Climate Finance: How Global Investment can Lead to a Resilient Low-Carbon Economy

Climate Finance: How Global Investment can Lead to a Resilient Low-Carbon Economy By Rana Abuhilal

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tabilizing the global climate is one of the most urgent challenges for current and future decades. I propose that major financial investments from both public and private sources—led by smart and equitable policies—are required to transition the world’s economy into a low-carbon economy, reduce greenhouse gases to a safe level, and help vulnerable economies build resilience to climate change. Background

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Energy is vital to modern economies: from industry, agriculture, transport, infrastructure, and more. Thus, securing a robust energy supply is necessary for nations to grow their economies and improve their living standards. As these economies continue to grow, so will their energy use. In fact, high-income countries consume more than 14 times as much energy per capita as “Least Developed Countries,” and seven times as much as “lower-middle-income countries.”1 Furthermore, as more countries rise out of poverty and develop their economies, energy demand will rise with them, putting pressure on global energy systems. Investing in energy efficiency and low-carbon technologies upfront may increase costs, but it will also bring nations closer to a resilient low-carbon economy. Recent trends in the global economy— such as the dramatically falling cost of clean energy, the continuing volatility of oil prices, and the growth of international carbon pricing—are building momentum for low-carbon development.2 The World Economic Forum estimates that by 2020, approximately $5.7 trillion will need to be annually invested in green infrastructure, which will require the world’s $5 trillion in business-as-usual investments to shift to green investments.3 Currently, The Climate Policy Initiative estimates that there is roughly $360 billion annually in pub-

lic and private climate investments, with developed economies providing between $10 to $20 billion per year.4 Combining these public and private levels of funding is needed to sustain growth, and ensure that the pathway to meeting investment needs in 2020 and beyond is achievable. Recommended Action Expand the Green Bond Market To encourage climate-friendly investment, expanding the market for green bonds is an important step. Green bonds were created to increase funding by accessing the $80 trillion bond market, and expanding the investor base for climate-friendly projects worldwide.5 They are fixed income, liquid financial instruments that are easy to understand, and the funds green bonds raise are dedicated exclusively to climate-mitigation and adaptation projects, and other environmentally beneficial activities.6 This provides investors an attractive investment plan as well as an opportunity to support environmentally beneficial projects.7 An increase in bond issuance will support new low-carbon—or climate-resilient investment in energy, buildings, transport, and water sectors. Originally distributed by development banks, green bonds are now issued by utilities, car manufacturers and a plethora of other corporations. In 2008, The World Bank Treasury issued its first green bond at a time when investors did not have liquid, fixed income investment options that specifically supported climate-focused and environmentally-friendly projects.8 Since then, The World Bank has issued nearly $9 billion in green bonds in 18 currencies, including a 10-year $600 million benchmark green bond and green growth bonds linked to an equity index and designed for retail investors. Separately, the

Implement a Global “Cap & Trade” Program

nancial departments across Europe. Then, by allowing companies to buy international allowances, the “trade” component acts as a major driver for investment in clean technologies and low-carbon solutions. While emissions trading has the potential to cover many economic sectors and greenhouse gases, the focus and strength of a “cap & trade” system is on emissions, which can be measured, reported, and verified with a high level of accuracy. Geographically, performance can vary; however, if a similar “cap & trade” model is implemented at a larger, more collectivized level, the “cap & trade” system has the potential to achieve prolonged international environmental change.12 Overall, low-carbon investment levels are currently below those needed to avoid surpassing the global warming threshold to irreversible climate change within the century.13 Due to weak leadership in the private financial community, governments should prioritize a low-carbon, climate-resilient agenda and explicitly publicize their involvement in climate finance-related projects. To enhance demand for risk management, governments have an array of tools available to them including building awareness, appropriately subsidizing or mandating coverage, and facilitating the development of sovereign risk pools. More policy attention is needed to allow low-cost capital to flow towards climate finance mechanisms, such as the green bonds market and the “cap & trade” system. Moreover, enhanced disclosure rules, as well as stress-testing, will provide more and better quality information that can improve decision making by companies, investors, and regulators. However, this will require international coordination. Depending on national circumstances, capital flows to the low-carbon climate resilient economy can be further supported by tax incentives, interest rate subsidies, credit enhancement, and dedicated financial institutions for green financing to achieve long-term economic, and environmental resilience a reality.14

Global investment in “cap & trade” programs has tremendous potential to achieve a resilient low-carbon economy. Considered the cornerstone to the European Union’s policy to combat climate change, the Emissions Trading System (ETS) is the first, and still the biggest international system for trading greenhouse gas emissions. In fact, the ETS covers more than 11,000 power stations and industrial plants in 31 countries.10 Operating on a “cap and trade” principle, the ETS has the most potential to achieve climate change by its ability to regulate emission usage among its companies. The principle aims to reduce pollution by setting a maximum allowable level of pollution and financially penalizes companies that exceed their emission allowance. A “cap” or limit is set on the total amount of certain greenhouse gases that can be emitted by factories and power plants, and that limit is reduced over time so that the total percentage of emissions also decreases. The European Commission estimates a 21 percent decrease in emissions than in 2005; and by 2030, the mechanism is to reduce emissions from sectors covered by the ETS by 43 percent. The Environmental Defense Fund claims that a “cap & trade” system is the most environmentally, and economically sensible approach to controlling greenhouse gas emission because it encourages companies to use less.11 By this theory, the less companies emit, the less they pay, so it is in their economic benefit to pollute less. Furthermore, putting a price on Endnotes carbon gives a financial value to each one of the saved emissions, and thus the ETS 1. “Better Growth, Better Climate.” The succeeds in placing climate change on the New Climate Economy, 2014. agenda of company boards and their fi2. “Innovation and Investment: Drivers of

Low-Carbon Economic Growth for a New Climate Economy.” Climate Policy Initiative. Climate Policy Initiative, 2014. 3. Trends in Private Sector Climate Finance: Report Prepared by The Climate Change Support Team of the United Nations Secretary-General. Rep: United Nations, 2015. 4. “Innovation and Investment,” Climate Policy Initiative. 5. Trends in Private Sector Climate Finance, United Nations, 2015. 6. “Better Growth, Better Climate.” The New Climate Economy, 2014. 7. “Investor Expectations for the Green Bond Market,” Investor Network on Climate Risk. 8. “Innovation and Investment,” Climate Policy Initiative. 9. “Green Bonds Attract Private Sector Climate Finance.” The World Bank: Working for a World Free of Poverty. The World Bank Group, 10 June 2015. 10. “The EU Emissions Trading System (EU ETS).” European Commission, 2016. . 11. “How Cap and Trade Works,” Environmental Defense Fund: Finding the Ways That Work. Environmental Defense Fund, 2016. . 12. Ibid. 13. “Better Growth, Better Climate.” The New Climate Economy, 2014. 14. “Innovation and Investment,” Climate Policy Initiative.

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Roosevelt Review International Finance Corporation has issued $3.7 billion, including two $1 billion green bond sales in 2013.9 Proceeds from the World Bank and IFC green bonds are used to support renewable energy, energy efficiency, sustainable transportation and other low-carbon projects—including financing infrastructure projects to prevent climate-related flood damage—and build climate resilience.

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