Financing Climate Change Action

POLICY PERSPECTIVES

OECD . 1 “In the interest of the next generation, we simply cannot afford to put climate change on the back burner… unlike the financial crisis, we do not have a ‘climate bailout option’ up our sleeves.”

Angel Gurría, OECD Secretary-General

November 2014

2 . Financing climate change action POLICY PERSPECTIVES POLICY

FINANCING Climate Change Action

Successfully tackling climate change developing countries is a priority. This requires urgent policy action across will require strengthened measurement, countries to scale-up and shift public reporting and verification (MRV) systems and private sector investments to raise accountability and transparency, towards low-carbon, climate-resilient and improved country systems to use infrastructure. An integrated framework climate finance effectively. The OECD with clear and stable climate policies, is assisting countries in their domestic sound investment policies and targeted and international efforts to mobilise and financial tools and instruments is track climate finance to ensure a smooth essential to overcome barriers to private transition to a low-carbon, climate- sector investments and address market resilient economy and greener growth. failures. Scaling up climate finance to

Key challenges: 1. Scale up climate finance 3. Ensure adequate financing flows and shift investment for adaptation to support green growth 4. Track climate finance 2. Strengthen domestic policy flows to and in developing frameworks in support of countries to build trust low-carbon and climate- through transparency and resilient infrastructure accountability investment

OECD . 3 Scale up climate finance flows and shift investment 1 to support green growth

Mobilise and shift public and private sources of investment

Because infrastructure has long made now from carbon-intensive to large-scale private sector engagement. operational life, infrastructure low-carbon infrastructure, and do this Limited public financing should be used investment decisions must be placed at scale. as a time-bound catalyst to leverage at the centre of efforts to tackle climate private investments and to target cost- change. Choices made today about Irrespective of climate change, effective activities unlikely to attract types, features and location of new and investment in infrastructure in the sufficient private funding on their own, renovated infrastructure will lock in coming years needs to be scaled up such as capacity building, education future levels of emissions and determine significantly to support the broader and training, and technology research the extent and impact of climate change. economic growth and development and development. For example, solar and wind power agenda. In OECD countries, many facilities, smart grids, demand-side infrastructure networks for water, management, floodplain levees and electricity and transport are in need coastal protection, road-side drainage of replacement and upgrading. In designed for increased precipitation, and developing countries, partly due to retrofitting buildings for energy efficiency rapid urbanisation, a major part of the help to mitigate or adapt to climate infrastructure stock required to meet change, or to do both. Such investments development goals is yet to be built. in low-carbon, climate-resilient (LCR) infrastructure that are compatible with In the face of growing infrastructure meeting the 2-degree Celsius climate needs and fiscal constraints, such change goal may come at an extra cost, transformational change will require but this increment is just a fraction of large-scale private investments. The the finance needed for infrastructure domestic public sector plays and will overall, and costs will be offset to a continue to play the leading role to significant extent by fuel savings and guide and “jump start” investment health benefits. Such investments could when needed. Public engagement also help governments avoid large costs should aim to address key market of inaction in the long term (OECD, failures and externalities as well as 2012a). There is an opportunity – and delivery of public goods, e.g. investment urgency – to build more of the right type in power grids to enable growth in of infrastructure. To do this, we need to new renewable energy sources. But find ways to shift the investments being achieving LCR development will require

Barriers to private investment in green infrastructure

Domestic and international private investment in green infrastructure is still seriously constrained by market failures and specific investment barriers. Barriers to private investments in infrastructure projects include high upfront capital costs and unattractive risk-return profiles. Country-specific risks may also limit the attractiveness of such investments. In addition to traditional infrastructure challenges, green infrastructure projects have to deal with specific barriers that limit engagement of the investment community. This includes a weak or partial environmental policy backdrop that fails to sufficiently price pollution, renders clean infrastructure projects less competitive than polluting projects, introduces regulatory risk, and raises uncertainty for private investors, e.g. sudden or retroactive change to support systems along with a lack of certainty on climate policies. Other barriers to investment include a lack of investor familiarity and expertise with green infrastructure projects, and limited information on project risks and returns. Finally, appropriately-structured financing instruments such as green bonds and funds need to be developed to provide the risk-adjusted return profile that private investors expect.

OECD work also shows that international investment in green energy is impeded by rising international trade and investment restrictions, e.g. through the use of local content requirements in solar photovoltaic (PV) and wind energy (OECD, 2015 forthcoming).

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Scale-up climate finance flows to developing countries

In an important step forward to scaling Recent OECD analysis shows that both up financing for climate change action, bilateral and multilateral external the Cancún Agreements called on development finance has a positive and developed countries to provide new significant effect in mobilising private and additional resources for developing finance flows to developing countries, countries: with a higher effect on domestic than on international flows. These results • USD 30 billion “fast start financing” are robust across different models over 2010-12. and estimation approaches. The analysis suggests that the effect of • A longer-term goal of USD 100 multilateral public finance is greater billion per year by 2020 to come on the decision whether to invest at all from public and private sources. than on the volume of investment once the decision to invest is taken (Hašcic North-South finance flows for et al., 2014). It also shows that raising mitigation still represent a fraction of the ambition of domestic policies in the total finance flows in the emitting developing countries to incentivise sectors. In the 2009-10 period, aggregate renewable energy investment, such as North-South flows for mitigation and through feed-in tariffs and renewable adaptation are estimated in the range energy quotas, will be vital to attracting of USD 70 to 120 billion annually private investment at scale to achieve (Clapp et al., 2012). This is mainly low-carbon goals. from private sources (i.e. foreign direct External official development finance investment (FDI), other private flows operates on at least two levels to and investment, and finance flows support green investment: i) to directly associated with the carbon market). attract private co-financing and While there is still no formal agreement investment for green infrastructure; on what to count as climate finance and ii) to work with middle-income under the United Nations Framework country governments to support policy Convention on Climate Change reform processes and build local (UNFCCC) targets, the magnitude of the capacity and conditions so as to make different flows suggests that private green investment viable in the longer finance will play a critical role in the term (OECD, 2013a). Delivered through future (Clapp et al., 2012; World Bank/ bilateral or multilateral development IMF/OECD/RDBs, 2011). Mobilising co-operation channels, external official private sector investment is clearly development finance often has a essential to successfully tackling catalytic role in shifting and scaling up climate change. green investment.

