Prepared for Bridging Climate Change Policy Gap Conference Daniel Radov Director NERA Economic Consulting Stockholm 21 November 2016 Contents Targets and investment needs Defining climate ID: 557144
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Slide1
Climate Finance: What is Needed?
Prepared for “Bridging Climate Change Policy Gap” Conference Daniel RadovDirector, NERA Economic Consulting
Stockholm21 November 2016Slide2
Contents
Targets and investment needsDefining climate financeBarriers to private climate finance
Reducing the barriers to private climate financeConclusions and discussionSlide3
Targets and investment needs
IEA estimates that total energy investment needs for 2015-2030 amount to $36 trillion COP21 pledges require $13.5 trillion investment in energy efficiency and low-carbon technologies in 2015-2030 period
(also according to the IEA)Meeting “below 2°C” goal requires additional “green energy” investment… (plus other sectors)Current investments in renewables, energy efficiency range between $390-740 billion/yearIn 2010 developed countries pledged $100 billion/year by 2020 for climate-related investment in developing countries. 2016 “Roadmap to US$100 billion” reaffirmed this target ahead of COP22.
Total expected energy investment,
2015-2030, is $36 trillion (IEA 2015)
Based on total
2014
investment of $390 billion (CPI, 2016)
Based on total 2014
investment of $740 billion (UNFCCC, 2016)
Gap for private financeSlide4
Defining “Climate Finance”
Wide definition: All investments made globally to reduce emissions or promote climate resilience Narrower
definition: Focus on specific technologies, and/or on developing countries.Policy debate often focuses on increasing “developed to developing” flows But “internal” and “developed to developed” are just as significant for reducing emissions – if not more so
Targets of Financing:
Developed
Country Projects:
Renewable Energy
Energy Efficiency
Adaptation
…
Developing Country Projects:
Renewable Energy
Energy EfficiencyAdaptation…
Investment
Sources of Financing:
Developed Countries:Public SectorConcessionalNon-concessional
Private SectorMultilateral Development Banks (MDBs)Developing Countries:Public Sector
Private SectorSlide5
Barriers to
(private)
climate financeRiskiness of climate investments:Regulatory risks: Future evolution of policy, including risk of policy reversalAllocation risk: Level and duration of subsidy awarded to projects (under given policy regime)Technology risk: Uncertain performance characteristics of underlying (often new) technologyMarket risks
:
Fluctuation in market prices and volumes/demand affecting project revenues and costs
Counterparty
risk
: Counterparty actions and characteristics
Refinancing risk
: Refinancing possibilities for investment, including risk of low market liquidity for “exiting” investmentInsufficient investment returns given risksDiffuse and immature market opportunities
: E.g. search for investable markets in energy efficiencyInadequate investment structures and procedures: E.g. tenor mismatch as barrier for institutional investorsWhere does
international arbitration (commercial / investor-state) fit?Regulatory risk: Governments may renege on prior commitments (“bait-and-switch”). Investors may want “change of law” provisions built into contracts.
Domestic and/or e.g. Energy Charter Treaty disputes linked to policy reversals have so far not tended to go in favour of investors. What is it reasonable for investors to expect they
are protected from?Market risk: Long-term contracts and foreseeability of market developments an important source of disputes
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2
34Slide6
Reducing the barriers to private climate finance
Riskiness of climate investments: Various policies exist to de-risk investments: First-loss tranches taken by public entities; CfDs protect against market risk; “Danish model” in offshore wind etc.
Insufficient investment returns given risks: Government subsidies; UN Clean Development Mechanism (CDM) or similar crediting mechanisms, concessionary finance.Diffuse and immature market opportunities: Public finance can draw in private finance, with government funded or backed “green investment banks”. Inadequate investment structures and procedures: Financial innovation provides responses: Yieldcos in the US and UK, Green Bonds, EPC wraps to protect against risk of cost overruns and delays etc.
The above measures can also increase
scope for
disputes due to
increased
contractual
complexity
E.g. renewable support policies, carbon credit disputes, use of government to government funds
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2
3
4
UK GIB Mobilisation Rates (NERA,
2015)
CDM
Mobilisation Rates (UNFCCC, 2014)Slide7
Conclusions and discussion
There is a potentially large climate investment gap for private finance to fillBarriers to include regulatory and market
risk Various policy interventions and market innovations can lower existing barriers…But these may give rise to additional disputes (and stranded assets…)Dispute resolution procedures can help to distribute risk / rewardEconomics can help quantify the value of policy interventions, risk/reward trade-offs, and whether / how unexpected it is when things go wrongAdditional points for discussionInfrastructure is “easy”… and current infrastructure investment mainly helps with mitigation
Other sectors may be harder
Passenger transport
Building retrofits
Agriculture
(payments for land
stewardship, resilient
crop varieties, land reform…?) …and what about adaptation? Is there an investor “return” ? Slide8
Contact Us
© Copyright
2016NERA UK LimitedAll rights reserved.
Daniel Radov
Director
NERA London
+44 20 7659 8744
daniel.radov@nera.comSlide9
Sources of Financing (2014, US$ billion)
Measuring climate finance
Investment
Flow – Type (2014, US
$
billion
)
Targets
of Financing (2014, US
$
billion
)
Investment
Flow – Geographical (2014, US
$
billion
)
Source: Climate Policy Initiative,
Global Climate Finance – An Updated View on 2013 & 2014 Flows
, October 2016Slide10
Investment needs in context
Source:
UNFCCC
IEA estimates
total
energy investment needs
(2015-2030) are
$36
trillion
COP21 pledges
imply $13.5 trillion investment in energy efficiency and low-carbon technologies from 2015-2030
UNFCCC estimates 2014 investment in renewables, energy efficiency around $740 billion – implying $11 trillion cumulatively over 15 years