Finance in Long-term Strategies
The urgency and scale of the financing challenge
Low-GHG emission development strategies (both short- and long-term strategies) are the linchpin in the transition from talk to action, from the goals set by countries in the Paris Agreement to implementation. Long-term and shorter-term strategies define the goals and staging posts necessary to drive economic growth and development, consistent with a low-carbon and climate-resilient pathway. But without appropriate financing, implementation will be compromised.
Overall, the scale of the financing challenge ahead is considerable, and the need for action urgent. Trillions of dollars of investment in low-carbon and climate-resilient infrastructure are required up to 2030 to prevent dangerous climate change. While US$392 billion was invested in low-carbon projects in 2014, up 15 percent from the previous year—investment levels are short of the need.1 Earlier-stage technologies and specific markets (e.g., energy efficiency, adaptation, agriculture, and forestry) in particular have difficulty attracting capital at scale.
Meanwhile, most global investments in energy ($1.7 trillion in 2016)2 and infrastructure ($413 billion in 2016)3 are inconsistent with low-carbon, climate-resilient objectives. While there has been considerable recent progress in understanding investment risks related to climate change, more effort must be focused on working with the private sector, which controls $4.7 trillion in assets globally,4 to green existing financial flows and systems and shift investments from traditional fossil-fuel based activities to low-carbon ones. For instance, greening existing agricultural finance from domestic, and especially international sources, could more than quintuple finance aligned with its sustainable land use objectives, to $169 million.5 In 2014, total global climate finance was less than a third of global subsidies for fossil fuels.6
Long-term strategies must therefore effect action at pace to address the investment gap.
Investment plans for low-carbon strategies
Many countries have already started work to develop investment plans for their nationally determined contributions (NDCs) to identify and prioritise key investment areas.
As a first step in developing these plans, countries need to understand the current state of play in financing, in order to set priorities and plan effective action. National-level climate finance mapping, an approach applied so far in Germany, Indonesia, and Côte d’Ivoire, can feed into the evidence base to inform investment plans.7 CPI’s Global Landscapes of Climate Finance series provides an up-to-date picture of how much finance is flowing from and between public and private actors. Landscapes create a baseline against which financing targets can be set and progress measured; they also identify opportunities to increase or redirect finance for implementation of national objectives.
Countries’ financing challenges are twofold: Finance flowing to low-carbon, climate-resilient activities needs to increase considerably, and eventually all flows of finance across the economy need to become consistent with, and not contrary to, climate objectives. Phasing out inconsistent public support not only levels the playing field but also increases the cost-effectiveness of low-carbon and climate-resilient investments.
At the same time, long-term strategies must target wider development objectives alongside climate goals. Infrastructure has a long lifetime: investment decisions made now can shape national development pathways for decades to come. It is critical that long-term strategies consider wider development objectives in order to finance climate-resilient infrastructure that both delivers development goals and avoids carbon lock-in. CPI recently worked with Sustainable Energy for All (SEforAll) to map finance for energy access. We found that finance for energy access is short of the need and that increased energy access can go hand-in-hand with low-carbon development. Long-term strategies should identify where and how climate finance can support development goals.
Long-term strategies must consider climate adaptation. The extent of private investment in infrastructure for climate adaptation is less well understood,8 as are measures that governments can implement to catalyse investment in activities that increase the resilience of countries, businesses, and communities. However, solutions are emerging that can drive private investment in climate resilience.9 Long-term strategies must assess and prioritize countries’ adaptation needs in order to identify solutions that increase climate resilience.
Private finance can play a role in long-term strategies, but it still relies on public support frameworks
Private finance has a key role to play in low-carbon, climate-resilient investment. Nonetheless, public policy and resources remain the driver, in particular for earlier-stage technologies and markets perceived as riskier by the private sector. Of the private finance that is used to address climate change, 92 percent is raised and spent in the same country.10 Given the importance of domestic private investment, domestic public policy and support frameworks must create an “enabling environment” that supports domestic investment in low-carbon and climate-resilient projects.
Targeted public policies can drive low-carbon and climate-resilient investment. Stable and supportive policy frameworks can close the gaps in risks and returns between business-as-usual investments and climate-compatible ones. A range of policy options are open to national governments, but their effectiveness and cost vary depending on the context. Strategies can consider targeted supportive policies such as feed-in tariffs, guarantees, tax incentives, and concessional loans; and they can take a broader view of the national policy framework, where there can be opportunities for improvement. For example, analysis has shown that Indonesia can improve its fiscal policy frameworks to meet tax revenue and emission-reduction targets, as well as incentivizing higher productivity.11 The high cost of financing has been identified as a key barrier to India’s meeting its ambitious renewable energy targets, leading the government to provide low-cost loans to viable renewable energy projects.12
International donors and development partners can also support implementation of long-term strategies. The gap between actual investment and needed investment highlighted above shows that there is still a need for coordinated, targeted support for developing countries. However, the field of technical assistance to government can often seem like a crowded environment, with many donors providing support and multiple initiatives that aim to drive investment in low-carbon, climate-resilient development. CPI is currently conducting trials on a new approach to technical assistance, GNIplus, that aims to work with government and private stakeholders to provide customized policy, technical, financial, governance, and legal expertise to support their NDC implementation and, in particular, mobilization of private investment.13
Innovative approaches can also fill part of the gap quickly
Long-term strategies should look for ways to encourage and incubate private sector initiatives that create new investment opportunities and scale up financing in new areas. Innovative approaches can help bridge the gulf between available finance and projects on the ground to mobilize significant amounts of private sector investment, often without any changes to the existing policy environment.