Removing fossil-fuel subsidies

Removing fossil-fuel subsidies has the potential to lower the global cost of reducing GHG emissions, and improve countries’ fiscal outlooks through reduced public expenditure and increased tax revenues. Subsidy removal would help shift the economy away from carbon-intensive activities, encourage energy efficiency, and promote the development and diffusion of low-carbon technologies and renewable energy sources. Fossil-fuel consumption subsidies amounted to USD 550 billion in 2013 in emerging and developing economies, while support for fossil-fuel production and consumption in OECD countries amounted to an estimated USD 55-90 billion per annum in recent years. Phasing out fossil-fuel subsidies can pave the way for carbon- pricing policies by helping to “get the prices right”. However, subsidy reform is politically challenging and can in some cases have negative impacts on low-income households who spend a higher share of their income on energy products. Subsidy reforms must be implemented carefully to ensure that any negative impacts on household affordability are mitigated through appropriate measures , e.g. means-tested social safety net programmes. To achieve intended social benefits, it is preferable to target the support directly at those who most need it, rather than to maintain an across-the-board subsidy to all. Reforms should also be carefully sequenced and phased-in with advance notice to allow businesses and consumers to adapt to the new market prices.

Sources: OECD (2013b; 2012b; 2011); IEA, OECD, OPEC and World Bank (2011, 2010); IEA (2014, 2011).

OECD . 5 Strengthen domestic policy frameworks in support of 2 green infrastructure investment

Integrate climate and investment policies In a series of case studies, the elements of the policy framework have been through a green investment policy framework applied in different sectors and country contexts. Although the elements of Governments have a central role (3) Establishing specific financial good practice for an integrated climate- to play to mobilise capital to LCR policies, regulations, tools investment policy framework are likely infrastructure in the establishment and instruments that provide to be similar for all countries and sectors, of reform agendas that deliver transitional support for new green country contexts do matter. Policy mixes “investment grade policies”. To technologies. These include: address barriers to LCR infrastructure and design will need to be tailored to the financial reforms to support long- investment, climate change policies strategic priorities and needs of sectors term investment and insurance and their effectiveness need to be and actors within unique national considered in a broader national markets; innovative financial circumstances. The OECD is currently policy context, including the enabling mechanisms to reduce risk or identifying lessons learned from case environment for investment and increase market liquidity; and studies, drawing connections to other development. The OECD has developed transitional direct support for LCR OECD work on policy frameworks elements of a “green investment policy investment. to promote green infrastructure framework” to help governments (4) Harnessing resources and building investment, and developing tailored create and improve domestic enabling capacity. This includes R&D for guidance to scale-up private sector conditions to shift and scale up green technology; human and investments in specific infrastructure private sector investments in green institutional capacity building to sectors and country contexts. The infrastructure (Corfee-Morlot et al., 2012; support LCR innovation; monitoring policy framework report will also draw see Figure 1). This policy framework can and enforcement; and climate risk lessons from a forthcoming case study guide domestic reforms to steer use of and vulnerability assessment. jointly undertaken by the OECD and limited public funds while also enabling CDC Climat Research (Cochran et al., and incentivising private investment to (5) Promoting green business and 2014 forthcoming), which analyses the simultaneously deliver climate change consumer behaviour. This includes role of five Public Finance Institutions and local development goals. information policies, corporate (PFIs) in fostering the low-carbon energy reporting and consumer awareness transition through domestic climate The proposed approach towards a green programmes, and public outreach. finance activities. investment policy framework consists of five elements (see Figure 1): Figure 1. Towards a Policy Framework for Green Investment

(1) Setting goals and aligning policies across and within levels of government. This includes: clear, long-term vision and targets for infrastructure and climate change; and policy alignment and multi-level governance, including stakeholder 1. Strategic goal setting engagement. and policy alignment

(2) Reforming policies to enable 5. Promote green 4. Harness 2. Enabling policies investment and strengthen market business and resources and and incentives for incentives for LCR infrastructure consumer build capacity LCR investment investment. This includes: sound behaviour for an LCR investment policies to create open economy and competitive markets; and 3. Financial policies and market-based and regulatory policies instruments to “put a price on carbon”, remove fossil-fuel subsidies and correct market failures.

Source: Corfee-Morlot et al., 2012.

