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Three Lessons from Japan's Climate Finance - Coal Controversy

Many delegates in Lima reacted with shock to recent press reports that Japan counted bilateral loans for coal-fired power in Indonesia as climate finance – as our analysis uncovered last year. While Japan maintains its funding supported relatively efficient technology that reduced greenhouse gas emissions compared to conventional coal-fired power, others in the climate community disagreed. “There is no argument” for supporting coal projects with climate finance, said UNFCCC Executive Secretary Christiana Figueres, and environmental groups bestowed a tongue-in-cheek “Fossil of the Day” award on Japan for its fast-start climate finance practices.

Coverage of Japan’s coal funding has sparked an important debate about the role of international climate finance in facilitating the transition to a low-carbon economy. This case reveals three key lessons pertinent to climate finance today:

1. Climate finance must support transformative changes

In principle, anything that reduces emissions could be considered climate finance. Developing countries urgently need affordable, reliable energy, and often use the most polluting technologies to get it because they often seem the cheapest. When climate finance helps them adopt less emission-intensive technologies than they otherwise would deploy – as is arguably the case in Japan’s investments – this could generate a relative climate benefit.

On the other hand, even more efficient fossil-fuel infrastructure results in significant greenhouse gas emissions relative to less carbon-intensive technologies, and these facilities often have long lifespans. (While it may be possible to build plants to be retroactively retrofitted with carbon capture and storage technology, this will not be feasible or cost-effective in all cases.) Continued investment in even the most efficient coal technology risks locking in emissions well into the future.

But scientists note the need to move away from fossil fuels. Since the industrial revolution, we have burned through half of our available “carbon budget,” and we are poised to emit the rest over the next three decades. This means that we need transformative change, beyond marginal or relative improvements.

Developing countries also recognize the need to make a change given the severity of the mitigation challenge. China, for example, recently declared it would cap coal use in 2020, while setting a target to increase renewable energy.

2. We need to know what we’re spending money on, and what it is achieving

The controversy over Japan’s coal investments underscores the fact that right now there is no agreement on what counts as climate finance, so it would be beneficial to have more precise definitions of climate finance under the UNFCCC. Shaping a common understanding of climate finance is critical because it informs where countries will make new investments, and that’s the first step towards understanding what climate finance does and doesn’t achieve.

The UNFCCC Standing Committee on Climate Finance identified some important points of convergence on a core definition of climate finance, but more precise guidance on what kinds of technologies and approaches do or don’t count would be useful. The multilateral development banks have made progress on this front, developing lists of activities that count as mitigation, and a working definition of adaptation based on how it targets vulnerability.

And we need transparency: the fact that Japan voluntarily published a complete list of its climate finance projects is what allowed this crucial public scrutiny to take place. But countries are not required to report at this level of detail, and there are no rules to ensure that similar investments would be transparent in the future. We need better reporting on what is being funded, and what impact it has.

It’s worth noting that so far dedicated climate funds such as the Climate Investment Funds have not supported conventional coal-fired power, because they have been subject to clear guidance on the goals they are supposed to achieve, and scrutiny over how they are spending their money. (Likewise, bilateral “fast-start” climate finance generally has not supported coal power either – Japan’s investments were the exception, not the rule.)

Scarce public finance aimed at addressing climate change needs to support the innovations and systematic shifts to low emission and more resilient approaches. The newly created Green Climate Fund has a mandate to focus on investments that contribute to this kind of “paradigm shift.” Indeed the extent to which the programs it funds contribute to a paradigm shift is a key element of its investment framework. The Fund also has extensive environmental and social safeguard policies in place to help it avoid negative environmental impacts, and an independent redress mechanism, which will allow stakeholders to keep it accountable for adhering with its policies. Governments will ultimately decide what programs it funds, and civil society should also have the opportunity to inform these decisions.

3. All development finance, not just climate finance, ultimately needs to be consistent with climate goals

Japan has attracted attention because it reported its coal investments as “climate finance” to the UNFCCC. But it is hardly alone in funding carbon-intensive infrastructure – other countries have supported similar projects, but have not claimed them as “climate finance.” The Natural Resources Defense Council estimates that since 2007, over $59 billion in public financing has gone to coal projects via development banks and international financial institutions.

Encouragingly, development banks and developing countries alike are increasingly recognizing the need for transformation. Last year, the United States committed to ending public financing of new coal plants overseas with rare exceptions. Denmark, Finland, Iceland, Norway and Sweden endorsed a call by the US for other countries and multilateral development banks to take a similar approach. The World Bank has adopted a new energy strategy significantly limiting financial support for new greenfield coal plants. The European Investment Bank and the European Bank for Reconstruction and Development also adopted policies limiting coal in late 2013. More recently, France announced it would end export credit for coal.

But there is more work to be done – global coal demand is still growing, though slowly. Stemming the tide will require a concerted, joint effort by developed and developing countries, public finance institutions, the private sector, and others. New actors in public infrastructure finance will also need to redirect investment. Ultimately, the challenge is to ensure that all investment is consistent with low carbon and climate resilient development.

Comments

Hi Taryn -- Many thanks to you and your co-authors for this excellent wrap-up and analysis. I learned a lot.

There's yet another argument for limiting climate finance and indeed all public development finance to climate-friendly technologies: the importance of market size in driving technological transformation.

We all eagerly await the day when renewables are consistently cheaper than fossil fuels. Costs fall through a combination of economies of scale and technological change--which is itself driven by a larger market. Public money--especially public money that calls itself climate finance--should help to accelerate this process. If Japan's coal investments went to low-carbon renewables instead, it would not only avoid locked-in emissions, it would help to grow the market for renewables, which in turn can drive down the costs. This dynamic effect can be much larger than the fixed effects, which is why funding for even a handful of coal plants is a serious misuse of climate finance.

(For those who care, this is not just my idle speculation. David Wheeler, drawing on academic literature on technological change, showed this for coal and renewables in a series of working papers at the Center for Global Development when arguing that the World Bank should stop funding coal--an argument that has since prevailed.)

The use of term of "bilateral loans" can be misleading since it can interpreted that the loan is given to the Government of Indonesia. In fact the loan came in the form of project finance provided by JBIC to a consortium of Japanese, Korean, and Indonesia private firms for the coal plant which is IPP project.

Dear Fabby, thank you for highlighting this important nuance. In our data set (http://www.wri.org/resources/data-sets/fast-start-finance-contributions), we used the term "bilateral" to categorize funds that do not flow through multilateral institutions, but in fact only about one third of fast-start finance was received directly by developing-country governments.

Hello! My name is Kian Kilpatrick and I live in De Witt,IA. I have read your blog post about Three Lessons from Japan's Climate Finance - Coal Controversy | World Resources Institute and I want to say that I am quite impressed with your professionalism on the subject!

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