Project preparation facilities are one way to support the development of bankable project pipelines consistent with long-term strategies and increase flows of capital into domestic projects. For example, CPI acts as the program manager for US-India Clean Energy Finance (USICEF), a partnership between the Indian government, the Overseas Private Investment Corporation, and a consortium of US foundations.14 USICEF provides preparation support that helps scale up clean energy projects to become investment-ready. As project preparation is a relatively small portion of total project costs, USICEF is a cost-effective solution that creates a “bridge” between available finance and projects on the ground to mobilize significant amounts of private sector investment.
Public private initiatives can drive innovation and open up new investment opportunities. The Global Innovation Lab for Climate Finance (the Lab) is a working example here.15 The Lab is a partnership between public and private actors to overcome barriers to investment. The Lab identifies, develops, stress-tests and supports pilots of the next generation of climate finance instruments. The Lab’s goal is to mobilize billions for climate action in developing countries. The Lab has helped raise over $600 million in seed capital for low-carbon and climate-resilient projects in just under three years—and it has been endorsed by the G7.
Instruments developed under the Lab target a range of sectors and technologies. Energy Savings Insurance, for instance, guarantees savings from investments in proven energy efficiency technologies made by small and medium-sized enterprises16. While these technologies are proven in some markets, a lack of confidence in, and experience of, their benefits in some developing countries has stalled investment. This instrument addresses those barriers and is being applied by the Inter-American Development Bank to reach thousands of businesses in seven Latin American countries. Lab instruments also target sectors with less of a track record. The Climate Smart Lending Platform brings together the tools, actors, and finance necessary to reduce climate risk in lending portfolios and scale up climate-smart lending to smallholders across the globe17. These types of financial structures can deliver both environmental and investment returns.
Long-term strategies can drive the transition to a low-carbon, climate-resilient economy that delivers prosperity and national development goals. However, they must affect action at pace and scale to address the investment gap quickly. Key to success are well-designed national investment plans, the effective use of public policies and resources to drive private investment where it is needed most, and momentum for innovative financial solutions to address persistent barriers to investment in the market.
1 Climate Policy Initiative, “Global Climate Finance Increased by 18% in 2014,” https://www.climatefinancelandscape.org/.
2 International Energy Agency, “World Energy Investment 2017,” https://www.iea.org/publications/wei2017/.
3 Gill Plimmer, “Investment in infrastructure assets soars to record”, 22 January 2017, Financial Times. https://www.ft.com/content/c841e854-d988-11e6-944b-e7eb37a6aa8e.
4 McKinsey and Company, Global Private Markets Review, 2017.
5 Angela Falconer, “The Landscape of REDD+ Aligned Finance in Côte d’Ivoire,” Climate Policy Initiative, January 2017, https://climatepolicyinitiative.org/publication/landscape-redd-aligned-finance-cote-divoire.
6 Climate Policy Initiative, “Global Climate Finance Increased by 18% in 2014.”
7 CPI began developing this approach in 2011. See Climate Policy Initiative, “Global Climate Finance Increased by 18% in 2014”; and Barbara K. Buchner, Chiara Trabacchi, Federico Mazza, Dario Abramskiehn, and David Wang, “Global Landscape of Climate Finance 2015,” Climate Policy Initiative, https://climatepolicyinitiative.org/wp-content/uploads/2015/11/Global-Landscape-of-Climate-Finance-2015.pdf.
8 Jessica Brown and David Wang, “Estimating Mobilized Private Finance for Adaptation: Exploring Data and Methods,” Climate Policy Initiative, November 2015, https://climatepolicyinitiative.org/publication/estimating-mobilized-private-finance-for-adaptation-exploring-data-and-methods/.
9 Chiara Trabacchi and Federico Mazza, “Emerging Solutions to Drive Private Investment in Climate Resilience,” Climate Policy Initiative, June 2015, https://climatepolicyinitiative.org/publication/emerging-solutions-to-drive-private-investment-in-climate-resilience/.
10 See Climate Policy Initiative, “Global Climate Finance Increased by 18% in 2014”; and Buchner et al., “Global Landscape of Climate Finance 2015.”
11 Tiza Mafira, Guntur Sutiyono, and Angela Falconer, “Improving Land Productivity through Fiscal Policy,” Climate Policy Initiative, December 2015, https://climatepolicyinitiative.org/publication/improving-land-productivity-through-fiscal-policy/.
12 Climate Policy Initiative, “Cutting the Cost of the Indian Government’s Renewable Energy Support,” https://climatepolicyinitiative.org/project/cutting-cost-indian-governments-renewable-energy-support/, accessed October 6, 2017.
13 Julia Ellis, “New Partnership Offers World-Class Expertise to Support Countries Implementing NDCs,” Climate Policy Initiative, May 2017, https://climatepolicyinitiative.org/2017/05/03/new-partnership-offers-world-class-support-countries-implementing-ndcs/.
14 USICEF, “Background,” https://www.usicef.org/about-usicef/, accessed October 6, 2017.
15 Climate Finance Lab, “The Lab: Driving Sustainable Investment,” https://www.climatefinancelab.org/, accessed October 6, 2017.
16 Valerio Micale, Martin Stadelmann, and Leonardo Boni, “Energy Savings Insurance: Pilot Progress, Lessons Learned, and Replication Plan”, April 2015, https://www.climatefinancelab.org/project/insurance-for-energy-savings/
17 Angela Falconer and Randy Rakhmadi, “Climate-smart Lending Platform”, June 2016, https://www.climatefinancelab.org/project/climate-smart-finance-smallholders/