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Tailor policy tools to specific investors, including institutional investors

Traditional sources of private capital classes which can deliver steady, • Promoting market transparency such as banks have increasing preferably inflation-linked, returns and improving consistent data constraints on their ability to support with low correlation to publicly traded collection. long-term investments due to equity and debt. In order to attract financial turbulence, deleveraging and institutional investment in LCR Moving from the current mind-set to a impending financial regulations such infrastructure, governments can take a longer-term investment environment as Basel III and Solvency II. In this number of key actions (Kaminker et al., also requires a change in investor context, institutional investors such as 2013). In addition to setting the wider behaviour. The market, by its nature, pension funds, insurance companies green investment policy framework is unlikely to deliver such a change. and sovereign wealth funds could play and creating favourable framework Major policy initiatives such as a key role in financing the transition conditions for investment as outlined creating public “green investment to a low-carbon economy. In 2013, on page 3, these actions include: banks” are needed in a variety of institutional investors managed USD areas. Institutional investors need to 87 trillion in assets in OECD countries, • Providing a national be brought into the debate with policy including USD 24 trillion from pension infrastructure road map that makers. funds (which received USD 2 trillion would give investors confidence in annual flows) and USD 26 trillion in government commitments The OECD is developing policy from insurance companies. However, to green infrastructure and guidance on long-term investment only 1% of large pension fund assets demonstrate that a pipeline focusing on the role of institutional are allocated directly to infrastructure of investable projects will be investors (see www.oecd.org/finance/ projects and an even smaller slice forthcoming. lti). As part of this effort, a forthcoming of this goes to green infrastructure report provides a framework for • Facilitating the development (OECD, 2013c). But interest in direct policymakers to better understand of appropriate financing investment has picked up in recent the process and channels through instruments and funds, such years. For instance, PensionDanmark which institutional investors make as green bonds and listed has a dedicated team working on sustainable energy investments funds, or de-risking tools such renewables and infrastructure (in projects or companies) and the as guarantees and other credit investments and is placing up to 10% methods available for facilitating these enhancements. of its investments in these areas. types of investments (Kaminker et al., • Reducing the transaction costs 2014 forthcoming). This work builds In the wake of the financial crisis, of investments by supporting on analysis examining case studies institutional investors are redefining securitisation with prudent of green investment (Kaminker et al., their investment and risk allocation oversight while engaging smaller 2013), which was transmitted to the strategies. Given the prevailing low investors and pooling smaller G20 Finance Ministers and Central interest rates and weak economic assets. Governors’ meeting and annexed to growth prospects in many OECD • Promoting public-private the Communiqué of their meeting in countries, institutional investors dialogue on green investments. October 2013. are increasingly looking for asset

OECD . 7 Strengthen domestic policy frameworks in support of 2 green infrastructure investment continued

Addressing barriers OECD Policy Guidance • Financial market policy: strengthening domestic financial for investment for Investment markets and providing specific in clean energy in Clean Energy financial tools and instruments. infrastructure Infrastructure • Governance of energy market institutions: enhancing OECD analysis and tools are helping To help governments identify ways to co-ordination between different levels governments to strengthen their enabling mobilise private investment in clean of governance, e.g. to align national environment for clean energy investments energy infrastructure, the OECD has and sub-national policies, ensuring by identifying potential roadblocks in the developed the Policy Guidance for the independence of the electricity areas of investment policy and promotion, Investment in Clean Energy Infrastructure market regulator, and co-ordinating energy market design, competition (OECD, 2014 forthcoming). the planning and deployment of the and financial markets. Local content electricity grid with that of clean requirements for wind and solar PV energy The Policy Guidance is a non-prescriptive energy generation. can also hamper international investment tool which raises key issues for policy by raising input prices in these globalised makers’ consideration, including in the • Other policies and cross-cutting industries. areas of: issues: regional co-operation; making and implementing the choice • Investment policy: applying between public and private provision investment policy principles such of clean energy infrastructure; and as non-discriminatory treatment of ensuring that clean energy policies international investment, intellectual are compatible with World Trade property protection and transparency. Organization (WTO) rules.

• Investment promotion and The Policy Guidance benefited from facilitation: improving coherence substantial contributions by the of the broad system of investment World Bank and the United Nations incentives and disincentives, Development Programme (UNDP) and e.g. by setting long-term goals, setting was annexed to the Communiqué of well-targeted and time limited G20 Finance Ministers at their meeting incentives, facilitating the licensing of in October 2013 (OECD, 2013d). renewable energy projects.

• Energy market design/competition The OECD will now apply the Policy policy: levelling the playing field Guidance to specific country contexts, between independent power in partnership with interested countries producers (IPPs) and state-owned and international organisations, through enterprises (SOEs) and between undertaking Clean Energy Investment national and foreign actors to tackle Policy Reviews to help countries make the market rigidities that favour fossil- most of their clean energy investment fuel incumbency in the electricity potential. sector.

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OECD In order to help government address market failures in the transport sector, the OECD has applied the five elements of a policy in the transport sector, to help government market failures In order address 2013). A key challenge (Ang and Marchal, investment to the case of sustainable transport infrastructure framework for green the non-monetised costs and benefits associated with mix of policy tools to better capture is to identify the appropriate projects. of sustainable transport infrastructure the risk- return profile and improve sustainable transport infrastructure The case of sustainable transport The case of sustainable There sector. driven by the road gas (GHG) emissions, largely contributor to global greenhouse is the second largest Transport in or to build new infrastructure existing infrastructure investments to renovate is a need to scale-up transport infrastructure is avoid lock-in into carbon-intensive and climate-vulnerable development pathways, there economies. To rapidly growing the absence of pricing mechanisms for However, sustainable transport infrastructure. also a need to shift investment towards externalities the existence of fossil-fuel subsidies (GHG emissions, local air pollution and congestion) and transport-related transport. favour investments in carbon-intensive road Strengthen domestic policy frameworks in support of 2 green infrastructure investment continued

Overcoming barriers Taking a value-chain approach, the report considers whether to international LCRs are hindering international investment in clean investment and competitiveness in the solar PV and wind energy energy sectors. By raising the cost of inputs for downstream activities such as Over the past decade, policy makers project development, installation, have provided substantial support to system integration, operations and clean energy that has been beneficial maintenance, LCRs can increase to both domestic and international installation costs, leading to reduced investment. Since the 2008 financial demand for solar and wind power crisis, however, the perceived generation installations, higher potential of clean energy to promote electricity prices and reduced economic growth and employment investment in renewable energy has led several governments to capacity. design and implement industrial policies aimed at supporting domestic manufacturers, especially in the solar PV and wind industries.

