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COP24 and finance

The foundation of trust

Imagine you’re the prime minister of a developing country. You can already see the damage climate impacts are causing. You feel the pressure to act. You have read the latest scientific papers that detail the hardship to come. You want to shift your country’s economic model, but lack the budget to do so.

As former UN climate chief Yvo de Boer recently observed, "a surprisingly long list of countries lack the institutional capacity, finances, policy understanding and technology to act on both mitigation and adaptation.”

Finance is often described as a bargaining chip, but it’s about more than just greenbacks. Finance is a proxy for trust. It’s the foundations of this process and is enshrined in Article 4 of the 1991 UN Climate Convention, which details the responsibility of the rich to help poor nations with finance, technology. It’s the foundations of the national climate plans submitted by developing countries ahead of the Paris Agreement. If the money does not flow, the plans won’t be delivered.

The IPCC 1.5C report is clear:

"Strengthened multi-level governance, institutional capacity, policy instruments, technological innovation and transfer and mobilization of finance, and changes in human behaviour and lifestyles are enabling conditions that enhance the feasibility of mitigation and adaptation options for 1.5°C consistent systems transitions."​

Time to reframe the finance debate?

Greening the global financial sector is like a marathon. It’s long, tough and only those who prepare now will do well. Like a marathon we also have a series of benchmarks. Early benchmarks include delivery of $100 billion to developing countries by 2020, full replenishment of the Green Climate Fund and support for other UN funds that support adaptation and least developed countries. Benchmarks also include switching funding away from fossil fuels and cutting inefficient subsidies for oil, gas and coal. Poorer countries also need to know they will continue to receive support in the next decade.

While these benchmarks are important, as a result of the Paris Agreement the overall goal is focused on shifting the trillions. The world is now on a journey to make financial flows consistent with a pathway towards low greenhouse gas emissions & climate resilient development (one of the three long-term goals of the Paris Agreement). Everywhere you look this is slowly happening, from high street banks offering green bank accounts, central banks warning of financial risks linked with fossil fuels, and multilateral development banks refusing to invest in polluting projects.

Keen for a finance deep-dive? Imagine you’re running a marathon…

 

5 kilometres - smaller climate funds

 

The Adaptation Fund and Least Developed Countries Fund (LDCF) are comparatively small but are politically important. Support for these bodies sends a signal to those countries most vulnerable to oncoming climate impacts that they have not been forgotten.

 

The Adaptation Fund has $200 million left and a significant pipeline of projects applying for support. Recently approved projects include $7.9 million for WMO to manage flood, drought and early warning systems in Benin, Burkina Faso, Cote d'Ivoire, Ghana, Mali and Togo; and a $10 million regional project by UNDP to restore marine ecosystems in Mauritius and Seychelles by rehabilitating coral reefs.

 

Importantly, COP 24 will confirm that that Adaptation Fund will serve the Paris Agreement. The decision may require some technical changes to allow the fund to fit with the Paris framework, but is primarily about sending a strong political signal that it will remain an important funding mechanism for many more years.

 

The LDCF, which funds adaptation in the poorest countries, has roughly $90 million left for new funding decisions. With a pipeline of $250 million in projects which have already been technically cleared or under review, it faces a significant funding gap that could be met by developed countries at or ahead of COP24.

10 kilometres - the $100 billion

In 2009, developed countries committed to mobilizing $100 billion a year in climate finance for developing countries by 2020. It is an important benchmark, albeit a small piece of the pie. The UNFCCC’s Standing Committee on Finance’s latest Biennial Assessment of Climate Finance [embargoed till Nov 24] provide an authoritative snapshot of flows. They show that public finance from developed to developing countries reached $57 billion in 2016, an increase of $14 billion from 2014 levels.

When taking account of private finance mobilized by public support, flows reached over $70 billion in 2016. If their funding continues to scale up at this rate, developed countries are well on track to meeting the $100 billion goal in 2020. There is of course much to do: especially to scale up adaptation support, which the report shows receives just a quarter of public climate funding.

The Climate Policy Initiative’s impending report offers equally positive initial estimates for global climate finance flows in 2017. These range from around $510 billion to $530 billion based on early data showing steady renewable energy investment, rising electric vehicle investment, and rising investment from development banks. That’s around a 12-16% increase from 2016.

That said, the lack of significant US climate finance through 2016-2020 is an issue. Early SCF drafts also underlined the need for more work, particularly to scale up adaptation finance. In Paris, countries committed to balance funding for mitigation and adaptation, but at present mitigation takes the lion’s share, around three-quarters of the total.

15 kilometres - the Green Climate Fund

The GCF board recently approved $1 billion of new projects and agreed that 2019 would be the year when the fund applies to donors for replenishment. This will be a year-long process culminating in a high-level pledging conference in Autumn 2019.

Despite its well-documented troubles, the fund - which opened for business in 2015 - has moved fast compared to other multilateral bodies to invest in transformation developing country low carbon and climate resilient projects in developing countries. It requires a new level of significant investment. COP24 is a moment where countries can eventually signal support for an ambitious replenishment.

20 kilometres - Global flows of finance to low carbon

Global investments in low carbon are continuing to rise, albeit more slowly than before. Part of this is because the costs of clean technology are falling fast, so it’s possible to do more for less. Unit costs for solar PV projects fell 15% through 2017, according to the IEA’s 2018 World Energy Investment.

