Climate Finance: Regulatory and Funding Strategies for Climate Change and Global Development

Chapter 3 The Climate Financing Problem: Funds Needed for Global Climate Change Mitigation Vastly Exceed Funds Currently Available

42 Climate Finance Chapter 3 The Climate Financing Problem Funds Needed for Global Climate Change Mitigation Vastly Exceed Funds Currently Available Bert Metz Senior Fellow, European Climate Foundation Key Points • Even assuming ambitious GHG reductions by developed countries, large additional reductions in developing country emissions will be required in order to limit global warming to 2°C. This pathway requires global emissions to peak no later than 2015, and to fall 50% from 1990 levels by 2050, split so that developed nations shoulder the majority of the burden. • In developing countries, some of these reductions have negative costs, such as energy efficiency in buildings, transport, and industry. Many areas have moderate positive costs (agriculture and forestry), and technology-intensive sectors (notably renewable energy) require significant funding. • On the basis of the principle of compensation for incremental costs by developed countries, a total of €65–100 billion annually over the 2010–2020 period is needed to finance these reductions and meet developing countries’ adaptation needs. However, these cost figures do not capture the significant positive externalities throughout society from low-carbon investment such as increased employment, heightened energy security, improved agricultural productivity, and improved infrastructure. The Climate Financing Problem 43 Background The latest assessment of the Intergovernmental Panel on Climate Change (IPCC) clearly shows that climate change risks will be manageable if global mean temperatures do not increase more than 2°C above the preindustrial period. This requires a global trajectory towards stabilization of greenhouse gas (GHG) concentrations in the atmosphere of 450 ppmv CO2 equivalent (CO2e) to give us even a 40–60% chance of meeting the 2°C target. This requires global GHG emissions to start declining no later than 2015 and fall to 50% below 1990 levels by 2050. For the period ending in 2020, this translates into a global emissions reduction of 17 Gt CO2e compared to business as usual (BAU) by 2020 (see Figure 3.1). Existing technologies can achieve over 90% of the global emissions reductions needed by 2020. Technology costs are already rapidly declining, and new technologies will further reduce costs and increase effectiveness. The costs of low-carbon transition are manageable. If the savings from negative cost mitigation actions can be effectively captured through intelligent regulation and incentives, the costs of more expensive investments Fig. 3.1. 17 Gt of reductions below the reference pathway in 2020 are required to stay on a 450ppmv pathway. (Source: McKinsey Global GHG Abatement Cost Curve v2.0 (2009); M. G. J. Den Elzen and M. Meinshausen, Multi-gas emission pathways for meeting the EU 2°C climate target, 2006; IEA World Economic Outlook 2007; Project Catalyst analysis) 44 Bert Metz can be offset. The main question of this essay is, “what level of financing will make achieving these reductions possible?” Developed and Developing Country Contributions Equity demands that developed countries need to realize substantial emission reductions by 2020 of 25–40% below 1990 on average (with differentiation amongst them). We do not have the luxury of time to enter into a global climate agreement where developed countries move first and developing countries follow on behind. Developing countries need to deliver the rest of the reductions in order to meet the overall global emissions freeze and decline. According to scientific analysis, developing countries’ emissions should be 15–30% below the BAU baseline by 2020. The question is, how this can be realized in a way that is consistent with the negotiation mandate that was agreed upon in Bali in December 2007 (the Bali Action Plan), and that is fair to developing countries with their generally low incomes and limited responsibility for current climate change? Project Catalyst assumes that developing countries implement their contribution in the form of a low-carbon development plan—made up of nationally appropriate mitigation actions (NAMAs)—that steers their economies towards a low-emission, sustainable economy over a longer period of time through specific NAMAs. This ensures that climate change mitigation is a development-oriented transformation of the economy that would enable countries to avoid large negative impacts from further climate change. It would also have many benefits for energy security, health, employment, mobility, and competitiveness. The Funding Needed by Developing Countries Based on this notion of low-carbon development, estimates have been made of the incremental costs of capturing the opportunities for energy efficiency improvement in buildings, transportation, and industry; moving to a low-carbon energy supply and reducing deforestation...