The project on “Overcoming Barriers to International Investment in Clean Energy” takes stock of policy measures that may distort international competition and hamper international investment in solar PV and wind energy. This project also assesses the possible impacts of these policy measures across the solar PV and wind energy value chains, with a focus on local content requirements (LCRs) (OECD, 2015 forthcoming). This report provides evidence to inform policymakers’ decisions in designing clean energy support policies, with a view towards levelling the playing field for international investment in clean energy.

Research shows that LCRs have been planned or implemented at national or sub-national level in at least 21 countries including in 7 OECD and 10 emerging economies, for the most part since 2009. Other existing trade and investment-restrictive measures have also been implemented, including FDI regulatory restrictions, divergent national standards and trade measures such as import tariffs and domestic trade remedies.

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OECD . 11 3 Ensure adequate financing for adaptation

The enabling Adaptation can ameliorate, but Financing climate will not necessarily prevent, the framework for negative effects of climate change. change adaptation in adaptation finance The appropriate risk-sharing and developing countries risk-transfer mechanisms such as Action to support climate resilience insurance will also need to be in place Adaptation and development are does not always entail large upfront to manage increasing risks, while inherently linked. OECD Development investments. Policy will play a role encouraging risk-reduction activities Assistance Committee (DAC) members and so-called “soft” measures, such (OECD, 2014; OECD, 2009). are working together to integrate as improving access to climate adaptation to climate change into all information or reforms to land-use their development activities at national, planning, are a vital element of The private sector has sectoral, project, and local levels (OECD, building resilience and incentivising a key role to play in 2009). Total bilateral adaptation-related adaptation investment. For example, aid commitments by members of the in rapidly growing urban coastal financing adaptation OECD’s DAC reached USD 9.3 billion areas the rise of flood risk is well per year in 2010-12, representing 7.1% documented (Hallegatte et al., Many of the benefits of adaptation are of total official development assistance 2013). This risk can be managed local and private, which can provide (OECD DAC Statistics, 2014a). by mainstreaming climate change a powerful incentive for private into urban land use, zoning and investments to manage those risks. infrastructure planning which in However, recent OECD work has shown turn shapes investment (OECD, 2014). that private action on adaptation – Planning for more frequent and whether it be at household or firm extreme disasters will also help to level – is lagging behind awareness limit damages, such as through better (Kato et al., 2014; Mullan et al., 2013; warning systems and evacuation Agrawala et al., 2011). Market failures, planning (Hallegatte et al. 2013).These limited examples of successful public- “soft” measures have been a central private co-operation in adaptation focus of countries’ adaptation efforts activities, and outdated institutional to date (Mullan et al., 2013; OECD, arrangements can all act as barriers to 2010). private investment in climate change adaptation. Where investments in infrastructure will be required, the risks of over- or Some companies have already begun under-investment can be managed to invest in managing the risks and by designing in flexibility at the responding to new opportunities outset. Tools such as robust decision from a changing climate (Agrawala et making and real options analysis al., 2011). Capacities, incentives and can be used to design strategies that awareness of risk all play an important can accommodate uncertainty about role in encouraging action. Partnership how the climate will evolve in the between the public and private future (OECD, 2013e). The approach sectors can help to raise awareness, is particularly useful in cases where strengthen capacities and ensure that projects are scalable, have high the right incentives are in place. sunk costs and long lead times, and there is an expectation of improved information over time (OECD, 2008; OECD, 2013e).

12 . Financing climate change action 12 . Financing climate change action POLICY PERSPECTIVES POLICY

Given that failure to adapt could impede development, particularly in the poorest countries and communities, it is essential to ensure that adaptation interventions are delivering results. This may require development co-operation providers develop and apply “soft” measures to support the resilience of states, communities and households, e.g. through joint risk assessments (OECD, 2013f).

The OECD recently surveyed approaches used to monitor and evaluate adaptation in development co-operation and identified examples of emerging good practice in this area (Lamhauge et al., 2011; Lamhauge, 2014 forthcoming). Given the long-term perspective of most adaptation initiatives it is important to clearly include the effects of future climate change when selecting indicators and generating baselines.

Beyond the key role for external development finance, there is also a role for the private sector to support adaptation in developing countries. At the local level, OECD analysis of microfinance in Bangladesh found that 70% of existing portfolios of the microfinance lenders analysed supported climate change adaptation (Agrawala and Carraro, 2010). In the longer term, instruments such as microfinance have the potential to be self-sustaining, but there is a need for public funding to pilot new methods and initiate new projects in the near term.

Further OECD work on adaptation and development planning, policy and co-operation is exploring: (a) risk management, reduction, transfer and sharing instruments; (b) opportunities to support climate change adaptation and resilience at the sub-national level, with a focus on cities; and (c) further work on monitoring and evaluation adaptation interventions.

