Current funding levels are insufficient to limit global warming to 2°C above pre-industrial levels, despite resources such as some of the Kyoto Protocol mechanisms. For a successful transition to a low-carbon, climate-resilient society, we need to change the scale of financings and rethink our energy paradigm and development models. Public funding has to support the most sustainable projects on a massive scale and steer more private-sector funding towards investments with climate co-benefits.
Concentrations of CO2 in the atmosphere have increased by 40% since the pre-industrial era. This increase and the change in climate observed since the 1950s cannot be explained without taking account of the impact of human activities. 1 Most of the blame lies in the burning of fossil fuels (coal, oil and natural gas). Despite the growing number of policies introduced to combat climate change, total anthropogenic greenhouse gas (GHG) emissions continued to rise between 1970 and 2010, with a net acceleration at the end of the period.2 The so-called developed countries3 which in 2010 accounted for around 18% of the population, 54% of GDP and 36% of GHG emissions – are no longer solely responsible for this increase. In 2005, China became the world’s biggest emitter, ahead of the United States, accounting for 28% of global emissions in 2013. To contain this increase, it is vital to change the energy and development paradigm, not just in the North but also in the South. However, new models have to be developped and must also lead to more resistant development that is adapted to the effects of climate change. As cited by the Intergovernmental Panel on Climate Change (IPCC), the impacts of climate change are already visible and pose a challenge for international solidarity since the consequences are felt more keenly in the developing world, especially in the least developed countries.
Status of international negotiations
Having failed in Copenhagen in 2009 to negotiate an agreement to succeed the Kyoto Protocol, the 196 parties to the United Nations Framework Convention on Climate Change (UNFCCC) are meeting once again to limit the increase in global warming to 2°C 4 by the end of the century. This threshold would still allow societies to adapt to new climate conditions, even though we are currently headed towards a 3° to 5° warming by 2100 (IPCC, 2014).
In 2011 in Durban, the countries committed to reaching a new international agreement in 2015 at the Paris Conference of the Parties (COP21) that will come into force in 2020. The aim in Paris (Box 1) is to reach a universal, legally binding agreement that will apply to all while taking into account national circumstances, particularly those of the most vulnerable countries.
This agreement will address mitigation 5 as well as adaptation.6 Although developped countries historically bear responsibility for the current levels of CO2 concentrations, the energy consumption profiles of emerging economies and the challenges that adaptation poses for all countries suggest the need for a holistic solution. If the increase in GHG emissions is to be contained to any meaningful degree, new development models clearly need to be found. And this means that international climate negotiations are intrinsically linked to development issues – and vice versa.
Lack of ‘climate’ funding
A recent OECD study estimates that in 2014 climate finance mobilised by the developed world for climate action in developing countries was USD 62 billion – including 16.7 billion in private funding mobilised by public financial interventions. Other estimates state that from 2010 to 2012, climate funding totalled between USD 340 and USD 650 billion per year. Developing countries have received between USD 40 and USD 175 billion per year in funding from developed countries, USD 5 to USD 125 billion of which was from private funding (SCF, 2010).7
Although the Kyoto Protocol’s flexibility mechanisms, such as the Clean Development Mechanism, have allowed the private sector to fund low-carbon projects in developing countries (Focus) the amount of funding required for the ‘2°C scenario’ is still far from being achieved. Furthermore, many developing countries are increasingly keen to integrate climate into their development policies but are waiting to see if the developed countries keep to their commitments to provide financial support – commitments that were written into the Convention as early as 1992.
The issue of funding new production and consumption methods will inevitably be a key part of the COP21 discussions. The transition to a low-carbon society requires massive investment – over 1,000 billion dollars per year between now and 2035 (IEA, 2015) – in renewable energy generation, the conversion to renewable energies of the highest-emitting power generation plants, and the implementation of more energy-efficient technologies. According to the International Energy Agency (IEA), investment in renewable energies should increase from USD 270 billion in 2014 to USD 400 billion in 2030 to approach the 2°C target.
