The rise of results-based climate finance
Results-based climate finance is surging as an avenue to scale carbon mitigation, according to speakers at the Carbon Expo in Cologne, Germany. Novel crediting mechanisms can route financial flows towards fiscal reforms for renewable energy, incentivize sectoral investments and leverage private capital.
"Of the $16 trillion needed to achieve the Paris Agreement’s below-2-degrees-Celsius target, $1.1 trillion has been invested in climate finance so far — but government funding alone will not do it," said Renat Heuberger, CEO of the South Pole Group, at the May event.
In partnership with the Swiss government, South Pole Group is pursuing a large-scale water purification investment. This is contingent on its direct delivery of water to villagers of Malawi, Kenya and Uganda.
"There is not one cent of upfront finance," Heuberger said. But the $10 million of earmarked government contributions has attracted $50 million of additional private-sector impact investment.
Joint public-private financing schemes are gaining momentum.
One such initiative is the World Bank’s Transformative Carbon Asset Facility (TCAF). Established as a market-based platform for coalescing finance to support mitigation efforts in developing countries, TCAF has mobilized $250 million from the governments of Germany, Norway, Sweden and Switzerland. The program, which is not yet fully operational, will reward countries for reducing emissions through per-ton abatement payments. This will facilitate the transition to clean energy.
"The key idea is to scale up mitigation beyond a project-by-project level and to move into sectoral and policy crediting approaches," said Klaus Oppermann, policy advisor at the World Bank’s Carbon Finance Unit.
In fact, Sri Lanka’s decarbonization agenda is being catalyzed by the support of TCAF.
"Sri Lanka’s target is to derive 20 percent of its energy supply from sources such as hydro, wind and solar, but there are pressures and technical barriers," said Noel Priyantha, chief engineer at Ceylon Electricity Board.
External pressures, such as "the cost of generation needing to be reduced" and internal pressures including "intermittency and the ease of operating conventional power plants" must be overcome, Priyantha said.
According to Priyantha, while pay-for-performance incentives and clean-energy subsidies provide solutions, the real remaining challenges are "the monopolistic nature of credits and the gap for open markets."
"Carbon markets are a tool to assist climate finance, but they are not the only one," Heuberger said, referring to the complementarities between carbon pricing and climate finance.
By developing the next generation of post-Kyoto flexible mechanisms, "paying the indirect social costs of carbon through carbon pricing policies can be an incentive to drive climate-finance investments," said Sigurd Klageg, a representative of the Norwegian Ministry of Climate and Environment.
Firm carbon pricing policies in tandem with climate capital are embedded in TCAF’s mission. Oppermann said the force driving scaled up action is "building a new international carbon market that is now possible thanks to the Paris Agreement’s fundamental change of engaging all countries."
The World Bank estimates that 13 percent of all global emissions are covered by carbon-pricing instruments. With the Chinese national emissions trading scheme set to launch next year, that figure will double, placing the value of carbon pricing at $100 billion.
Complementary to government policies on carbon pricing, the World Bank is leading efforts on public-private carbon-pricing partnerships such as the Carbon Pricing Leadership Coalition. It is also working with the Partnership for Market Readiness.
Despite progress with results-based crediting mechanisms, significant hurdles remain — notably, political economy problems and a lack of implementation pathways.
Contingencies set both by developing countries and funders persist. One is Norway’s post-2020 pledge, which is conditional on functional EU flexible mechanisms. Another is Sri Lanka’s pledge to increase its renewable energy usage, contingent on international monetary support.
TCAF and similar models also will need to consider the setbacks of a multi-stakeholder effect, Oppermann said. He added that TCAF cannot be accessed directly by the private sector alone.
What is the future of results-based climate finance? "Risks, returns, and scalability are the three simple principles of any investment — and if they are met, the money will flow," Heuberger said.
To create a level playing field, "simplicity, certainty, and thinking outside the box" are fundamental, Priyantha said.
Note: The author is employed as a summer intern by an organization that receives funding from the World Bank.