OECDOECD .. 13 Track climate finance flows to build trust through 4 transparency and accountability

Strengthening Measurement, Reporting and Verification (MRV) systems for climate-specific financial flows to developing countries

Tracking climate finance to and in Developing an integrated system assistance reporting to the DAC’s developing countries is challenging is particularly necessary to track Creditor Reporting System (CRS) as flows come from different sources the evolution of flows and to avoid whereby each bilateral aid activity - national and international, public double counting over time and across is screened and identified as either and private - and are provided via the variety of finance providers and targeting mitigation and/or adaptation different channels, notably bilateral instruments. as a principal or significant objective. and multilateral (Clapp et al., 2012; Data on mitigation-related aid have Buchner et al., 2011). Significant It is crucial to strike the right balance been collected since 1998, adaptation- progress is being made on the between ensuring robust MRV and related aid from 2010, and since 2012 measurement and reporting of incurring a reasonable cost burden. partial reporting has begun on other climate finance under the UNFCCC, To this end, efforts should build on official flows (i.e. non-concessional notably through the Biennial Reports, existing data systems, including the loans). supported by reporting guidelines. UNFCCC Biennial Reporting and However progress relates largely to review process as well as the statistical The OECD DAC Joint ENVIRONET- monitoring public climate finance systems of the OECD’s Development WP-STAT Task Team is currently flows. Significant limitations remain Assistance Committee (DAC) and other working to improve the quality, in reporting on private finance, international sources of information coverage, communication and use of with no single system providing a (Corfee-Morlot et al., 2009). the Rio marker data. This includes comprehensive picture. advancing collaboration between the Building on existing OECD DAC, Multilateral Development Outstanding political and technical systems to track Banks (MDBs) and other international questions continue to slow the financial institutions to reconcile accurate measurement and monitoring public financial flows methodological approaches and of climate finance flows. For example, identify multilateral climate finance it remains unclear exactly which The OECD DAC has a robust system flows within the DAC statistical instruments and types of flows should for measuring and monitoring climate framework. A key objective is to be counted and how to identify them. change-related aid: the Rio markers provide full coverage and reconciliation Confidentiality can also impede on Climate Change Mitigation and of bilateral and multilateral flows, detailed reporting of some flows, such Adaptation. The Rio markers are based while ensuring there is no double- as export credits and private finance. on providers of official development counting. Moreover, the elements required for a suitable verification system are yet to be identified. Figure 2. Climate-related Aid (bilateral commitments): Annual averages over 3 years

25 18% Climate-related aid: "Significant" objective

Climate-related aid: "Principal" objective 16% The need for an Climate-related share of Total ODA 20 integrated MRV 14% system for climate 12% 15 finance 10%

8% Key elements for developing a 10 comprehensive framework for 6% Share of Total ODA (%) ODA of Total Share the Measurement, Reporting and USD, Billion (2011 Prices) 4% Verification (MRV) of climate change 5

support are: consistent definitions, 2% clear methodologies, robust and 0 0% integrated data management systems, 2004-6 2007-9 2010-12 and transparency. Source: OECD DAC Statistics, May 2014.*

14 . Financing climate change action POLICY PERSPECTIVES POLICY

Improving the Figure 3. Climate-related Aid, Lower and Upper Bounds, Annual Average 2010 to 2012 tracking of private Mitigation Only Mitigation and Adaptation sector flows Adaptation Only

Tracking private climate finance 14% and estimating how public finance Lower Bound: "Principal" Objective 75% 11% USD 12.8bn interventions mobilise private climate finance and investment is crucial. Yet there is currently limited understanding of private capital flows to activities to tackle climate change beyond large-scale renewable energy projects, with critical data gaps for sustainable transportation, water, land-use, energy-efficiency and Upper Bound: "Principal" & "Significant" 57% 18% 25% USD adaptation (Caruso and Jachnik, 2014). Objective 21.5bn Considering the significant role that private capital plays in financing climate action, an improved understanding of the volume and characteristics of these flows - 5 10 15 20 25 is useful in: i) assessing overall progress Source: OECD DAC Statistics, May 2014. USD Billion (2011 Prices) on the transition towards low- carbon and climate-resilient economies; ii) core contributions to multilateral building trust and transparency around Climate-related aid organisations was estimated at an international agreements to mobilise additional USD 4 billion in 2012 (based private finance; and iii) informing the Total bilateral climate change-related on partial data received to date), bringing design and use of public interventions to aid provided by members of the OECD’s the estimated total for climate-related do so. Development Assistance Committee (DAC) increased at a steady pace over aid to USD 25.5 billion in 2012. To facilitate further research in this the past decade. Estimates suggest that The Rio markers are descriptive rather area, the OECD is co-ordinating a the upper bound for climate-related aid 1 than quantitative and allow for an Research Collaborative on Tracking reached USD 21.5 billion on average approximate quantification of financial Private Climate Finance, building upon per year in 2010-12, representing 16% flows targeting the objectives of the Rio initial research by the Climate Change of total official development assistance. conventions. Not all climate-related Expert Group (Caruso and Ellis, 2013). For 59% of the climate-related aid (USD aid is reported by parties as climate The aim of the initiative is to contribute 12.8 billion), mitigation or adaptation finance to the UNFCCC, but many OECD to data collection and the development was the principal objective; for the DAC members draw on this data as a of more comprehensive methodologies remainder (USD 8.7 billion) it was a starting point and apply adjustments and systems to measure private significant objective (see Figure 2). Of to report only a share of this as climate climate finance flows to, between, the total climate change-related aid, 57% finance (Gaveau and Ockenden, 2014 and in developing countries as well as addressed mitigation concerns only, 25% forthcoming). estimate their mobilisation by public addressed adaptation concerns only, and interventions. Future efforts to improve 18% consisted of activities designed to tracking of private flows could involve address both (see Figure 3). extending reporting systems for public Notes Finance for climate change also finance, e.g. DAC CRS, to include private 1. For technical reasons, statistics on climate- co-finance, improving bottom-up flows through multilateral financing related aid for the United States are currently institutions. While earmarked unavailable and excluded from these figures. measurement and reporting of climate- The United States is working to review its data specific private finance transactions, contributions channelled through collection methodology and will supply data for 2011 and 2012. as well as using proxy estimates based multilateral organisations are included on relevant environment, energy, or in bilateral figures, contributions to * 1) Figure 2 presents a trend based on averages specific multilateral climate funds over three years, so as to smooth fluctuations from trade statistics and aggregate private large multi-year projects committed in a given investment data into climate-relevant and core contributions are included year. 2) Reporting against the mitigation marker became mandatory from 2006 flows onwards. sectors. in multilateral aid and not marked 3) The adaptation marker was introduced in against Rio markers. Instead, 2010. Data on total climate-related aid for earlier years mainly relates to mitigation and “imputed multilateral contributions” may underestimate bilateral aid flows to climate are calculated. The total of DAC change. members’ contributions to specific multilateral climate funds plus the climate-related share of DAC members’

