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 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). 4 . FINANCING CLIMATE CHANGE ACTION POLICY PERSPECTIVES 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