Stabilizing the global climate is one of the most urgent challenges in coming decades. Our warming world affects all people and ecosystems, particularly the poor who already suffer disproportionately from climate-change impacts.
Research shows that developing countries will need about $531 billion of additional investments in clean energy technologies each year in order to limit global temperature rise to 2° C above pre-industrial levels, thus preventing climate change’s worst impacts. While developed countries have pledged to provide $100 billion of climate finance per year, this amount is well below what’s needed to help developing nations mitigate and adapt to climate change.
So how can countries bridge this funding gap? The answer lies in part on how well developing countries implement “readiness” activities, as well how effectively developed nations and international institutions like the Green Climate Fund (GCF) can mobilize finance to support them.
The Need for Readiness
To attract investments on the scale required, developing country governments must provide an attractive investment climate—one that encourages public and private sector investors to put their money into climate-friendly projects like solar and wind energy. On their end, developed countries need to offer financial and technical support for “readiness” activities that create the right conditions for said investments. Readiness includes any activity that makes a country better positioned to attract investments in climate-friendly projects or technologies. A few examples include: developing a policy to promote energy efficiency in industry; passing a law that gives a new or existing institution the mandate to promote renewable energy; conducting an assessment of a country’s wind energy resources; or strengthening a bank’s capacity to lend to small businesses in low-carbon sectors. International institutions such as the GCF can play a big role in supporting readiness activities, thereby helping developing nations attract the investments that will help them transition onto a low-carbon, climate-resilient development path.
In a little more than one generation—by the time your grade-schoolers will be seeing their own kids off to school—our planet will be home to 9 billion people. This will create an unprecedented demand for water, food, and energy--and stress the supporting infrastructure required for life in the 21st century. How are we to meet this demand while respecting planetary boundaries? And importantly, how will we pay for it?
Under current OECD growth projections, the world will need to invest $5 trillion annually until 2020 in the water, agriculture, telecommunications, power, transport, buildings, industrial, and forestry sectors. However, solely delivering this investment to maintain “business-as-usual” economic growth will not lead the world onto a sustainable growth path. We need to find ways to “green” our growth to cope with resource scarcity and alleviate risks from climate change and environmental degradation. Greening this investment will require a mix of appropriate policies and capital. The lion’s share will need to come from the private sector, given the scale required.
The “Green Investment Report” estimates that an additional $700 billion will be needed annually to green the business-as-usual investment in the global economy. This is a large sum, but relatively insignificant compared to the cost of inaction as negative environmental impacts increasingly take their economic toll.
However, some question whether these funds are going to the right places and meeting real needs. Is adaptation finance being directed towards the nations that need it the most? Is it being used to support projects that will allow people to adapt to climate change’s impacts?
The Question Is: Where Should Adaptation Finance Go?
The easy answer is that adaptation finance should go to activities that strengthen the resilience and reduce the vulnerability of countries most susceptible to climate change’s impacts. People in developing countries will likely be hit hardest by global warming.
The Doha negotiations that just concluded earlier this month have again drawn attention to the urgent need for climate adaptation and emissions reductions. Government representatives, civil society stakeholders, development aid organizations, and corporates agree that the world must make big strides—soon—if we are to have any hope of keeping global average temperatures to 2 degrees Celsius above pre-industrial levels.
One problem, though, is how to generate enough finance to fund these activities. A new WRI working paper aims to address this challenge by examining the role multilateral agencies can play in mobilizing private sector finance for climate change adaptation and mitigation.
Leveraging the Private Sector to Bridge the Climate Finance Gap
Developing countries—those most vulnerable to climate change’s impacts—will need $300 billion annually by 2020 and $500 billion annually by 2050 for mitigation activities alone. The newly established Green Climate Fund (GCF), meant to channel $100 billion annually into climate-relevant investments starting in 2020, is a significant first step, but does not fill the gap of what’s needed.
The public sector cannot tackle this challenge alone, and indeed, the GCF already envisions funding from a mix of public and private sources. The key, then, is to mobilize the private sector to create new investment opportunities and new markets.