OECD . 15 Track climate finance flows to build trust through 4 transparency and accountability continued

Lessons from development finance to improve the effectiveness of international financial support

Scaling up international public climate finance is essential, but Partnership for Climate Finance and Development once available these funds will have to be accessed, managed and used The voluntary Partnership for Climate effectively, including to catalyse Finance and Development was private investment and finance. created to help apply lessons from There is significant and growing development co-operation to the common ground amongst the climate, access, management and use of development and private-sector climate finance. The Partnership helps communities as to what constitutes different actors in climate-related “effectiveness” (Ellis et al., 2013). development co-operation to work together to facilitate peer-to-peer learning. During the 4th High Level Forum on The focus is placed on national capacity building to effectively prioritise and Aid Effectiveness in Busan (2011), plan action as well as to allocate, manage and track climate finance. Another area of co-operation is on how to build readiness to improve access to climate finance was outlined as a international finance. priority for effective international development, explicitly connecting The OECD currently supports this initiative, together with the UNDP and 28 the international development other countries and institutions. OECD’s current contributions focus on how to co-operation and climate change create and strengthen regional platforms for dialogue and peer-to-peer learning. communities in this effort. A key goal A strong regional platform for dialogue already exists in Latin America and the is to ensure that the principles of Caribbean, which can serve as a model for other regions, such as Africa. effective development co-operation apply to international public climate finance (ownership by developing countries, a focus on results, inclusive The Partnership recently showcased country experiences at a Global Forum in development partnerships, and Incheon, Korea, December 2013. Key lessons learnt include: transparency and accountability to one another). • The need for strong political leadership and ownership of climate-related policy to ensure climate finance integration within national allocation and budgetary systems; • Aligning climate change strategies with national development plans is conducive to more comprehensive climate responses. It is essential to build in-country capacity to develop new institutional frameworks and public financial management to attract, guide and manage climate finance. • Providers of development co-operation across different funds and delivery channels should better co-ordinate to streamline and simplify the requirements to access finance, and achieve a balanced geographical distribution of funds between countries with special needs or more generally a balanced distribution between mitigation and adaptation finance. • Country-led regional dialogues can also help co-ordinate efforts and support South-South-North exchange, peer review and mutual learning. • To ensure results, tracking climate finance spend through the budget and other extra-budgetary mechanisms, e.g. funds, projects, programmatic support, is central, and further strengthening of results-based frameworks is needed to understand the impact of climate finance on the most vulnerable countries and segments of the population. • Mutual accountability can be achieved by engaging a broader range of stakeholders (including local and urban level and the private sector) and providing transparency and accountability mechanisms.

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OECD . 17 Relevant OECD references

