The UN’s Green Climate Fund is working to divert trillions of dollars away from investment in industries that contribute to climate change and towards investment in the businesses of mitigation and adaptation.
The question of who should pick up the bill for mitigation and adaptation measures associated with climate change has long been a contentious issue. Should only developed countries, which have contributed the most to climate change, shoulder the bill, or should larger developing countries lend a hand? The dispute hinges on whether historic emissions or current economic capabilities should be the basis for decisions.
The question has driven a wedge between developed and developing countries since the world first got together to pursue a multilateral response to climate change. The economic division was a decisive cause of the collapse of the 2009 Copenhagen Climate Summit. Last year, at the 21st Conference of the Parties to the UN agreement on climate change (COP21) in Paris, the division threatened to put a spanner in the works up until the very last minute.
The Paris Agreement was ultimately adopted after two weeks of marathon negotiations. It contains little concrete wording, however, on who will pay for the implementation of the national climate plans, so-called Intended Nationally Determined Contributions, or INDCs. Instead it repeats the ill-defined goal from Copenhagen of mobilising $100 billion by 2020 from a variety of sources. The wording allows for diverse interpretations and the source of finance is likely to remain a bone of contention between developed and developing countries.
The brutal arithmetic
Even if developed countries stopped all carbon emissions tomorrow, it would not be enough to avoid dangerous climate change. Meantime, less developed countries, which have contributed little historically to climate change and have utilised less fossil fuel, are being asked to follow a path of low-carbon and climate-resilient development.
Nicholas Stern, a prominent British economist, has dubbed this the “brutal arithmetic of climate change,” referring to the unfair aspect of demanding that developing countries refrain from exploiting their natural resources. But the need for them to pursue mitigation measures is pressing. Less developed countries are currently responsible for 65% of global carbon emissions and that percentage is continuously increasing, as more countries grow their way out of poverty.
While the Paris Agreement reflects this brutal truth by allocating mitigation responsibilities to both developed and developing countries, the agreement is largely voluntary. Incentives are still required to persuade developing countries to move completely beyond fossil fuels, such as offering green technology and large amounts of climate finance. Funding is also urgently needed to support countries in adapting to the adverse effects of climate change, such as flooding, droughts and water deficits.
Global flows of climate finance
Experts estimate that developing countries will require new investments of up to $300 billion annually by 2020 to limit their carbon emissions and another several hundred billion for adaptation. Resources are intended to come from a wide variety of sources, public and private, bilateral and multilateral, as well as more novel instruments, such as taxes on financial transactions.
Despite the Paris Agreement, the voluntary flow of public climate finance continues to be inadequate and unpredictable. Signatories to the agreement are now looking to private equity, venture capital and institutional investors. The ambition is to shift some of the trillions of dollars in annual business-as-usual investments towards green initiatives.
The good news is that the amount of private climate finance is growing and will continue to grow. Divestment from fossil fuel is a beginning. The Climate Policy Initiative, a global advisory organisation, estimates that the private sector annually invests $243 billion in clean tech solutions. Danish pension funds PensionDanmark and PKA are among the frontrunners, with an aggregate climate investment portfolio of $4 billion, which is growing steadily.
The bad news is that most green investments are made in developed countries and do not count towards the $100 billion intended to flow from north to south. Moreover, 92% of private climate finance is raised and spent within the same country. The weak economies of developing countries have a hard time attracting low-carbon and climate-resilient investments from private sources.
Tapping into the world’s major money streams requires introduction of the right regulations and fiscal instruments. One way is to blend concessional public finance with private capital. Some larger developing countries are already doing this. China is leading a global revolution in renewable energy, driven by supportive policies and attractive incentives for the private sector. Alone, it accounted for $84 billion of public and private climate finance last year.
Scaling up
In the run-up to 2020, when the Paris Agreement is supposed to take effect, other developing countries are expected to follow China’s lead. Denmark has a proven role to play in facilitating low-carbon pathways by exporting advanced clean energy technology and providing grants and loans to local financiers and project backers, with longer tenors and grace periods than they could otherwise access. Africa’s largest wind farm, Lake Turkana in Kenya, is demonstrating what can be achieved. It is partly financed by the Danish Investment Fund for Developing Countries and equipped with wind turbines from Danish supplier Vestas.
Danish know-how is also being utilised by international organisations. Among those is the $10 billion UN Green Climate Fund, which is advised by PensionDanmark’s director, Torben Möger Pedersen, a self-taught wind investment expert. The fund hopes to lift barriers to investment in developing countries, partly by helping protect investors from climate-related risks and partly be facilitating good policy. It intends to disburse equal funding for adaptation and mitigation activities and will work through a variety of partners, such as multilateral development banks, private sector entities and NGOs.
One way the fund will attract private sector finance is to cover first-loss through grants to risky projects. So far a variety of mitigation and adaption projects worth $375.6 million have been approved for funding. These range from energy-saving insurance for energy-efficiency investments by small and medium-sized enterprises in Central America, through off-grid solar and clean energy products in East Africa, to improving the resilience of vulnerable coastal communities in Vietnam, Senegal and the island state of Tuvalu.
The Green Climate Fund intends to raise its output to $2.5 billion a year starting in 2016. If successful it will be a game-changer in the fight against climate change, both by attracting private sector mitigation finance, but especially by scaling up finance for adaptation in the lowest income countries. •
TEXT Jonas A. Bruun