in 2014. The market is estimated to hit $100 billion in 2015.
Under the Lima-Paris Action Agenda, which grew out of the UN Secretary General’s Climate Summit in September 2014, many new and inspiring finance initiatives have been launched by and with the private sector, including:
a coalition of institutional investors committed to decarbonising $100 billion by December 2015 and to measuring and disclosing the carbon footprint of at least $500 billion in investments; and
the insurance industry committed to doubling its green investments to $84 billion by the end of 2015, and announced its intention to increase its investment in climate-smart development to 10 times the current amount by 2020.
Meanwhile, an increasing number of cities are investing in a low-carbon future. Earlier this year, 17 mayors including those from Berlin, London, New York and Yokohama launched the Carbon Neutral Cities Alliance and pledged to reduce emissions by at least 80 per cent by 2050.
So there are reasons to be optimistic – there are many funds, initiatives, mechanisms and policy switches happening and momentum is building.
Towards climate neutrality
But there are uncertainties and there are gaps, including whether those most in need, such as the least-developed countries, are being supported.
There is also unevenness in regions, with South Asia, sub-Saharan Africa and the Middle East and North Africa still far behind in terms of domestic and international investments, according to the Climate Policy Initiative.
The toughest challenge to address is the fact that, to date, financial flows for increasing adaptation and boosting resilience to climate impacts is minute in comparison with the need. The New Climate Economy Report points out that some $90 trillion will be invested in infrastructure alone over the next 15 years – a huge opportunity, but also a potential risk.
Unless infrastructure is both resilient and green, the world may lock itself into a highly vulnerable, high-carbon pathway that will seriously undermine the collective ability to avoid dangerous climate change and meet the post-2015 development agenda and the Sustainable Development Goals.
The Paris climate agreement of December 2015 needs to be more than a short-term business plan. It needs to put in place the policies, pathways and structures required to makes sure global greenhouse gas emissions peak in around 10 years, that trigger a deep de-carbonisation of the worldwide economy and that achieve climate neutrality in the second half of this century.
This is the supercharger to a successful future for seven to nine billion people and the trajectory needed to stay under a 2°C rise in line with the scientific consensus.
Finance or, more importantly, how public policy domestically and internationally liberates transformative investment into a low- – indeed, a zero- – carbon future for many sectors will be key.
Equally important, at least in the short term, will be the subsidies and support that governments give to the fossil fuels market, which are estimated at well over $500 billion a year.
The G7 and the G20 summits have the potential to send clear and unequivocal signals to global markets on the kind of investment future they wish to see.
In doing so, these political forums can assist in delivering a milestone climate agreement at Paris that will produce the paradigm shift required and make the world proud now and for the century to come.