Nov 08, 2022
The transition to net zero comes with a huge bill. Precisely how much is a subject of much debate, but there’s one argument that has been settled – the price of inaction on climate change is infinitely larger – and horrifying to contemplate.
Back in 2016, when many countries were still agreeing their climate commitments in the wake of the 2015 Paris Agreement, an UN Environment Program (UNEP) report suggested that the cost of adapting to climate change in developing economies could reach up to $500 billion a year by 2050.
More recently, it has been estimated that the worldwide capital expenditure on the physical assets and infrastructure for energy and land-use systems in the net-zero transition alone could amount to $275 trillion by 2050. An annual average of $9.2 trillion according to McKinsey in their January 2022 report.
It was consideration for the large sums required for effective climate action that became one of the motivations behind Article 9 of the Paris Agreement. Another motivation was the fact that some countries have contributed the least to climate change, yet they are paying the heaviest price. Low- and middle-income economies are most at risk from the growing ferocity and frequency of extreme weather events, rising sea levels, food insecurity and other climate threats. They’re paying the cheque that wealthier economies have written. Article 9 is designed to counter this injustice by committing developed countries to provide financial resources to assist.
As the flagstone for scaling up climate actions and achieving a just transition for developing economies, the opening day of COP27 is dedicated to climate finance. The innovative and blended finance and financial instruments, tools and policies needed to accelerate the transition to net zero will be discussed.
Importantly, the Day will also address how to mobilize the capital required – an area in which the Climate Investment Funds (CIF) are expert. CIF has been helping low- and middle-income countries adapt to and mitigate climate change since 2008 - channeling over $60 billion from governments and the private sector to support more than 370 projects in 72 countries.
Climate finance is a multi-sectoral, multi-partner, and multi-dimensional endeavor.
It is aimed at developing economies who want to join the push to net zero but do not have the capital to get started. Or access to reasonably priced credit and risk-friendly investors. Development banks or multilateral funds step in to buffer the risk and so increase the likelihood of success for the climate objectives of beneficiary countries.
There is no one size fits all. A range of below market-rate financial packages are tailored to the unique economic and infrastructural challenges of each beneficiary. Climate finance can come in the form of a grant to create the enabling conditions for a clean transition e.g., optimizing a country’s legal and policy framework for industry decarbonization. Alternatively, credit guarantees, and low interest loans could finance major projects in clean energy infrastructure, sustainable land use and so on.
CIFs blend of on the ground technical expertise and concessional finance tailored to host economies is now proven. A country led approach that collaborates with multilateral development banks (MDBs), the private sector and indigenous communities has assisted many low- and middle-income countries to deliver their Paris agreed Nationally Determined Contributions (NDCs) while stimulating new local markets in e.g., clean technology.
CIF’s model has an additional dimension - to attract private sector actors and other local investors to build on the original in-country investments. It has an impressive average ratio of co-financing generation; for every dollar from the original investment another 8 are crowded in. This approach works because it deploys innovative financial instruments, such as long-term loan tenures, to reassure non-government actors that investing in an area such as renewables in a developing economy is not necessarily high risk and that alternatively, it has greater long-term return prospects.
For example, in Kazakhstan, initial investments were structured as a grant to kickstart a commercially viable renewables market by enabling constitutional changes to the laws governing energy and feed in tariffs. While challenges still lie ahead e.g., switching out the country’s ageing power grid, targeted support like this has since attracted a further $1 billion of clean energy investment into the region. Presently, there are 115 clean energy projects in the country that have increased the region’s capacity by a factor of six.
The scale of the challenge ahead is vast, but with the support of the global community and effective, tailored, and targeted climate finance, it is not insurmountable. CIF expertise looks set to be in even greater demand between now and 2050.
