In 2009 Parties to COP15 in Copenhagen agreed to a global goal of mobilizing $100B (that’s right, billion) per year for climate finance by 2020. A recent OECD report indicated that we are well on our way to achieving that goal (with $62B committed in 2014). Unfortunately though, $100B may not even be enough to keep global temperature rise between 1.5˚C and 2˚C. For this reason, much of the discussion at COP21 has centered on the scale of climate finance. Exactly how much additional funding will be necessary? For now, the answer seems to be “more.”
In response to this need, the Global Environmental Facility (GEF), one of the entities responsible for providing climate finance under the UNFCCC, announced a new initiative today: the Climate Aggregation Platform (CAP). The GEF will seed CAP with $2M, which is expected to catalyze over $100M in co-financing from other partners, including from the Inter-American Development Bank.
CAP is just one piece of an ongoing effort by all global actors to increase access to climate financing from a variety of sources. The draft Paris Outcome places an emphasis on the use of public funds, but also acknowledges the role that private finance will play in addressing climate change. Private investors, which currently comprise about 25% of global climate investment, typically offer loans rather than grants. This means that the investors expect to make their money back over time. Therefore, to entice private
investors to promote clean energy in developing countries, there must be some indication that the project represents a sound investment. CAP aims to help facilitate these types of robust investment opportunities.
First, CAP will establish a global working group to provide key finance and industry stakeholders with transparent access to, and coordination of, climate-related projects in developing countries. CAP will also promote project standardization, with the goal of creating uniform contracts and repayment plans. Finally, CAP will develop in-country demonstration projects and provide technical support for other pilot transactions. These actions will serve to increase the number of qualified projects, creating a scalable pipeline of clean energy investments.
Establishing a streamlined framework for project development has two major benefits: It increases the penetration of clean energy technologies in the developing world, thereby serving climate change goals. It also allows investors to aggregate a large number of projects, thereby reducing the financial risk. In the same way that insurance companies profit by insuring large groups of people with a variety of health risks, climate investors will be more successful if they invest in large numbers of projects with a variety of risk profiles. As your financial planner will tell you, a diverse portfolio is generally a strong portfolio.
And confidence is high that, if we build it, they will come. Since the financial crisis of 2008, there is a significant appetite for impact investments, which are transparent investments in projects that have demonstrated social benefits. Many institutional investors, along with independently wealthy individuals, are actively seeking investments like clean energy projects in the developing world. There is approximately $46B in impact investment already under management, and that number is on the rise. Leveraging a small amount of public money has been shown to catalyze additional private investment in these types of projects. Some studies indicate that $1 of public funding can attract $20 of private funding. Just last week, Bill Gates alone pledged to contribute $1B in seed capital to potentially transformative energy systems with “near zero carbon emissions.” And he’s getting his friends to pitch in too.
Developing programs like CAP that foster a strong market for investment in climate-friendly projects is one of the most important things that come from COP21.