THE SUSTAINABLE INFRASTRUCTURE IMPERATIVE Financing for Better Growth and Development
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THE SUSTAINABLE INFRASTRUCTURE IMPERATIVE Financing for Better Growth and Development THE 2016 NEW CLIMATE ECONOMY REPORT PARTNERS Managing Partner New Climate Economy New Climate Economy www.newclimateeconomy.report c/o World Resources Institute c/o Overseas Development Institute www.newclimateeconomy.net 10 G St NE 203 Blackfriars Road Suite 800 London, SE1 8NJ, UK Washington, DC 20002, USA +44 (0) 20 7922 0300 +1 (202) 729-7600 October 2016 Cover photo credit: Flickr/The Danish Wind Industry Association Current page photo credit: Flickr/DFID Photo credit: Flickr/IIP Photo Archive The New Climate Economy The Global Commission on the Economy and Climate, and its flagship project The New Climate Economy, were set up to help governments, businesses and society make better-informed decisions on how to achieve economic prosperity and development while also addressing climate change. The New Climate Economy was commissioned in 2013 by the governments of Colombia, Ethiopia, Indonesia, Norway, South Korea, Sweden and the United Kingdom. The Commission has operated as an independent body and, while benefiting from the support of the partner governments, has been given full freedom to reach its own conclusions. In September 2014, the Commission published Better Growth, Better Climate: The New Climate Economy Report and in July 2015 it published Seizing the Global Opportunity: Partnerships for Better Growth and a Better Climate. The project has released a series of country reports on Brazil, China, Ethiopia, India and the United States, and various reports on cities, land use, energy and finance. It has disseminated its messages by engaging with heads of governments, finance ministers, business leaders and other key economic decision-makers in over 45 countries around the world. The Commission’s 2016 report The Sustainable Infrastructure Imperative: Financing for Better Growth and Development is a synthesis of the latest evidence and analysis of relevance. In particular, the Commission’s deliberations, findings and recommendations drew extensively on Delivering on Sustainable Infrastructure for Better Development and Better Climate, by Amar Bhattacharya, Joshua P. Meltzer, Jeremy Oppenheim, M. Zia Qureshi and Nicholas Stern (forthcoming) which was part of a work program launched by the NCE partnership to contribute to the milestone events in 2015 and inform and give concrete impetus to the delivery of sustainable infrastructure as a central element of the 2015 global agenda. In addition, please see page 150 for the full list of those who provided expert inputs or comments to the draft report. The Commission’s programme of work is conducted by a global partnership of numerous leading institutions, including: World Resources Institute (WRI, Managing Partner), Climate Policy Initiative (CPI), Ethiopian Development Research Institute (EDRI), Global Green Growth Institute (GGGI), Indian Council for Research on International Economic Relations (ICRIER), Overseas Development Institute (ODI), Stockholm Environment Institute (SEI) and Tsinghua University. The Global Commission on the Economy and Climate The Global Commission on the Economy and Climate comprises former heads of government and finance ministers, and leaders in the fields of economics, business and finance. Members of the Global Commission endorse the general thrust of the arguments, findings, and recommendations made in this report, but should not be taken as agreeing with every word or number. They serve on the Commission in a personal capacity. The institutions with which they are affiliated have therefore not been asked formally to endorse the report and should not be taken as having done so. Felipe Calderón, Former President of Mexico (Chair) Naina Lal Kidwai, Chairman, Max Financial Services; Chairman, FICCI Water Mission Nicholas Stern, IG Patel Professor of Economics and Government at the London School of Economics Caio Koch-Weser, Chair, European Climate and Political Science and President of the British Foundation, Former Vice Chairman, Deutsche Bank Academy (Co-Chair) Group Sharan Burrow, General Secretary, International Ricardo Lagos, Former President of Chile; Professor Trade Union Confederation (ITUC) at Large, Watson Institute for International Studies, Brown University Suma Chakrabarti, President, European Bank for Reconstruction and Development (EBRD) Carlos Lopes, Executive Secretary, United Nations Economic Commission for Africa Chen Yuan, Vice-Chair, National Committee of the Chinese People’s Political Consultative Conference; Takehiko Nakao, President, Asian Development Bank former Chairman, China Development Bank Ngozi Okonjo-Iweala, Former Minister of Finance, Helen