Niklas Höhne from NewClimate Institute presents at a lunch event hosted by the German Ministry for Economic Cooperation and Development (BMZ) at the margins of the UNFCCC ADP negotiations on the development of 2°C compatible investment criteria.

1. Development of 2°C
compatible investment criteria
Niklas Höhne, n.hoehne@newclimate.org
21 October 2015, Bonn
Authors: Niklas Höhne, Frauke Röser, Markus Hagemann, Lutz Weischer, Alexander El
Alaoui, Christoph Bals, David Eckstein, Sönke Kreft, Jakob Thomä, Morten Rossé

2. Key messages
2°C investment criteria are necessary
Financial institutions use climate criteria but rarely linked to 2°C
2°C investment criteria for individual projects …
Can be developed from scenarios
Have to be sector specific
Need to strike a balance between complexity and manageability
Use of 2°C investment criteria can be integrated in the decision making
processes of international financial institutions
Criteria are also needed to reduce the risks to investments from and
increase the resilience of communities to climate change impacts
A coalition of “early adopters” could be formed

3. Key messages
2°C investment criteria are necessary
Financial institutions use climate criteria but rarely linked to 2°C
2°C investment criteria for individual projects …
Can be developed from scenarios
Have to be sector specific
Need to strike a balance between complexity and manageability
Use of 2°C investment criteria can be integrated in the decision making
processes of international financial institutions
Criteria are also needed to reduce the risks to investments from and
increase the resilience of communities to climate change impacts
A coalition of “early adopters” could be formed

4. 2°C requires step change in investments
towards zero emissions
0
10
20
30
40
50
2000 2005 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100
GlobalGHGemissionsinGtCO2e
CO2 from fossil fuels
and industry
CO2 from forestry
Non-CO2
Source: Illustrative 2°C scenario, based on marker scenario RCP 2.6 of the IPCC, from RCP scenario database
http://tntcat.iiasa.ac.at:8787/RcpDb/dsd?Action=htmlpage&page=download
• Annual investments in clean energy
need to quadruple to 1 trillion US$
per year until 2030
• Misguided investments will lock in
greenhouse gas emissions for
decades
Business as usual

5. Key messages
2°C investment criteria are necessary
Financial institutions use climate criteria but rarely linked to 2°C
2°C investment criteria for individual projects …
Can be developed from scenarios
Have to be sector specific
Need to strike a balance between complexity and manageability
Use of 2°C investment criteria can be integrated in the decision making
processes of international financial institutions
Criteria are also needed to reduce the risks to investments from and
increase the resilience of communities to climate change impacts
A coalition of “early adopters” could be formed

6. Criteria in use
Some banks already use climate-related indicators to guide
investments, but direct link to 2°C is limited. Examples from
development banks:
Positive lists Qualitative conditions Quantitative
conditions
Negative lists
• Funding for
renewable energy
• Best available
technology
• CCS readiness
• National climate
strategy
• Country groups
(e.g. LDCs)
• Others
(development,
energy access,
system reliability,
etc.)
• Efficiency-floor
values in x (net) %
• Carbon-ceiling
values in x gCO2
per (net) kWh
• Shadow economic
prices of carbon in $
x per t/CO2
• Others (incremental
costs of
alternatives, etc.)
• No funding for
greenfield coal fired
power plants

7. Key messages
2°C investment criteria are necessary
Financial institutions use climate criteria but rarely linked to 2°C
2°C investment criteria for individual projects …
Can be developed from scenarios
Have to be sector specific
Need to strike a balance between complexity and manageability
Use of 2°C investment criteria can be integrated in the decision making
processes of international financial institutions
Criteria are also needed to reduce the risks to investments from and
increase the resilience of communities to climate change impacts
A coalition of “early adopters” could be formed

8. Categories of investment areas
2°C compatible Conditional Ambiguous Misaligned
Fully aligned with 2°C
consistently across all
scenarios
2°C aligned only under certain
conditions in all scenarios
2°C aligned in some
scenarios, but not in
others
Consistently misaligned
with 2°C in all scenarios
• Due to the fact that multiple pathways can lead to 2°C
(e.g. more renewables and less efficiency or the other way
around)
• Due to different assumptions on technological
development
• Due to considerations of other sustainability factors
• Renewable
energy
• Energy storage
• Low carbon
transport fuel
infrastructure
• Low carbon
vehicles
• Gas fired power plants
• Energy transmission and
distribution infrastructure
• Energy efficiency in heating
and cooling of buildings
• Efficiency in industry
• Transport infrastructure
• Transport efficiency
• Agriculture and forestry
• Building appliances
• Biofuels
• Fossil fuel production
• Large hydropower
• Bio energy carbon
capture and storage
• Nuclear
• New coal fired power
plants with unabated
emissions over their
lifetime
Based on a comprehensive review of 2°C compatible
model scenarios, including scenarios from Integrated
Assessment Models (e.g. as in IPCC report), energy
sector models (e.g. IEA), renewables and efficiency
scenarios and sector specific scenarios.

