When COP 21 takes place in Paris this year, it will need to send a signal to business, investors, governments and the public that the transition to a low carbon, resilient world is inevitable.
A key part of the agreement will include climate finance.
An unprecedented financial dynamics on climate finance
The year 2014 was probably the ringing bell on climate finance. This issue was one of the most urgent in last year’s negotiations, as developed countries rushed to provide more than US$10 billion for the Green Climate Fund. In the private sector, climate bonds are increasing tremendously. In total, about US$331 billion a year has been flowing in to support projects that can lower greenhouse gas emissions and increase resilience to the effects to stop climate change.
But current investments are insufficient to meet the 2°C target
But while US$331 billion in climate finance is flowing globally, it is less than half the amount required to equal the climate challenge, particularly for developing countries whose fast-growing cities are making energy and infrastructure decisions today that will set their development course for the future.
To have an 80% chance of maintaining this 2°C limit, the IEA estimates an additional US$36 trillion in clean energy investment is needed through 2050 (or an average of $1 trillion more per year compared to a “business as usual” scenario over the next 36 years).
That level of money is available for investment now (the bond market alone is worth US$80 trillion) and innovative public and private sector leaders are finding ways to help investors overcome perceived risks and connect with projects.
Public and/or private finance for the Green Climate Fund?
That is the question on everyone’s minds now. The dynamics on climate financial flows clearly have to be continued and, for lack of a better word, continuous.
But part of these flows has to also be institutionalized, in order to provide the financial needs to support for least developed countries, and send positive signals to the rest of the world.
Developed countries have committed to provide US$100 billion by 2020. But the issue remains completely blurred.
Will the US$100 billion amount include private finance? And if it is, how? Also, how does public & private finance, like that coming from the EDF in France, account its climate bonds as part of the national contribution to climate finance?
These are questions on which we don’t have answer yet.
Scale a public finance roadmap is crucial
Public finance is the key lever in the climate finance machine.
The public’s sector role before everything else is to leverage private investment in a low-carbon future. We need to encourage both public and private finance, but their purposes are totally different. Public finance’s purposes are firstly, to enhance the financial flows on this issue and send positive signals to the investors.
It is secondarily to support developing countries in order to reach an equitable criteria on the contributions to the future regime. This is the same regime which will contribute to the increase in funds from emerging economies as well.
In this regard, if financial provisions for the Green Climate Fund are not mixed together with public and private finance, the flows will be much more transparent, much more adequate, and inspire much more confidence.
Sending positive signals on climate finance is a critical part of the ongoing work to secure an equitable and ambitious climate agreement. After the efforts of 2014, we need this positive environment to prosper, and pave the way to deliver a clear, well structured roadmap on climate finance.
Parties should agree on a detailed and time bound process for defining the pathway to US$100 billion by 2020. It’s a big hurdle, and we need to build up our public finance jumping muscles fast, or we risk stumbling to a low-ambition finish line.
This piece was written by Clement Bultheel from CliMATES