Topic: low carbon

Mobilizing Climate Investment: The Role of International Climate Finance in Creating Readiness for Scaled-Up, Low-Carbon Energy

Sarah Parsons — Fri, 22 Feb 2013 15:20:51 -0500

Executive Summary

Between now and 2050, developing countries need an estimated $531 billion per year of additional investment in energy supply and demand technologies in order to limit global temperature rise to 2° C above pre-industrial levels. To achieve this scale of investment, developing country governments and custodians of international public finance will need to deploy limited public finance in ways that leverage an unprecedented volume of private sector investment. Despite growing global investment in low-carbon energy and falling costs, it will be difficult to achieve the scale and urgency of investments needed without the appropriate policy, institutional, industry, and financial conditions. Governments and their international partners need to undertake “readiness” activities designed to put in place the conditions that attract scaled-up investment and enable a transformation toward low-carbon energy development pathways.

Drawing on six developing country case studies, this report identifies a set of key lessons and insights for readiness. The report develops a framework to identify and prioritize readiness activities that will require public financial support to create the conditions necessary to scale up investments in renewable energy and energy efficiency (collectively referred to as low-carbon energy). The report discusses the implications of the findings for international climate finance and draws a number of recommendations for the Green Climate Fund (GCF). It targets international public funds and institutions looking to accelerate investment in low-carbon energy, as well as developing country governments looking to identify and prioritize activities for funding.

Enabling conditions for scaling up investment

We identify a number of policy and institutional, industry, and financial sector conditions that can attract scaled-up public and private investment in low-carbon energy. Policy and institutional conditions include plans and targets for low-carbon energy, institutional capacity to effectively implement climate change and energy policies, laws supporting investment in low-carbon energy, and regulatory and fiscal instruments to implement laws. Industry conditions include the capacity of developers to prepare bankable projects, information on renewable resource availability or options to conserve energy, engineering capacity, and the presence of a support industry and enabling infrastructure. Financial conditions include a stable financial sector with the capacity and range of financial products needed to support low-carbon energy.

In six case studies, we analyze the role that enabling activities have played in promoting scaled up investment in low-carbon energy, and the role that international public finance has played in supporting such activities. These case studies examine energy efficiency in Thailand, wind power in South Africa, solar water heaters in Tunisia, geothermal power in Indonesia, wind power in Mexico, and energy efficiency in India. Taken together, the case studies suggest two overarching determinants of success in scaling up investment: government leadership and effective responses to pricing distortions. When government leadership is strong, a commitment to policy and institutional reform and implementation of stated goals usually follows. This in turn strengthens the investment climate and increases investor confidence. In cases where market failures severely distort the market in favor of carbon-intensive energy sources, it has been more difficult to create the conditions that attract investment in low-carbon energy.

Lessons learned for the design of readiness activities

The case studies also reveal a number of lessons about the design of readiness activities and the role of international partners in supporting them.

Small amounts of long-term funding for enabling activities can help scale up investment

In each case study, small investments in enabling activities—from several hundred thousand dollars to several million dollars—helped pave the way for scaled up private and public investments by supporting the creation of conducive policies and market conditions. International support has been most effective when sustained over five or more years. Technical support can also be more effective if international advisors are integrated into national institutions and report to national, rather than international, authorities.

International support is likely to be more effective if it identifies and targets a few critical barriers to investment. In countries with comparatively few enabling conditions for investment, attempts to simultaneously surmount all investment barriers may result in resources being spread too thin to achieve a significant impact. Chapter 4 presents a framework that can aid governments and their international partners in identifying activities to support.

Strengthening the enabling environment should not end when investment begins. In each case study, readiness activities and larger investment took place simultaneously. Even in cases where the investment climate was already strong, there was still scope for additional enabling activities to address specific gaps.

Integrated, inclusive planning processes and policy and institutional reform are key to attracting investment

The integration of low-carbon energy into a broader development agenda can enhance coordination and alignment between different sectors of the economy. Civil society and private sector actors can bring valuable expertise and experience to the planning process, and play important roles in ensuring that low-carbon energy policies and plans are realistic, robust, and tailored to the needs of the country. International support should be aligned with national plans and priorities for effective and sustained outcomes, and should be flexible enough to respond in a timely manner to evolving priorities.

Changes to the policy and regulatory environment proved crucial to attracting investment on a significant scale in the case studies. International support for the design of policies is likely to be effective only if it is demand-driven and not seen as infringing on national sovereignty. Countries that have set up their own financial mechanism to support low-carbon energy projects are well positioned to implement their objectives effectively and independently, thereby reducing their reliance on international partners to finance their low-carbon energy needs.