Clark, Administrator, UN Development Federal Republic of Nigeria Programme (UNDP); former Prime Minister of New Zealand Eduardo Paes, Mayor, Rio de Janeiro Jamshyd Godrej, Chairman and Managing Director, Paul Polman, Chief Executive Officer, Unilever Godrej & Boyce Mfg Co. Ltd., India Christian Rynning-Tønnesen, President and Chief Stuart Gulliver, Group Chief Executive, HSBC Executive Officer, Statkraft Ángel Gurría, Secretary-General, Organisation for Kristin Skogen Lund, Director-General, Confederation Economic Co-operation and Development (OECD) of Norwegian Enterprise Chad Holliday, Chairman, Royal Dutch Shell Jean-Pascal Tricoire, Chief Executive Officer and Chairman, Schneider Electric Sri Mulyani Indrawati, Finance Minister of Indonesia, former Managing Director and Chief Maria van der Hoeven, Former Executive Director, Operating Officer, The World Bank International Energy Agency (IEA) Investing in sustainable “ infrastructure is the growth story of the future. This report provides a roadmap to deliver a safe and prosperous future for ourselves and our children. Follow it well and follow it fast. ” – The Global Commission on the Economy and Climate 6 THE SUSTAINABLE INFRASTRUCTURE IMPERATIVE: FINANCING FOR BETTER GROWTH AND DEVELOPMENT Table of Contents Executive Summary 10 Section 1 19 Section 2 29 The sustainable A roadmap for financing infrastructure opportunity sustainable infrastructure 1.1 Current investment trends 24 2.1 Where does infrastructure 30 finance come from? 1.2 Charting the finance roadmap 27 2.2 Barriers to sustainable 33 infrastructure financing 2.3 Key areas for action 37 Section 3 47 Section 4 65 Section 5 85 Transforming the Energy Cities financial system 4.1 Addressing the fundamental 69 5.1 Addressing the fundamental 89 3.1 Greening the financial 49 price distortions price distortions system 4.2 Strengthening investment 74 5.2 Strengthening investment 92 3.2 Strengthening the role of 62 frameworks, institutional capacity frameworks, institutional capacity multilateral development banks and policies and policies and other development finance 4.3 Boosting investment in 83 5.3 Boosting innovation 99 institutions innovation Section 6 101 Endnotes 120 Land Use 6.1 Addressing price distortions 106 and market failures 6.2 Strengthening investment 109 frameworks, institutional capacity and policies 6.3 Boosting agricultural R&D 118 investment The Sustainable Infrastructure Imperative: Financing for Better Growth and Development Key Messages Investing in sustainable infrastructure is key More money alone won’t do the job. A range to tackling the three central challenges facing of barriers must be tackled to raise the quantity and the global community: reigniting growth, delivering the quality of infrastructure investment. Concerted on the Sustainable Development Goals, and reducing action in four, inter-linked areas can together help climate risk in line with the Paris Agreement. us overcome these barriers and build the sustainable infrastructure of the 21st century: A comprehensive definition of infrastructure includes both traditional types of infrastructure (everything 1. We must collectively tackle fundamental price from energy to public transport, buildings, water distortions – including subsidies and lack of supply and sanitation) and, critically, also natural appropriate pricing especially for fossil fuels and infrastructure (such as forest landscapes, wetlands carbon – to improve incentives for investment and and watershed protection). innovation, to drastically reduce pollution and congestion, and to generate revenue that can be Significant investment is needed over the next redirected, for instance, to support poor people. 15 years: around US$90 trillion, which is more than the entire current stock. These demands 2. We must strengthen policy frameworks and are driven by ageing infrastructure in advanced institutional capacities to deliver the right economies and higher growth and structural change policies and enabling conditions for investment, to in emerging market and developing countries, build pipelines of viable and sustainable projects, especially rapid urbanization. to reduce high development and transaction costs, and to attract private investment. The global South will account for roughly two- thirds of global infrastructure investment (or 3. We must transform the financial system to about US$4 trillion per year). This new infrastructure deliver the scale and quality of investment offers a great opportunity to “leapfrog” the inefficient, needed in order to augment financing from sprawling and polluting systems of the past. all sources (especially private sources such as long-term debt finance and the large pools of Transformative change is needed now in how institutional investor capital), reduce the cost of we build our cities, produce and use