3 ways to unlock climate finance
3 ways to unlock climate finance
Ministers and senior officials from developed countries gathered recently in Washington, D.C., to tackle one of the world’s foremost challenges: how to mobilize private sector capital to reduce greenhouse gas (GHG) emissions in developing countries and help them adapt to climate change’s impacts. The meeting, organized by the U.S. State Department, comes on the heels of another meeting of climate finance experts and researchers in Paris, organized by the Organization for Economic Cooperation and Development (OECD).
This global attention on climate finance comes at a critical moment: Research shows that the world will need to invest at least $5.7 trillion in clean water, sustainable transport, renewable energy and other green infrastructure annually by 2020 in order to keep global temperature rise below 2 degrees Celsius, thus preventing climate change’s worst impacts. We’re currently directing only about $360 billion annually toward these activities.
While these discussions are necessary, what’s more important is whether ministers and officials are talking about the right issues and asking the right questions. Addressing three questions -- on the correct investment figures, the most effective policy and financing tools and the importance of collaboration -- will be critical to ensure that the Ministerial Meeting on Mobilizing Climate Finance achieves meaningful results.
Officials have been focusing on the wrong issues
Much of the $5.7 trillion in annual investments surely will need to happen in developing countries, where vulnerability to climate change’s impacts is high but significant opportunities to reduce GHG emissions exist. However, governments -- which have an important role to play in mobilizing the finance needed -- have been distracted recently by the wrong numbers and the wrong issues.
At the OECD Paris discussions, for example, developed country governments spent two days discussing methods to quantify how public climate finance dollars can mobilize private sector dollars. This fixation with so-called “leverage ratios” of public to private dollars stems from developed nations’ collective pledge to mobilize -- from public and private sources -- an “additional” $100 billion annually by 2020 to support climate change activities in developing countries. Faced with fiscal tightening, these governments realize that demonstrating progress towards the $100 billion is more easily achieved by reporting the highest possible leverage ratio. This narrow bean-counting fails to acknowledge the real amount of investment needed to shift the world onto a low-carbon economy and acts as a distraction from the bigger challenges related to mobilizing climate finance.
Where should decision-makers focus their attention at the U.S. ministerial meeting on mobilizing climate finance?
In order to truly mobilize the amount of money needed to mitigate and prepare for climate change, we must press the reset button on climate finance discussions. As ministers and other officials gather for the Ministerial Meeting on Mobilizing Climate Finance, three questions should guide their decision-making:
1) Are we focusing on the right investment figures?
The World Economic Forum projects that by 2020, about $5.7 trillion will need to be invested annually in green infrastructure, much of which will be in today’s developing world. This will require shifting the world’s $5 trillion in business-as-usual investments into green investments, as well as mobilizing an additional $700 billion to ensure this shift actually happens. The Climate Policy Initiative estimates that we are currently at roughly $360 billion annually in public and private climate investments, with developed country governments providing somewhere between $10-20 billion per year, according to their fast-start finance reports and OECD estimates.
When you consider these figures, the $100 billion annual goal that is usually referenced is only a small piece of the $5.7 trillion puzzle. Governments are not focusing on the right figure, and therefore, aren’t acknowledging the scale of the challenge. It sounds daunting, but there are ways to achieve this significant shift. The UN Secretary General’s High Level Advisory Group on Climate Change Financing and a World Bank paper addressed to the G20 have shown us a few ways to get there. Both public and private levels of funding need sustained growth to ensure that we get on a pathway to meeting investment needs in 2020 and beyond.
2) Are we deploying policy and financing tools effectively?
Governments are struggling to mobilize the amount of finance necessary to meet the climate change challenge, so we need to ensure that the finance available is used as effectively as possible. Identifying and using the right policy and financing tools will be pivotal in creating the right incentives for public and private investors to shift their investments into climate-friendly activities. Policy and financial interventions are only catalytic and transformational if they are precisely targeted at the right barriers, which vary widely in different contexts. There are no silver bullets and cookie-cutter approaches will not work, but we have some good examples to draw from.
For example, Mexico’s wind industry showcases how powerful public dollars can be in mobilizing private investment — if they are used to provide sustained policy and institutional support and apply appropriate financial instruments at the right time. Between 2003 and 2011, a mix of domestic renewable energy policies, international finance and technical support transformed Mexico’s fledgling wind industry from two small projects to an industry boasting 17 projects and total investments of $1.14 billion at the end of 2011.
3) Can we work together?
Public and private actors from developed and developing countries are important if we are to progress toward $5.7 trillion. Overemphasizing any one set of actors over others will undermine our ability to create the scale of impact desired. Each controls different pots of money, yet each can play a complementary role. Different sets of actors undoubtedly will need to be prioritized, but these choices must be flexible to respond to the dynamism of each sector, geography and actor.
Ensuring a robust discussion
The conversation at the Ministerial Meeting on Mobilizing Climate Finance is important to have, but it must focus on answering the right questions. Moreover, participants will need to rise above the narrow political pressures they face and focus on how to do better as a community — collectively — to address the scale of the challenge. Depending on how governments act today, they can turn the $5.7 trillion challenge into either a major risk they’ll grapple with for decades to come, or an opportunity that promises a more climate-secure and prosperous future.
LEARN MORE by reading the following climate finance publications:
- Mobilizing Climate Investment: The Role of International Climate Finance in Creating Readiness for Scaled-Up, Low-Carbon Activities
- Moving the Fulcrum: A Primer on Using Public Climate Finance to Leverage Private Capital
This article reprinted with permission from the Insights blog at WRI. It was originally published April 10, 2013.
Photo of three antique keys on a wooden table provided by Amanda Hobbs via Shutterstock.