• Agrawala, S., M. Carraro, N. Kingsmill, • Cochran, I et al. (2014, forthcoming), The • Hašcic I., M. Cárdenas Rodríguez, R. M. Mullan and G. Prudent-Richard PFIs in Financing the Low Carbon Transition, Jachnik, J. Silva and N. Johnstone (2014), (2011), “Private Sector Engagement OECD Publishing, Paris. “Public interventions and private finance in Adaptation to Climate Change: flows: empirical evidence from renewable Approaches to Managing Climate Risk,” • Corfee-Morlot J., B. Guay, K. M. Larsen energy financing”, OECD Environment OECD Environment Working Papers, No. 39, (2009), “Financing for Climate Change Working Papers. OECD Publishing, Paris, http://dx.doi.org/ Mitigation: Towards a Framework for 10.1787/5kg221jkf1g7-en. Measurement, Reporting and Verification”, • IEA (2014), World Energy Outlook, Climate Change Expert Group Paper, OECD/ International Energy Agency, • Agrawala, S. and M. Carraro IEA Publishing, www.oecd.org/env/ OECD Publishing, Paris, www. (2010), “Assessing the Role of Microfinance cc/44019962.pdf. worldenergyoutlook.org/. in Fostering Adaptation to Climate Change”, OECD Environment Working Papers, • Corfee-Morlot, J., V. Marchal, C. Kauffmann, • IEA (2011), World Energy Outlook, No. 15, OECD Publishing, Paris, http:// C. Kennedy, F. Stewart, C. Kaminker and G. International Energy Agency, OECD dx.doi.org/10.1787/5kmlcz34fg9v-en. Ang (2012), “Toward a Green Investment Publishing, Paris, http://dx.doi.org/10.1787/ Policy Framework: The Case of Low- weo-2011-en. • Ang, G., and V. Marchal (2013), “Mobilising Carbon, Climate-Resilient Infrastructure”, Private Investment in Sustainable Environment Directorate Working Papers, No. • IEA, OECD, OPEC and World Bank (2011), Transport Infrastructure: The Case of 48, OECD Publishing, Paris, http://dx.doi. “Joint report by IEA, OPEC, OECD and Land-based Passenger Transport”, OECD org/10.1787/5k8zth7s6s6d-en. World Bank on fossil-fuel and other energy Environment Working Papers, No. 56, subsidies: An update of the G20 Pittsburgh OECD Publishing, Paris, http://dx.doi. • Ellis, J.,R. Caruso and S. Ockenden and Toronto Commitments”, Prepared org/10.1787/5k46hjm8jpmv-en. (2013), “Exploring Climate Finance for the G20 Meeting of Finance Ministers Effectiveness”, OECD/IEA Climate Change and Central Bank Governors (Paris, 14-15 • Buchner, B., J. Brown and J. Corfee- Morlot Expert Group Papers, OECD, Paris, http:// October 2011) and the G20 Summit (2011a), “Monitoring and tracking long www.oecd.org/officialdocuments/ (Cannes, 3-4 November 2011), term finance to support climate action”, cdisplaydocumentpdf/?cote=COM/ENV/ http://www.oecd.org/env/49090716.pdf. OECD Publishing/IEA, Paris, http://dx.doi. EPOC/IEA/SLT(2013)4&docLanguage=En. org/10.1787/5k44zcqbbj42-en. • IEA, OECD, OPEC and World Bank (2010), • Gaveau, V. and S. Ockenden (2014, “Analysis of the Scope of Energy Subsidies • Caruso, R. and R. Jachnik (2014), forthcoming), “A Stock-take of OECD and Suggestions for the G-20 Initiative”, “Exploring Potential Data Sources for DAC Members’ Reporting Practices Joint report prepared for submission to the Estimating Private Climate Finance”, on Environment-Related Official G 20 Summit Meeting, Toronto, 26-27 June OECD Environment Working Papers, No. Development Finance and Reporting to 2010, http://www.oecd.org/env/45575666. 69, OECD Publishing, Paris, http://dx.doi. the Rio Conventions”, OECD Development pdf. org/10.1787/5jz15qwz4hs1-en. Co-operation Technical Paper. • Kaminker, C. et al. (2014, forthcoming), • Caruso, R. and J. Ellis (2013), Comparing • Global Partnership for Effective “Mapping Channels to Mobilise Definitions and Methods to Estimate Development Co-operation (2011), Institutional Investment in Sustainable Mobilised Climate Finance, OECD/IEA Outcome Document 4th High Level Forum Energy”, OECD Publishing, Paris. Climate Change Expert Group Papers, No. on Aid Effectiveness, Busan, Korea, 29 2013/02, OECD Publishing, Paris, http:// November-1 December 2011. • Kaminker, C. et al. (2013), “Institutional dx.doi.org/10.1787/5k44wj0s6fq2-en. Investors and Green Investment: Selected • Hallegatte, S., C. Green, R.J. Nicholls and Case Studies”, OECD Working Papers on • Clapp, C., J. Ellis, J. Benn and J. Corfee- J. Corfee-Morlot (2013), “Future flood Finance, Insurance and Private Pensions, No. Morlot (2012), “Tracking Climate Finance: losses in major coastal cities”, Nature 35, OECD Publishing, Paris, http://dx.doi. What and How?,” Draft discussion Climate Change, 3, http://www.oecd.org/ org/10.1787/5k3xr8k6jb0n-en. document prepared for the Climate environment/future-flood-losses-in- Change Expert Group (CCXG) Global major-coastal-cities.htm. • Kato et al. (2014), “Scaling up and Forum on the New UNFCCC Market Replicating Effective Climate Finance”, Mechanism and Tracking Climate Finance, Climate Change Expert Group Paper, No. 19-20 March 2012, OECD, http://www.oecd. 2014(1), OECD Publishing, Paris, http:// org/env/cc/50293494.pdf. www.oecd.org/env/cc/Scaling_up_ CCXGsentout_May2014_REV.pdf.