Having the appropriate institutions in place to develop, implement, and regulate policy reforms—and empowering them with the mandate and resources to carry out their functions effectively—helped ensure that policies were coherent and consistent, which increased investor confidence.

In key institutions, strengthening the capacity of staff and management to carry out their functions is an important readiness activity that often requires international funding support. The case studies suggest that capacity-building support is most effective when carefully targeted to address particular skills gaps.

Tackling information barriers and strengthening industry and financial sector capacity can unlock investment

Public support for broad-scale renewable resource assessments or exploration can provide information on resource availability that is key to attracting investor interest. Similarly, measures to familiarize industry and other actors with low-carbon energy options—such as training centers, awareness campaigns, and seminars and workshops that bring together stakeholders—can strengthen industry knowledge of and capacity to implement renewable energy projects, and raise awareness of the potential cost savings from energy efficiency.

International support plays an important role in facilitating learning and demonstrating new financing models for renewable energy, as well as strengthening industry’s capacity to develop and implement low-carbon energy projects. In some cases, international support to strengthen the capacity of small and medium enterprises (SMEs) and improve their access to financing for low-carbon energy projects has helped unlock investment by this sector of the market.

Financial institutions can play a key role in opening the market for low-carbon energy technologies. However, some financial institutions lack knowledge of and experience with these technologies. Strengthening the capacity of financial institutions to support renewable energy and energy efficiency projects, including through pilot financing programs, has been important in scaling up domestic sources of finance for low-carbon energy in several cases. In some cases, the high risk—real or perceived—of investing in low-carbon technologies without a proven track record in the country has deterred domestic financial institutions. Mechanisms that carefully allocate risks to those best placed to manage them can help attract financing from domestic banks and other financial institutions.

A framework for guiding readiness support for low-carbon energy investments

Building on the experiences of the six case studies, we propose a framework to guide governments and their international partners in determining how best to provide readiness support to countries with low-carbon energy sectors in different stages of development. The framework describes some of the activities required to strengthen the enabling policy and institutional environment for investment. In the early stages of development, these include support for assessing energy options, engaging stakeholders in the energy planning process, capacity building for government agencies and civil society, technical support for developing plans and strategies, and outreach activities. In later stages, activities include support for designing and implementing regulations and fiscal instruments, and targeted capacity building for government agencies, including local governments.

The proposed framework also describes some of the activities needed to strengthen the enabling industry and financial conditions for investment. In early stages of development, these include renewable resource assessments and energy conservation awareness campaigns, capacity building for project developers and financial institutions, support for technology transfer and localization, feasibility studies and environmental and social impact assessments, and support for financial sector reform. At later stages, activities include strengthening engineering capacity for low-carbon energy projects, supporting ancillary industries (such as upgrading grid infrastructure), and supporting financial institutions to assess and finance low-carbon energy projects.

Recommendations for the Green Climate Fund

The six case studies illustrate different approaches that various international partners have used to support readiness activities. The lessons learned are intended to inform the recently established GCF as it attempts to identify how best to support a paradigm shift toward low-emission and climate-resilient development pathways. Although the GFC’s detailed operational modalities are not yet defined, it could take a number of approaches to support readiness. These include supporting readiness directly or partnering with existing institutions; establishing distinct channels and allocations for readiness or integrating enabling activities into existing channels and allocations; and supporting readiness through the private sector facility.

Climate Finance

Christine Potochny — Mon, 05 Nov 2012 13:55:16 -0500

Facts and Figures: The Scale of Needed Investment

Developing countries will require new investments of up to $300 billion annually by 2020—growing up to $500 billion annually by 2030—to adequately limit their growing greenhouse gas emissions.
These countries will also require several hundred billion additional dollars to protect themselves from the worsening physical and economic impacts of greenhouse gases already in the atmosphere.
About $900 billion per year between now and 2050 will be needed to address investments in global energy supply and demand technologies (in addition to the roughly $2.6 trillion in annual investments to occur in a “business as usual” scenario.
While developed countries have committed to channeling US$100 billion (from public and private sources) annually by 2020 to developing countries for climate mitigation and adaptation activities, this level of investment is far from what is required.

Global Investment for a Resilient Low-Carbon Economy

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. Major financial investments – from both public and private sources and guided by smart and equitable policies - are required to transition the world’s economy to a low-carbon path, reduce greenhouse gas concentrations to safe levels, and build the resilience of vulnerable countries to climate change.