But public policies can sometimes be contradictory when it comes to guiding energy investments. Thousands of billions of dollars continue to be invested every year in infrastructure and power plants that emit greenhouse gases, sometimes in huge quantities. In OECD countries, fossil resources account for two-thirds of the investments made in the energy sector, while the private sector receives between €50 and €82 billion per year in public aid (OECD et al., 2015). By contrast, public funding for research and development in the energy sector has been cut by two-thirds in IEA countries over the past 30 years or so. In developing countries, subsidies allocated to fossil fuel projects in particular have hindered investment in energy efficiency and renewable energies.
The need for active involvement of all actors
Public budgets must therefore be redirected and also used to encourage more private investment in climate change mitigation and adaptation projects. International development institutions and development banks also play an active role (Box 2).
For instance, in 2013 members of the International Development Finance Club (IDFC), a network of 22 national, regional and international development banks from around the world, contributed USD 89 billion in funding to activities that contribute to the fight against climate change. Complementarity and synergy among funders is one of the priorities of ‘climate’ financial architecture. Multilateral development institutions and the IDFC have agreed, for example, on the drafting of definitions and harmonized calculation principles regarding the leverage effect of public finance on the mobilization of private and institutional investment in the area of climate change in 2015.
There are several ways in which public funds can encourage economic players to steer their capital towards low-carbon investments that help societies adapt to climate change. Strengthening the green or climate bonds mechanism seems particularly promising, since these bonds are linked to sustainable development and climate action projects. Today, supply and demand are growing. For the past two years, companies have followed in the footsteps of the international financial institutions.
In a clear sign of private-sector interest, volumes of green and climate bonds have increased rapidly. Of course, what these bonds actually cover varies. Requirements in terms of impact on climate change are not widely standardized and rating practices need to be refined. As for the Green Climate Fund adopted at the 2010 climate conference in Cancun, this is one of the main financing mechanisms created to support climate action in developing countries. The Fund is a legally independent institution based in South Korea and has USD 10 billion in budgetary resources for its first four years of operation. It is expected to become one of the main channels for distributing climate-related public funding. It will also encourage the private sector to increase its participation in funding mitigation and adaptation initiatives.
Climate funding has led to the design of a number of tools and the involvement of a range of actors. The main challenge now is to increase the scale, involve more actors, and improve some of the existing tools while creating new ones. Greater consultation and cooperation is also needed, along with major changes in public policies and budget allocation if the energy transition phase is to be a success. The Paris agreement must give clear, long-term economic and political signals so that private-sector investment choices can be consistent with the 2°C global warming target. Of course, governments alone cannot fund a low-carbon economy – all economic actors need to play their part. But governments need to formulate regulatory frameworks consistent with their climate action goals while still meeting the economic and social aspirations of a growing global population over the long term.
1 According to the Intergovernmental Panel on Climate Change (IPCC), the link between human activities and the increase in temperatures observed since 1950 was deemed likely in 2001 (66% certainty) and extremely likely today (95% certainty).
2 GHG emissions increased by 1.3% per year between 1970 and 2000 and by 2.2% per year between 2000 and 2010.
3 Annex 1 Parties to the United Nations Framework Convention on Climate Change.
4 The warming levels indicated in the article are compared with pre-industrial temperatures.
5 Mitigation refers to the efforts made in all industry sectors to reduce GHG emissions to limit global warming to below 2°C.
6 Adaptation means strengthening the resilience of food, water and healthcare systems, infrastructure and ecosystems, and improving the livelihood of vulnerable people, communities and regions.
7 There are no precise estimates of overall private funding, beyond the private co-financing mobilised
References / International Energy Agency, 2015. World Energy Outlook Special Report 2015. // International Maritime Organization, 2014. Third IMO Greenhouse Gas Study 2014. // Intergovernmental Panel on Climate Change, 2014. 5th IPCC Assessment Report. Available online at: https://www.ipcc.ch/report/ar5/. //OECD, International Energy Agency, Nuclear Energy Agency and International Transport Forum, 2015. Aligning policy for a low-carbon economy. // Standing Committee on Finance, 2010. Biennial Assessment and Overview of Climate Finance Flows Report (2010–12)