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Climate and carbon finance
1. Overview of Climate Finance
Jacqueline Tao Yujia
MFA-NTU Green Climate Finance Workshop
Energy Studies Institute, National University of Singapore
24 November 2014
2. Definitions
• Lack of universally accepted definition of climate finance
• Climate Finance
• local, national or transnational financing
• public, private and alternative sources of financing
• both mitigation and adaptation financing
• Carbon Finance
• Financing generated through the pricing of the resultant emissions
reductions for mitigation projects
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6. Sources of International Climate Finance
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Source: Climate Funds Update.
http://www.climatefundsupdate.org/about-climate-fund/global-finance-architecture
7. Intermediary agencies
• Global Environment Facility (GEF)
▫ operating entity of the financial mechanism of the UNFCCC
• Green Climate Fund (GCF)
▫ operating entity of the financial mechanism of the UNFCCC
• Climate Investment Funds (CIFs)
▫ champions innovative country-led investments
▫ supported by public finances and leveraging of other sources
• Indonesian Climate Change Trust Fund
▫ Harmonize all sources of finance to ensure that they are aligned
with national development plans
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8. Size of Climate Finance
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Source: Climate Policy Initiative report on “Global Landscape of Climate Finance 2013”
Accessed at: http://climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2013/
9. Further action
• Scaling up much needed climate finance
• Spending the limited finance efficiently and effectively
▫ Mitigation v Adaptation
▫ Domestic v International
▫ MRV
• Encourage private sector investments
▫ Addressing barriers to private investment
Domestic and International public policy efforts
▫ Leveraging Private Finance
▫ Functioning carbon market
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10. De-risking of Climate Change Investments
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Risk Instruments
Project Risk Cost Risk • Due diligence
• Commercial insurance
• Public guaranteeResource Risk
Technology risk
Country Risk Regulatory Risk • Rule of Law
• Policy certainty, clarity,
longevity
• Political Stability
Sovereign risk
Financing Risk Debt/equity availability • Financial support
mechanism
• Established capital
markets
11. Public Support for Private Climate Finance
• Conducive policy environment
▫ Long term price signals
• Financial support instruments
▫ Loans/Grants
▫ Subordinated debt / Mezzanine financing
▫ Guarantee / Risk-sharing products
▫ Feed in tariff (Renewable energy)
• Other forms of support
▫ Technical Assistance
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12. Leveraging Private Finance
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Source: International Finance Corporation report on “Climate Finance: Engaging the Private Sector ”
Accessed at: http://www.ifc.org/wps/wcm/connect/5d659a804b28afee9978f908d0338960/ClimateFinance_G20Report.pdf?
MOD=AJPERES/
13. Thailand: Energy Efficiency Revolving Fund (EERF)
• aimed to stimulate EE investments in large-scale energy consuming
industrial sectors and leverage commercial financing in EE projects
• EERF provides capital to Thai banks to fund EE projects, banks then
extend the credit in the form of low-interest loans to EE projects in
industries and buildings
• Yield significant results in terms of reduced demand for oil imports
and power
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14. Carbon Finance
• A strong price signal is essential to establish the right incentives and
to direct financial flows away from carbon-intensive growth to low-
carbon investments.
▫ Carbon as an asset/commodity/factor of production
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15. Carbon Finance Innovations
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Use Type of
Instrument
Innovations
Capital Raising Debt Carbon/green bonds
Carbon asset backed loans/securities
Equity Green stocks
ESG/SRI IPOs
De-risking Insurance Project-based (CDM/JI) insurances
Derivative Carbon derivatives forwards, futures,
options, swaps
Others Project guarantee
16. Concluding Remarks
• Climate finance is critical Scaled up, new, additional, predictable
and adequate funding is required FAST for both mitigation and
adaptation
• Combination of public and private financing sources required
• Role of public sector:
▫ Kick-start the market/ Leverage private sector finance
▫ Provide strong long-term enabling policy assurances
▫ Supply much-needed finance in critical areas of adaptation that
private funds are less suited for
• Rapidly evolving structure: much room for public and private
innovations
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17. 17
Thank you!
Energy Studies Institute
29 Heng Mui Keng Terrace
Block A, #10-01
Singapore 119620
Jacqueline Tao
Tel: (65) 6516 6692
Email: esity@nus.edu.sg
18. Indonesia Public Climate Finance 2011
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Source: Climate Policy Initiative 2014 report on “Landscape of Public Climate Finance in Indonesia”
19. Carbon Pricing
• can be achieved through markets or taxes, and different instruments
will be appropriate in different countries for different sectors of the
economy.
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21. China’s Pilot ETS
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Guangdong Shanghai Tianjin Beijing Shenzhen
Emission
Covered
43%-50% About 50% About 60% About 40% 38%
Covered
Sectors
Energy intensive
industries
Transports and buildings
(public, commercial)
construction are part of
the newly released
regulation
16 sectors:
including both
industrial and
service sectors
Energy intensive
industries
Electricity providers,
heating sector,
manufacturers
(automobile, cement,
petrochemicals) and
major public
buildings
Almost all sectors.
