New infographic shows challenges and opportunities for climate finance

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15 October 2015

LONDON: This year’s Climate Week NYC has clearly shown how the shift toward a global low carbon economy is now irresistible and irreversible. Business and government leaders came together at the event organized by The Climate Group to say that low carbon business is smart business – and good for consumers too.

One of the themes discussed at the Climate Week NYC Signature Event on September 28 was the urgent necessity of sustaining climate actions through greater financial support.

Climate Action has published an infographic that highlights the challenges and some of the solutions toward this goal, and the crucial role of private investment in developing a strong, sustainable economy.

THE CHALLENGES

While support for climate actions such as carbon pricing is gaining more and more consensus, there is still a gap if we want to keep global warming under an additional 2 degrees Celsius compared with the preindustrial era, the internationally agreed threshold to avoid the worst effects of climate change. To achieve this, according to a report by the World Economic Forum (WEF), it will be necessary to invest about US$5.7 trillion by 2020 in green infrastructure – particularly in developing countries.

But to date such investments are just US$360 billion per year, according to a paper by the Climate Policy Initiative. The WEF report highlights how we will need an additional US$700 billion each year to shift the business-as-usual investments to support green projects.

To put the numbers in perspective, a separate Carbon Tracker report – significantly called “Wasted capital and stranded assets” – shows that in 2012 alone, companies around the world spent US$674 billion to find and develop new fossil fuel reserves. Such investments clash with the necessity of keeping the majority of fossil fuels in the ground, as a study published in Nature this year shows – putting them at greater risk.

CARBON PRICING

However, all around the world climate actions are building the momentum toward the climate discussions starting next month in Paris, where a global deal among all countries is likely. To date, 40 countries and 20 regions have adopted (or are planning to adopt) a carbon pricing mechanism.

Also called the ‘Emissions Trading Scheme’ (ETS) or ‘cap and trade’, such economic instruments are designed to put a limit – or ‘cap’ – on the carbon emissions that every company in a certain country is allowed to produce in a year. Every firm can then ‘trade’ these permits in a central market. If a company needs to emit more pollutants, it can buy allowances from those that haven’t used them at all, because they have been able to reduce emissions.

The final goal of the mechanism is to incentivize firms to be far below this limit, achieving a double result: they not only avoid buying new allowances, but can also sell their own. Moreover, the total number of permits – the volume of pollutants every firm can emit into the atmosphere – is usually lowered over time.

To date, Europe has pioneered this scheme, achieving mixed results because of the low price of the permits due to many free permits each State member allowed to its own industries. After years of pilots, China is now planning to launch its own next year. Once implemented, this market for carbon permit trading will become the biggest in the world, helping the largest greenhouse emitting nation to axe pollution.

Last year California and Québec, two leading members of The Climate Group States & Regions Alliance, linked their ETS to create the first cross border market in North America as part of the Western Climate Initiative’s regional carbon market – the largest of its kind in the area. The move was followed by the Canadian province of Ontario, another member of the Stats & Regions Alliance, which in April launched its own ETS aiming to link it to the California and Québec one.

climate finance

Image: a section of the infographic by Climate Action and The Climate Group

GREEN BONDS

In the last year, private climate investments are ramping up. According to the international rating service Standard & Poor’s (S&P), by the end of this year companies will have issued green bonds for a record US$30 billion – a market worth a total of US$600 billion that already tripled in size between 2013 and 2014.

‘Bonds’ are a form of debt that regulate investments. The ‘buyer’ lends money to a company or a project, with the agreement to be fully paid back within a precise timescale and with regular interest rates.

‘Green bonds’ are initiatives based on the same mechanism, but entirely devoted to investments in low carbon projects and clean technologies. The global bank Citigroup has pledged to invest US$100 billion to tackle climate change, while US$28 billion of investment was dedicated to climate action by multilateral banks last year.

Another important instrument in this fight is the Green Climate Fund, set up after the Copenhagen accord to raise US$100 billion a year by 2020 to sustain the shift toward the low carbon economy. To date, only US$9.7 billion has been pledged to the fund – mainly by the US, Japan and EU nations – but this is still the largest source of money directed to green investments.

The infographic developed by Climate Action and The Climate Group shows that many positive actions around the world are shaping the dialogue about the incoming climate negotiations in Paris, pushing policymakers and business leaders to acknowledge the necessity – and the opportunity – of this shift.

At the same time, the gap between the ambitious pledges submitted so far and what is necessary to keep the world safe is still open – and can be closed only through collaboration and the sharing of best practices among partners.

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By Ilario D'Amato

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