Three reasons to be optimistic about climate finance flows

COMMENT: Data shows climate funds dropped $28 billion in 2013, there are signs for hope, argues Barbara Buchner

(Pic: Lance Cheung/Flickr)

(Pic: Lance Cheung/Flickr)

By Barbara Buchner

For those who hope the world can avoid dangerous climate change, some recent developments have given cause to celebrate. 

Last week, the world’s two largest emitters – the US and China – reached a deal to tackle emissions.

This week, the US, Japanese, and UK governments have joined others by pledging billions to the Green Climate Fund to help developing nations deal with climate change.

These political announcements are clearly timed to inject momentum into UN climate negotiations in December.

But key questions remain unanswered: What do these financial pledges mean in terms of existing investment in a low-carbon economy future? How should money be spent? And are we on the right track?

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At Climate Policy Initiative, our analysis of global climate finance flows helps to identify who is investing in climate action on the ground, how, and whether investments are keeping up what is needed to transform the global economy.

We released the latest edition of our Global Landscape of Climate Finance report yesterday.

It shows global climate finance has fallen for the second year running and we are falling further behind the level of investment needed to keep global temperature rise below two degree Celsius – but reveals some positive news as well.

Firstly, that nations around the world are investing in a low-carbon future in line with national interests.

Last year, climate finance investments were split almost equally between developed and developing countries, with USD 164 billion and USD 165 billion respectively.

With almost three-quarters of total investments being made in their country of origin, the majority of climate finance investments are motivated by self-interest—either for governments or businesses.

Motivations include increasing economic productivity and profit, meeting growing energy demand, improving energy security, reducing health costs associated with pollution, and managing climate risk including investment risks.

Secondly, that getting domestic policy settings right offers the best opportunity to unlock new investment.

When policy certainty and public resources balance risks and rewards effectively, private money follows.

In 2013, private investment made up 58% of global climate finance with the vast majority (90%) of these being made at home where the risk to reward ratio is perceived relatively favourably.

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Targeting the needs of domestic investors offers the greatest potential to unlock investment at the necessary global scale.

International and domestic public policies, support and finance have complementary roles to play: it is significant, for instance, that almost all of the developed to developing country finance we capture came from public actors.

But ultimately, it is getting domestic policy frameworks right, with international support where appropriate, that will drive most of the necessary investment from domestic and international sources.

Thirdly, that despite a fall in overall investment, money is going further than ever.

While investment fell for the second year running, this is largely because of decreased private investment resulting from falling costs of solar PV and other renewable energy technologies.

In some cases, deployment of these technologies is staying steady or even growing, even though finance is shrinking.

In 2013, investment in solar fell by 14% but deployment increased by 30%.

Technological innovation is reducing costs and because of this renewable energy investments in some markets are cheaper than the fossil fuel alternatives, particularly in Latin America.

Achieving more output for less input is one of the basic foundations of economic growth, so this is great news.

From solar PV, to energy efficiency and agricultural productivity, growing numbers of low-carbon investments are competing with or cheaper than their high-carbon counterparts.

This despite a highly uneven playing field in which global subsidies to fossil fuels continue to dwarf those for renewables and where carbon prices do not reflect the true costs of emitting CO2.

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So what do our findings mean for the recent China/U.S. deal and Green Climate Fund pledges?

Increasing political pressure on other countries to keep pace in terms of their domestic action and international commitments is an encouraging sign as the deadline nears for finalizing a new global climate agreement in Paris just one year from now.

Reaching a global accord offers the best prospect for tackling climate change.

But we must recognize that international agreements are themselves, guided by collective national interests.

There is clear recognition that international public resources should complement and supplement national resources where these are insufficient.

But if we are to bridge the investment gap they should also be focused on finding ways to lower costs, boost returns and reduce risks for private actors. Public finance alone will not be enough to meet the climate finance challenge.

Many private investors are ready to act.

In September, over 300 institutional investors from around the world representing over $24 trillion in assets called on government leaders to phase out fossil fuel subsidies and implement the kind of carbon pricing policies that will enable them to redirect trillions to investments compatible with fighting climate change.

Businesses and citizens are investing, and technological innovation means more and more investments are making economic and environmental sense.

Accompanying innovation with policy, appropriately targeted finance and new business models, in a growing number of economies, can build the momentum and economies of scale to make the low-carbon transition achievable.

The low-carbon transition isn’t just a way of reducing climate risk, it also represents a huge investment opportunity.

Dr. Barbara K Buchner is Senior Director at Climate Policy Initiative. In 2014, she was named one of the most influential women in climate change. She is lead author on the Global Landscape of Climate Finance reports.

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