Transport inclusion
under consideration.
Allocation
methods
Grandfathering based on
10-12 emissions,
considering sectors’
characteristics.
Grandfathering
for 2013-2015
based on 2009-
2011 emissions,
growth
considered.
Whenever
possible,
benchmarks will
be used
Existing entities:
Grandfathering
New entities:
Benchmark
Grandfathering based
on 09-12 emissions
or carbon intensity
(corrected by a
sector-specific factor)
declining with time.
New entrants:
benchmarks.
Grandfathering based
on firms’ historical
emissions,
performance and
future activity level.
Offset
mechanism
Up to 10%, 70% of which
must stem from local
projects.
Up to 5% Up to 10 % Up to 5%. At least
half must originate
from local projects
(except certain types
of projects owned by
liable entities)
Up to 10 %
22. Chile’s Carbon Tax
• Stationary sources: power sector
▫ $US5/tCO2 for generators operating thermal plants with
installed capacity equal or larger than 50 megawatts (MW)
▫ thermal plants fueled by biomass and smaller installations
exempted
▫ Measurements of emissions in 2017 and the new tax would be
levied from 2018.
• Mobile sources: vehicles
▫ additional tax on import of light diesel vehicles
• Local pollutants such as NOx and PM are also taxed at US$0.1/t of
pollutant
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23. Adaptation Fund
• established in 2001 to finance concrete adaptation projects and
increase climate resilience of developing country Parties to the
Kyoto Protocol that are particularly vulnerable to the adverse effects
of climate change.
• Financed by 2% of share of proceeds of CERs and others sources of
funding
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24. Green Bonds
• Broadly defined as debt instruments that are applied exclusively
towards projects with significant environmental benefits
• Growing market: USD40 billion (2014)
▫ Steady demand (many issues are oversubscribed)
▫ Diverse supply
• Offset climate risks of portfolio
• Uncertainty
▫ lack of standardization on the definition
of green bonds
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Editor's Notes
As my colleague has described in detail earlier, the policy questions over the raising and disposition of financial resources to fund climate change mitigation and adaptation activities are among the most contentious in the protracted series of summits and negotiation under the UNFCCC.
So what is it about climate finance that makes the discussions around it so heated?
To understand this, we would have to boil down to the basics: the definition of climate finance.
While the concept of climate finance is fairly straightforward: developed countries, with historical responsibilities and stronger economies, are to provide developing countries, who are more often than not disproportionately affected due to climate change for mitigation and adaptation activities, under the principle of common but differentiated responsibilities of UNFCCC, there is a general lack of consensus of what that actually means.
The UNFCCC defines climate finance as local, national or transnational financing, which may be drawn from public, private and alternative sources of financing which may be used for both mitigation and adaptation purposes.
This definition itself covers a variety of issues. Firstly, how should international finance be allocated reasonably to the developing countries? What are the relative importance of public and private finance in the climate finance regime and how much of the financing should flow into mitigation and adaptation projects respectively. Countries often have wildly divergent views on these issues, leading to the heated discussions on this matter. We will explore some of these issues along the way.
The definition of carbon finance is rather straightforward. As defined by World Bank, it is the financial resources generated through the pricing of the resultant emissions reductions for mitigation projects.
So the diagram here illustrates what climate finance is.
Climate finance consists of both mitigation and adaptation finance. There are areas where the two components overlap.
Carbon Finance is considered part of mitigation finance, since most of its associated financial resources are linked to mitigation activities. But the classification is not fixed, there are exceptions, such as the Adaptation funds, that use financial flows from the sale of CERs from CDM projects to fund Adaptation activities.
So when you look at climate finance, we need to think about it as a flow of financial resources.
Some key themes that are present in climate finance are
revenue raising- which relates to what are sources of climate finance
revenue disbursement – who are involved in dispersing the funds and what instruments and mechanisms are used
And oversight or MRV – so how efficiently the resources are allocated and what is the effectiveness of the use of funds
In this case, we are using revenue loosely to refer to financial resources.
This diagram shows the various sources of international climate finance and I will bring you through them. Please note that this diagram is not exhaustive and may not represent all the existing institutions and mechanisms.
So right at the top, you will see the contributor countries such as Australia, EU, US, UK and so on. Financial resources from these contributor nations may flow directly to national implementing agencies, such as DECC (Department of Energy and Climate Change) in the UK or the Japan Bank of International Cooperation (JBIC), directly to the recipient countries. Or financial resources may flow into dedicated bilateral funds such as the Global Climate Change Initiative (US) and the International Climate Fund (UK) which then disperses them to recipient countries.
Some of the funds from the dedicated funds and the national implementing agencies may also flow into multilateral institutions. Most of the multilateral institutions are governed under UNFCCC mechanisms. Here you can see the major UNFCCC financing mechanism such as the GCF and GEF. Climate Investment Funds, administered by the World Bank in partnership with regional development banks are also illustrated.
