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

Chapter 15 Investment Opportunities and Catalysts Analysis and Proposals from the Climate Finance Industry on Funding Climate Mitigation

Climate Finance 143 Chapter 15 Investment Opportunities and Catalysts Analysis and Proposals from the Climate Finance Industry on Funding Climate Mitigation Nick Robins Head of Climate Change Centre of Excellence, HSBC Mark Fulton Global Head of Climate Change Investment Research and Strategy, Deutsche Bank Key Points • Investments in low-carbon energy solutions have grown almost five-fold in the past five years. However, investments need to grow a further ten-fold to drive emissions onto a safe path, with almost a twenty-fold expansion in energy efficiency in buildings, transport, and industry. • Improving regulatory certainty is the lowest-cost option, and this applies at every level from local (e.g., planning permission, fiscal certainty) to international (e.g., policy on technology transfer or credit generation and demand). • Increasing local capacity to absorb low-carbon finance will also be crucial, requiring the transfer of knowledge from those with expertise in the developed world to their counterparts in the developing world. • Reducing the perceived risk of investing in low-carbon projects is a crucial step in this process regardless of the success of the previous two options, and the use of credit guarantees backed by public funds and carbon insurance in case of project non-execution or 144 nick robins and mark fulton credit non-delivery will play a key role in making low-carbon investments attractive. It is clear significant support from private finance will have to be mobilized in order to meet the world’s mitigation and adaptation needs in the coming years. As matters currently stand, the right incentives are not in place for this to occur in sufficient volume to have the desired effect. A hospitable climate for low-carbon investment rests on two main pillars : certainty on mid- and long-term targets and a comprehensive policy framework to implement these targets. This paper focuses on the second of these, examining how to both reduce financing barriers and intensify capacity building and knowledge transfer from the developed to the developing world. An overview of barriers to financing is given, before an examination of some key areas where scaled-up investment could have a significant impact such as technology, energy efficiency, and forestry. Barriers to Financing: An Overview On the regulatory side, private finance needs long-term regulatory predictability based on transparent rules and procedures at the national, international, and UN levels. Under this regime, climate change institutions such as Designated National Authorities would exist and function efficiently, while markets would internalize the carbon externality. On the financial side, the current difficulty of obtaining debt finance up front for projects, the risk of possible late- or non-execution of the project (including non-delivery of credits), and volatility of carbon prices—assisted by uncertainty on the demand side from cap-and-trade schemes—all contribute to significant project risk that disincentivizes investment. One approach to overcome these barriers is regulatory in nature, substituting clarity and predictability for uncertainty and opacity in international and national regulation. Another is infrastructure-based, increasing the physical (electricity grid, available resources), institutional, and human (technology workers, public agency capacity, local financial resources , and know-how) capacity to absorb low-carbon investment at the local, regional, and national levels in developing countries. A third approach is the use of public finance. Debt guarantees backed by public funds, one of the core suggestions of this paper, would significantly reduce project risk caused by any number of the above barriers. Investment Opportunities and Catalysts 145 One possibility is the creation of a mechanism whereby the home government of a foreign investor issues guarantees in order to facilitate lowcarbon investments in host countries. Examples of these mechanisms currently exist: Overseas Private Investment Corporation (OPIC) and other export credit agencies provide de-risking services, while the Multilateral Investment Guarantee Agency (MIGA), traditionally a guarantor for noncommercial risk, has also been recently experimenting with mitigating commercial risk. Credit risk guarantees and other risk-sharing instruments can considerably lower the investment barriers for many investors and keep the risks associated with direct investments at a reasonable level, even when there exists uncertainty in long-term policy and regulation, local infrastructure, and capacity at the local level. There is also a desperate need for readily available commercial insurance for low-carbon projects to protect developers and investors across host countries and market environments from risk. One solution is the creation of a Carbon Insurance Vehicle, equipped with public funds but...