Bloomberg data from Q2 2018 suggests clean energy investment was $76.7 billion in the second quarter of 2018, up 8% year-on-year. Global investment in clean energy for the first 6 months of 2018 was $138.2 billion, with China and the U.S. accounting for 65% of the total.

A 2018 UNEP analysis into global renewable spending revealed 2017 as the "eighth in a row that global investment in renewables exceeded $200 billion.” Global investment in renewable energy edged up 2% in 2017 to $279.8 billion, taking cumulative investment since 2010 to $2.2 trillion, and since 2004 to $2.9 trillion.

Still. One big issue is the money is heading to the usual suspects, as a November 2018 report from the UN's energy agency SE4ALL underlines: "While there has been a dramatic and encouraging increase in electricity access investment over the last four years... the electrification investment gap remains large where it is most needed and its urgency is intensifying." SE4ALl warns that committed finance stands at only half of the $52 billion that is needed annually to deliver electricity access to the 500 million still without power.

25 kilometres - Corporates are going clean

Major corporations are increasingly leading on clean energy investments and R&D spend. As the 2018 REN21 report makes clear, 'R&D spending rose 6% in 2017, to a record high of USD 9.9 billion, with the increase driven entirely by corporate R&D. Government R&D stayed flat relative to 2016, at USD 5.1 billion, while corporate R&D increased 12% to USD 4.8 billion.

As REN21 shows, corporate renewable energy sourcing has moved beyond the United States and Europe and is now found in countries such as Burkina Faso, Chile, China, Egypt, Ghana, India, Japan, Mexico, Namibia and Thailand. The IT sector is a clear leader: by the end of 2017 US-based Google, Amazon Web Services and Microsoft. Amazon Web Services reached a total of 1.2 GW contracted by year’s end, followed by Microsoft (759 MW) and US-based Apple (749 MW) and Facebook (736 MW)

30 kilometres - Multilateral Development Banks shifting the billions

Climate financing by the world’s six largest multilateral development banks (MDBs) rose to a seven-year high of $35.2 billion in 2017, up 28 per cent on the previous year. The MDBs’ latest joint report on climate financing said $27.9 billion, or 79 per cent of the 2017 total, was devoted to climate mitigation projects that aim to reduce harmful emissions and slow down global warming. That’s not to say they can’t do better…. MDBs can and they must, as this E3G analysis illustrates.

35 kilometres - the end of Fossil Fuel Subsidies

Fossil Fuel subsidies account for a whopping $5 trillion per year. That was the finding from an IMF study in late 2016. The number for 2015 is more than double the US$2 trillion previously estimated for 2011. Over half of the increase is explained by more refined country-level evidence on the damaging effects of energy consumption on air quality and health. IMF calculations differ from the IEA as they take into account the damage from fossil fuel emissions. The IEA calculates fossil fuel subsidies were around half a trillion in 2012 and have since halved… until 2018. Now it says they’re on the rise.

"New data for 2017 show a 12% increase in the estimated value of these subsidies, to more than $300 billion. Most of the increase relates to oil products, reflecting the higher price for oil (which, if an artificially low end-user price remains the same, increases the estimated value of the subsidy)… the 2017 data sees oil return as the most heavily subsidised energy carrier.”

40 kilometres - evolution or revolution?

Nearly there… but as with every marathon the last few kilometres are often the hardest. The Paris Agreement requires a fundamental shift in finance flows. Failure to limit global temperature rises to safe levels will lead to a new, potentially existential, financial crisis, Bank of England governor Mark Carney warned in 2015. "Risks to financial stability will be minimised if the transition begins early and follows a predictable path,” he said.

Impacts are already biting, as Lloyds of London’s 2017 Annual Report makes clear. "Global risks are changing and the potential consequences are severe. Increased frequency and severity of major weather events mean that climate change has increased the risks and costs of insurance,”it said. Hurricanes Harvey, Irma and Maria were factors in turning Lloyds $2.1bn profit in 2016 into a $2bn loss in 2017.

In October 2018 the Bank of England told the City to speed up its work on climate risk. This comes as the Financial Stability Board rolls out implementation guidelines for companies relating to its Taskforce on Climate Related Disclosures. “Increasing transparency makes markets more efficient, and economies more stable and resilient,” said TCFD chair Mike Bloomberg.

To avoid ‘hitting the wall’ efforts to address climate change will need a boost at this stage, and that means…

-a radical shift in green bonds - which hit $155 billion in 2017

-more carbon pricing - 51 initiatives globally as of 2018

-fossil fuel divestment to accelerate - $6 trillion and counting as of 2018

-a swift end to overseas coal investments - $16 billion in 2016

-investment in fossil fuel supplies to end - $790 billion in 2017

Finish line - the $125 trillion opportunity


All economic activity ultimately depends on services provided by nature, making it an immensely valuable component of a nation’s wealth. According to WWF’s latest Living Planet report it’s estimated that, globally, nature provides services worth around US$125 trillion a year. The good news that the answer is win-win. As the latest New Climate Economy report illustrates, bold action could yield a direct economic gain of US$26 trillion through to 2030 compared with business-as-usual. "And this is likely to be a conservative estimate,” it says.

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