Some countries have also set up national climate funds to receive and channel climate finance from various contributor countries.
According to the Climate Policy Initiative, the total flow of climate finance in the year 2013 amounted to $359 billion in total.
Current scale of finance far below investment needs
Costs for Mitigation
World Bank (2008) $400 bn/yr
Potsdam-Institute for Climate Impact Research (2009) $480 – 600 billion a year up to 2030, and $1.2 trillion a year from 2030 to 2050
IEA (2011) developing: $1 trillion a year over the next four decades.
Global Energy Assessment (2012) $1.7 trillion and $2.2 trillion.
Costs for Adaptation
UNFCCC (2007) developing country:$27 billion to $66 billion a year.
World Bank (2010) $75 billion to $100 billion a year.
The sooner we act, the cheaper the price of adaptation and mitigation
Public sources and public intermediaries account for 3% and 34% of all sources of climate finance, with the other 62% provided by private sources.
Interesting observation on the instruments used. A large proportion of them are debt related, as compared to grants.
Also mitigation accounts for 94% of all climate finance, while adaptation accounts for only 4%.
As you have seen before, a large portion of funds are spent on mitigation as compared to adaptation. Given the nature of investments in adaptation, it is unlikely that the private sector an play a large role in it. Public good, uncertainty, social good as the main return. Private investments are a poor fit for these risk and return profiles
Given that there are limited amount of finances flowing around, it is vital to ensure that the climate finance reaches the poorest and most vulnerable people, that its impacts can
be clearly evaluated and monitored, and that adequate social, environmental and human rights safeguards are in place.
There must be clear accountability to the taxpayer for the use of any public monies.
36-40% of all climate finance is spend within their own borders. OECD to non-OECD flows comprise 12% of all climate finance.
Although contributions from public budgets are essential and will have to be scaled up, it is unlikely that climate change costs in the tens of billions of dollars annually could be covered through government contributions alone.
The primary requirement to attract private sector capital into low carbon investments is an appropriate policy framework.
Almost all of such investments are policy-dependent, having higher costs than carbon intensive options
Create the policy with clarity, stability, predictability and long-term visibility that will attract finance
Private investors are a heterogeneous group, who have different risk preferences that need to be considered to design policies and instruments that provide adequate risk-adjusted returns for the required capital flow.
A project can be divided into three key financing stages
the project development prior to financial close,
financial close
operating period
Thailand’s local banks had a limited understanding of energy efficiency projects, making it challenging for potential developers to access financing for such projects.
The Thai government was provided credit line in the range of THB 100 to 400 million (about USD 2.5 to 10 million) to 11 commercial banks at zero interest rate which the banks are expected to lend to eligible projects (EE measures) are as defined in Thailand’s Energy Conservation Promotion Act. (ENCON Act)
The banks were allowed to charge an interest rate of up to 4% to cover their management and administration costs and risk coverage.
The financial incentives to banks, combined with the enhanced awareness of energy efficiency,
Attaching a price to carbon emissions and creating markets to trade them is thought to provide financial incentives to encourage emitters to undertake emission reduction efforts. If a company wants to emit more than it is allowed to, it can buy credits from those who have reduced their emissions below the target level, or from a project in a developing country which has certified emission reduction credit to sell.
In the early 1990s, Thailand’s economy was growing rapidly at 10 percent per year; the power sector was growing even faster. The government recognized that conserving energy would provide a low-cost way to meet its citizens’ rising demand for energy.
It responded by passing a law in 1992 that set energy efficiency standards for industry and established an Energy Conservation Promotion Fund, which raised funds for energy efficiency projects by taxing petroleum products.
Objective of the ESCO Fund
To foster the expansion of the energy service market (ESCO)
To stimulate private investment in energy efficiency and renewable energy projects
To encourage enterprises to develop energy efficiency and renewable energy projects
To facilitate the enterprises to reduce energy costs and gain potential benefits from carbon reduction revenue through global carbon market
To increase financial institutions’ confidence in financing energy efficiency and renewable energy projects
Encourage energy savings and reduce the dependence on energy imports
Carbon Credit Facility – the ESCO Fund can facilitate project owners in developing CDM documents, Project Idea Notes (PIN) and Project Design Documents (PDD). It can also help owners of small projects enter the carbon credit markets by bundling projects so that they have higher chances of selling credits.
Credit Guarantee Facility – the ESCO Fund cooperates with financial institutions or credit guarantee agencies to assist entrepreneurs in accessing long-term loans from banks by providing credit guarantees depending on the project risk and limited to 10 Million THB at low premium rates.
Technical Assistance – the ESCO fund provides financial support for technical assistance, e.g. energy audits and feasibility studies. The support is limited to 100,000 THB per project and this fee must be reimbursed to the ESCO Fund if the proposed technical solutions have not been implemented. However, the ESCO companies usually offer free audit services, with technical support under the ESCO fund barely implemented
market-based mechanisms are likely to deliver large-scale emission reductions more efficiently and quickly