This piece was written with analysis from Athena Ballesteros, Edward Cameron, Yamide Dagnet, Florence Daviet, Aarjan Dixit, Heather McGray, and Clifford Polycarp.
Expectations were low for this year’s UNFCCC climate negotiations in Doha, Qatar (COP 18), which concluded last week. It was scheduled to be a “finalize-the-rules” type of COP, rather than one focused on large, political deals that went into the early hours of the morning. Key issues on the table included finalizing the rules for the Kyoto Protocol’s second commitment period; concluding a series of decisions on transparency, finance, adaptation, and forests (REDD+); and agreeing on a work plan to negotiate a new legally binding international climate agreement by 2015. The emissions gap was also front-and-center, as the new UNEP Gap Report showed that countries are further away than even a year ago from the goal of keeping global average temperature rise below two degrees C.
Decisions made at these meetings are critically important for the funding of climate mitigation and adaptation activities in developing nations. They’ll have important implications for meeting the immediate investment needs of developing countries, as well as for long-term global climate finance. The meetings will mark the start of discussions on how to sunset the CIFs and transition to a new global climate finance mechanism—the Green Climate Fund.
The Intergovernmental Panel on Climate Change (IPCC) estimates that our best chance of containing global temperature rise to 2°C is to keep atmospheric concentration of carbon dioxide below 450 parts per million (we’re currently at 390 ppm). In addition to several other climate mitigation strategies, sticking to this cap will require significant new investment in low-carbon infrastructure and activities in developing countries.
Experts estimate the cost of funding this development to be about $300 billion annually by 2020, growing to $500 billion by 2030. The problem is, there’s a huge funding gap when it comes to meeting these costs—industrialized nations have only committed to mobilize $100 billion of new funds annually by 2020 to meet these needs. The world will need to figure out a way to come up with the rest of the funding if we’re going to prevent developing nations from feeling climate change’s most severe impacts.
Introducing WRI’s Climate Finance and the Private Sector Project
The Green Climate Fund (GCF) Board wrapped up its second meeting on Saturday with a major decision: selecting Songdo City in South Korea to host the Fund. The decision, which was adopted by consensus of the Board, was greeted with joy by the Koreans, who spared no effort to provide an offer of the highest quality to earn the confidence of the Board. The UNFCCC Conference of Parties will have to endorse this decision at its next meeting in Doha later this year to confirm the selection.
The second meeting of the Green Climate Fund (GCF), the institution that’s expected to become the main global fund for climate change finance, will take place tomorrow in Songdo, Korea. While the Board will discuss several issues—everything from criteria for its executive director to hammering out a work plan—one is likely to take center stage: choosing the Fund’s host country.
Six countries are currently vying for the role: Germany (Bonn), Korea (Songdo), Mexico (Mexico City), Namibia (Windhoek), Poland (Warsaw), and Switzerland (Geneva). The decision is an important one—the appointed country will be tasked with providing a home for one of the main vehicles to help the world’s most vulnerable nations mitigate and adapt to climate change.
Addressing global climate change requires huge investments. In order to keep global temperature rise below 2 degrees Celsius and protect vulnerable communities from climate change’s impacts, experts estimate that developing countries will need between $110 and $275 billion annually to mitigate and adapt to climate change. The International Energy Agency estimates that for developing countries to transition to low carbon energy, approximately $10 trillion dollars in energy investments by 2050 is required. In addition, another $ 1.5 trillion per year will be required by 2030 for adaptation action.
Unfortunately, there’s a huge gap between the funding we have and the funding we need: According to experts, developing countries’ climate change financing needs exceed current and prospective flows by at least five to 10 times. While many policy analysts focus on the need for more money and a greater availability of technology to bridge this gap, there’s another issue that’s less talked about but equally important: investing in institutions and capacity development.
By “institutions,” I mean countries’ national structures, mechanisms, and related arrangements to effectively implement climate policy and administer climate finance, such as a national climate change commission, an inter-agency committee on climate change, a national climate change adaptation fund, or national climate change trust funds. “Investing” in these institutions means creating the necessary policy, institutional, industry, and financial conditions that can help scale up investments in climate action. Building these strong and effective institutions will also require capacity and knowledge-building.