18 . Financing climate change action POLICY PERSPECTIVES POLICY

• Lamhauge, N., E. Lanzi and S. Agrawala • OECD DAC Statistics (2014b), “Climate- • OECD (2012b), “An OECD-wide Inventory of (2011), “Monitoring And Evaluation related Aid”, May 2014, http://www.oecd. Support to Fossil-Fuel Production or Use”, For Adaptation: Lessons From org/dac/environment-development/ OECD Policy Brief, http://www.oecd.org/ Development Co Operation Agencies,” Climate-related%20aid%20Flyer%20-%20 site/tadffss/Fossil%20Fuels%20Inventory_ OECD Environment Working Papers, No. 38, May%202014%20final.pdf. Policy_Brief.pdf. OECD Publishing, Paris, http://dx.doi. org/10.1787/5kg20mj6c2bw-en. • OECD (2013a), Putting Green Growth • OECD (2011), Inventory of Estimated at the Heart of Development, OECD Budgetary Support and Tax Expenditures for • Lamhauge, N. (2014, forthcoming), Publishing, Paris, http://dx.doi. Fossil Fuels, OECD Publishing, Paris, http:// “National Monitoring and Evaluation of org/10.1787/9789264181144-en. dx.doi.org/10.1787/9789264128736-en. Climate Change Adaptation: Lessons from Developed and Developing Countries”, • OECD (2013b), Inventory of • OECD, (2010), Cities and Climate Change, OECD Publishing, Paris. estimated budgetary support and tax OECD Publishing, Paris, http://dx.doi. expenditures for fossil fuels- 2013, org/10.1787/9789264091375-en. • Mullan, M. et al., (2013), “National OECD Publishing, Paris, http://dx.doi. Adaptation Planning: Lessons from org/10.1787/9789264187610-en. • OECD (2009), Integrating Climate OECD Countries”, OECD Environment Change Adaptation into Development Working Papers, No.18, OECD • OECD (2013c), Annual Survey of Large Co-operation: Policy Guidance, OECD Publishing, Paris, http://dx.doi. Pension Funds and Public Pension Reserve Publishing, Paris, http://www.dx.doi. org/10.1787/5kg20mj6c2bw-en. Funds: Report on pension funds’ long- org/10.1787/9789264054950-en. term investments, OECD Publishing, • OECD (2015, forthcoming), Overcoming Paris, October, 2013, http://www. • OECD (2008), Economic Aspects of Barriers to International Investment in Clean oecd.org/daf/fin/private-pensions/ Adaptation to Climate Change: Costs, Energy, OECD Publishing, Paris. LargestPensionFunds2012Survey.pdf. Benefits and Policy Instruments, OECD Publishing, Paris, http://www.dx.doi. • OECD(2014, forthcoming), Policy Guidance • OECD (2013d), “Policy Guidance org/10.1787/9789264046214-en. for Investment in Clean Energy Infrastructure: for Investment in Clean Energy Expanding Access to Clean Energy for Growth Infrastructure”, an OECD report to • Partnership for Climate Finance and and Development, OECD Publishing, Paris. the G20, with contributions by the Development (2014), Partnership for World Bank and UNDP, http://www. Climate Finance and Development • OECD (2014), Climate Resilience in oecd.org/daf/inv/investment-policy/ Brochure, www.oecd.org/development/ Development Planning, Experiences CleanEnergyInfrastructure.pdf. environment-development/climate- in Colombia and Ethiopia, OECD partnership.htm. Publishing, Paris, http://dx.doi. • OECD (2013e), Water and Climate Change org/10.1787/9789264209503-en. Adaptation : Policies to Navigate Uncharted • Partnership for Climate Finance and Waters, OECD Publishing, Paris, http:// Development (2013), Global Forum • OECD DAC (2013), “Terms of Reference dx.doi.org/10.1787/9789264200449-en. Summary: Using Country Systems to and Scope of Work for a Joint ENVIRONET Manage Climate Change Finance, www. and WP-STAT Task Team to Improve Rio • OECD (2013f), Risk and Resilience: From Good oecd.org/development/environment- Markers, Environment and Development Idea to Good Practice, OECD Publishing, development/climate-partnership.htm. Finance Statistics”, OECD, http://www. Paris, December, 2013, http://www. oecd.org/dac/environment-development/ oecd.org/dac/governance-development/ • World Bank/IMF/OECD/RDBs (2011), Terms%20of%20Reference_Declassified. FINAL%20WP%2013%20Resilience%20 “Mobilising Climate Finance”, a paper pdf. and%20Risk.pdf. prepared at the request of G20 Finance Ministers, http://www.imf.org/external/np/ • OECD DAC Statistics (2014a), “Aid to • OECD (2012a), OECD Environmental Outlook g20/pdf/110411c.pdf. adaptation”, OECD, May 2014, http://www. to 2050: The Consequences of Inaction, OECD oecd.org/dac/environment-development/ Publishing, Paris, http://www.dx.doi. Adaptation-related%20Aid%20Flyer%20 org/10.1787/9789264122246-en. -%20May%202014.pdf.

OECD . 19 Contacts

Climate change

Robert Youngman, Virginie Marchal – Mobilising private climate finance and investment – ([email protected], [email protected])

Geraldine Ang, Chung-a Park – Investment policy and private investment – (geraldine. [email protected], [email protected])

Jane Ellis, Raphaël Jachnik – Tracking climate finance, Climate finance in the context of the UNFCCC climate negotiations – ([email protected], [email protected])

Christopher Kaminker, Osamu Kawanishi, Kate Eklin – Institutional investors and green infrastructure investment – ([email protected], [email protected], [email protected])

Michael Mullan – Adaptation policy and development – ([email protected])

Rob Dellink – Economic modelling – ([email protected])

Development Co-operation

Jan Corfee-Morlot – Development and climate change policy and finance – ([email protected])

Julia Benn – Aid statistics, Development Assistance Committee, Creditor Reporting System and Rio markers – ([email protected])

Stephanie Ockenden and Valérie Gaveau – Tracking climate-related development finance and Joint ENVIRONET-WP-STAT Task Team – ([email protected] and [email protected])

Trade and Agriculture

Jehan Sauvage – Fossil-fuel subsidies – ([email protected])

Financial and Enterprise Affairs

Karim Dahou – Investment policy – ([email protected])

www.oecd.org/env/cc/financing.htm

20November . Financing c 2014limate change action