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.
The AFD, a bilateral bank committed to reconciling climate and development
With € 18 billion awarded since 2005 to projects incorporating climate action – 2.86 billion of it in 2014 alone – the AFD Group is one of the main international public funders of the battle against climate change. The agency is sponsoring renewable energies projects in Morocco and Burkina Faso, public transport in Cairo, Bangalore and Medellín, and agroecology in Madagascar. It is also supporting national policies that take account of climate issues in Indonesia, Vietnam, Mexico and Benin. These projects are enshrined in the AFD’s ‘climate and development’ strategy, whose aim is first and foremost financial commitment on a long-term basis. For instance, 50% of the agency’s activity to developing countries and 30% of its private arm Proparco’s activity are directed to projects that include action against global warming. Proven, transparent methodology is used to calculate the carbon footprint of each funded project. Lastly, the project selection process considers a project’s impact on climate as well as the development level of the country concerned.
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).
France, as chair of the 21st UNFCCC Conference of the Parties (COP21) from 30 November to 11 December, wants to use the occasion to set up an alliance based on four interrelated pillars. This will first mean achieving a legally binding universal agreement with differentiated national commitments and common rules to ensure transparency and commitment comparability. Furthermore, national contributions will state what climate action each government is able to define and implement. A financial and technological package will also have to be drawn up to support developing countries that undertake to combat climate change. This will mean in particular implementing the USD 100 billion per year of funding pledged in Copenhagen in 2009 by developed countries to aid the developing South. Lastly, numerous initiatives are currently being developed by non-government actors in what can genuinely be referred to as a “Lima Paris Action Agenda” to supplement state commitment.
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.
The clean development mechanism and private funding
Igor Shishlov, Ian Cochran, Benoit Leguet (Institute for Climate Economics – I4CE)8
The Clean Development Mechanism (CDM) is the world’s largest carbon offsetting instrument. Created by the Kyoto Protocol, this flexibility mechanism allows developing countries to host projects aimed at reducing emissions and to issue certified emission reduction (CER) credits which can then be used by developed countries to meet their own emissions targets. Thanks to its “bottom-up” nature, the mechanism is well suited to private funding and is currently the only environmental commodity-based market to attract several billions of dollars in capital each year. As a spearhead in the battle against climate change, the CDM has evolved through trial and error throughout its 10-plus-year history. Although the mechanism’s fate remains in doubt after 2015, the experience gained to date could serve to reform the CDM as well as create new market instruments. In the past decade the CDM has approved more than 7,500 projects in developing countries, saving more than 1.5 billion tons of CO2 equivalent, an amount equal to the annual emissions level of Russia. A total of USD 360 billion, mostly from private funding, has been invested into some 6,000 CDM projects, for which invest ment-related data have been made public, resulting in 900 million tons of CO2e abated. Taking the average CER price of USD 10/ton during the Kyoto Protocol’s first commitment period, each carbon finance dollar has raised an average of almost USD 40 in investment through this mechanism. The CDM can therefore be regarded as an effective public policy tool for leveraging private investment to mitigate climate change in certain sectors.
However, the CDM has also attracted some legitimate criticism, in particular regarding the mechanism’s environmental integrity, the complexity of its administrative procedures and projects’ contribution to the sustainable development of host countries. For example, projects to reduce fluorinated gas emissions were so profitable that some project originators may have been tempted to produce greenhouse gases as part of the elimination process. But these ‘perverse incentives’ have been eradicated, and compared to other types of investment, the mechanism’s transparency increases the risk to an investor’s reputation substantially. Generally speaking, the CDM has so far proved to be a flexible instrument capable of learning from its mistakes and improving through multiple reforms. In the meantime, demand for CERs – mainly from the European emissions trading system (EU ETS) – is waning because of quantitative limits on carbon credit use (around 1.6 billion tCO2e). This decline in demand has caused the price of the Kyoto credits to fall below one dollar per ton of CO2 equivalent, with no prospect of recovery. The usefulness of the CDM as a mitigation tool is therefore seriously in doubt.
At present, carbon offsetting is increasingly regarded as one of the most viable means of achieving emission reductions in certain sectors, particularly air and sea transport. The International Civil Aviation Organization (ICAO), for example, adopted an aspirational goal in 2010 aimed at capping the sector’s emissions from 2020 without allocating specific targets to states or airlines. ICAO preliminary estimates suggest that this could create demand worth between USD 2 and USD 6 billion in 2025 and up to USD 24 billion in 2035. The maritime sector could also be a source of funding for projects in developing countries. Although member countries of the International Maritime Organization have agreed to cap the sector’s emissions at the 2020 level, this could produce an offsetting demand ranging from hundreds of millions of tons per year in 2030 to a billion tons per year in 2050 9.
Today, developing carbon offsetting mechanisms to succeed those of Kyoto hinges on restoring confidence in the impact and environmental integrity of carbon crediting projects. But it is also necessary to reassure investors – who lost some USD 66 billion with the collapse of demand and asset price in 2012 – about the safety of their investments. Lessons must be learned from the experience gained during the operation of existing mechanisms.
8 The Institute for Climate Economics – formerly CDC Climat Recherche – produces analyses and public research on climate change economics. Contact: firstname.lastname@example.org or email@example.com
9 Calculations of the authors based on International Maritime Organization (OMS, 2014)
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)