WRI is addressing how these massive investments toward a low-carbon and resilient economy – which we refer to as climate finance –can be realized.

In developing countries, climate change investment needs are significant. Direct government funding is scarce. And the billions of dollars committed to be marshaled by industrialized countries remain inadequate to the magnitude of the challenge of stabilizing a steep trajectory of greenhouse gases. Additional financial investment should be accompanied by rules, regulations, fiscal incentives and effective markets at international, national, and sub-national levels to shift current and projected “business-as-usual” investments, and mobilize resources at the scale required.

WRI’s Vision of Success

Public and private actors—development financing institutions, governments, and private sector investors, including financiers and project developers—significantly shift and scale-up their investments in sustainable, low-carbon and climate-resilient development. These investments will create new markets, address long-term opportunities and risks arising from climate change, promote wider socio-economic benefits, and minimize social and environmental harm.

WRI Strategy

WRI focuses on climate finance broadly defined, not just international public climate finance but both public and private flows including domestic (within developing countries) and international (to developing countries) finance that support climate-related goals.

WRI focuses its expertise on the technical and institutional aspects of three major questions:

How to SHIFT finance from high carbon to low carbon and climate resilient investments (mainstreaming);
How to LEVERAGE private flows using public climate finance (domestic and international) and
How to ASSESS the impact or effectiveness of climate finance, whether positive or negative.

WRI is pursuing national, international and private sector strategies.

National Strategy: Strengthen institutions for effective climate finance mobilization, management and monitoring

SHIFT

Facilitate building national public institutions and capacity to access, manage, program, deploy and monitor climate finance in an effective and transparent manner.
Empower non-governmental institutions and actors to engage and participate in climate finance processes in order to ensure more effective outcomes.
Related projects: Open Climate Network, Electricity Governance Iniative, Measurement & Performance Tracking in Developing Countries.

LEVERAGE

Ensure development financing institutions and finance ministries catalyze a shift in public and private investments toward climate-friendly development through the strategic use of international climate finance.

ASSESS

Help create efficient and accountable financial systems. WRI aims to help national governments and their domestic stakeholders develop systems through which they can wisely generate, access, disperse, and track finances for adaptation.
Related work: Vulnerability & Adaptation
Maximize the impact and effectiveness of climate finance by aligning national mechanisms for receiving, allocating and disbursing international climate finance with the country’s planning, budgeting, programming and monitoring procedures and systems.
Related project: Open Climate Network
Related publication: Summary of Developed Country ‘Fast-Start’ Climate Finance Pledges

International Strategy: Build a robust, effective and equitable climate finance architecture

SHIFT

Promote more effective and legitimate governance of international climate finance by bringing to bear developing country expertise and experience to inform discussions on governance and operation of international climate finance.
Related project: International Financial Flows & the Environment (IFFE).
Related blog posts: the Green Climate Fund.
Ensure mainstreaming climate change in international development finance by encouraging public international financial institutions to adopt and implement ambitious, internationally recognized standards. Such a significant investment shift will support low‐carbon and climate‐resilient development, while ensuring high environmental and social standards.
Related project: International Financial Flows & the Environment (IFFE)
Related publications:

ASSESS

Create an enabling environment for investment by ensuring that international climate finance includes long-term support for conducive policy environments and addresses non-financial barriers to investment. WRI has developed a framework to guide governments and their international partners in selecting pre-investment activities to support and inform the providers of public international climate finance.

Private Sector Strategy: Leverage private sector flows from public climate finance

Related project: Climate Finance & the Private Sector

SHIFT

Provide robust research and analysis to determine what tools and approaches are the most effective at leveraging private climate investment, including detailed mapping of financing instruments used by public and private institutions to finance climate-relevant projects.
Related publications:
Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Capital
Public Financing Instruments to Leverage Private Capital for Climate-Relevant Investment: Focus on Multilateral Agencies

LEVERAGE

Help leaders in the public sector seize the opportunity to leverage private investment in a low-carbon future. The public sector can expand its role in effectively unlocking private investment by reducing risk, directing investment and maximizing public and private benefit through the appropriate mix of policies and finance.
Related resources:
Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Capital
Climate Finance and the Private Sector brochure

ASSESS

Mobilize WRI’s strong external ties with private sector financial institutions to bring a private sector perspective to climate finance, and help translate the complex languages of private sector investors and public sector policy makers.