9. Key messages
2°C investment criteria are necessary
Financial institutions use climate criteria but rarely linked to 2°C
2°C investment criteria for individual projects …
Can be developed from scenarios
Have to be sector specific
Need to strike a balance between complexity and manageability
Use of 2°C investment criteria can be integrated in the decision making
processes of international financial institutions
Criteria are also needed to reduce the risks to investments from and
increase the resilience of communities to climate change impacts
A coalition of “early adopters” could be formed

10. Guidance for
individual project
types
Country frameworks
Integrating criteria on decision maling
processes
Preliminary
screening
Economic
evaluation
ESG evaluation
Development
evaluation
• Within the bank’s
priority sectors ?
• …
• Is the project
viable?
• Not crowding out
private finance?
• …
• Are any
environmental,
social or
governance issues
associated with the
project?
• Does project
promote
development, in line
with country
strategy/needs?
Sector policies
Overall Bank
strategies
• For development banks: on negative list?
• For dedicated climate funds: on positive list?
• Project viable with shadow carbon price?
• Does project meet qual/quant benchmarks?
• Does project fulfil existing standards deemed
to be 2°C compatible?
• Is project consistent with national 2°C
strategy
• …
Regular project
evaluation
Additional questions on 2°C compatibility

11. 2°C criteria for the power sector
2°C
compatible
Conditional / ambiguous Misaligned
Preliminary
screening:
Energy
source:
Wind
PV
Small hydro
Economic
evaluation:
Energy source:
e.g. natural gas
Shadow economic
price of carbon
ESG evaluation:
Energy source:
e.g. natural gas
Decarbonisation based approach.
Simple: Prove that project fits into a
path towards 0 gCO2/kWh in 2050
Advanced: Prove that the project fits
into a national sector-based
decarbonisation strategy including
lifetime, operation mode and capacity
requirements
Preliminary
screening:
Energy source:
New coal fired
power plants with
unabated
emissions over
their lifetime

12. Decarbonization approach – Electricity sector
CO2/kWh
Year
Grid emission
factor
2015 (Today) 2050
Aim:
Decarbonization
by 2050
2030
Project needs to contribute to
reducing the grid emission
factor to this level over its
lifetime
Gas power plants
- Power plant has to be able to
support a system change
towards decaronization
- Practice has shown that this
requires high flexibility in
conventional power plants
- This needs to be taken into
account when developing the
project (i.e. through lower FLH in
the future)
20652045

13. Bottom up considerations - buildings
Positive
investment
Conditional investment No investment
Fully aligned with
2°C consistently
over all scenarios
2°C aligned only under certain conditions in all scenarios Consistently
misaligned with
2°C in all
scenarios
e.g. 20 kWh/m2 e.g. 200 kWh/m2
Q: What do you support as a bank? (examples)
BAT
globally
BAT in
country
Current
average in
country
Pot. Future
average after
development
A: (bank with climate as co-mandate):
advance BAT in country.
A: (bank with clear climate mandate):
implement global BAT in country.

14. 2°C criteria for the building sector
2°C
compatible
Positive list
Conditional
Quantitative / qualitative conditions
Misaligned
Negative list
Preliminary
screening
(Near) zero
emission
buildings (new
and renovation)
below 10 kWh/
m2
ESG evaluation
Quantitative benchmark (simple)
- Specific energy use between 10 and 150 kWh/ m2
- Gradual phase in and increased stringency based on BAT or
country average
Sector based decarbonisation (advanced)
Fit into a decarbonisation of the building stock during the course
of the century
Benchmark of energy use per floor space (x kWh/m2) determined
at a country level, considering
 Market maturity
 Current energy use and local BAT levels
 Annual growth and lifetime of buildings, renovation rates and
levels, demolition rates
 Climatic zones
Preliminary
screening
Specific building
energy use above
150kWh/ m2

15. 2°C criteria for the transport sector
Sub-sector 2°C compatible
(positive list)
Conditional Misaligned
(negative list)Qualitative
conditions
(example)
Quantitative
conditions
Air, Water, Rail Inland waterways
Rail network and
assets (passenger
and freight)
Mass rapid transit/
Light Rail Transit
(LRT)
Airports with transport
interconnectivity plan/
bio-fuelling stations
Quantitative criteria
for transport
infrastructure are
difficult to set given
the indirect link of
infrastructure to GHG
emissions.
Quantitative criteria
may be set for
vehicles (e.g. fuel
efficiency, penetration
of electric/ hybrid
vehicles) and linked
as sub condition to
infrastructure
investments.
Dedicated fossil fuel rail
network
New airports in
developed regions
Road Non-motorised
infrastructure
High quality Bus
Rapid Transit (BRT)
Road renewal to
include strategic plan
Electric vehicle
charging
infrastructure linked to
RE plan
New road network in
developed regions*

16. Key messages
2°C investment criteria are necessary
Financial institutions use climate criteria but rarely linked to 2°C
2°C investment criteria for individual projects …
Can be developed from scenarios
Have to be sector specific
Need to strike a balance between complexity and manageability
Use of 2°C investment criteria can be integrated in the decision making
processes of international financial institutions
Criteria are also needed to reduce the risks to investments from and
increase the resilience of communities to climate change impacts
A coalition of “early adopters” could be formed

17. Criteria for climate resilience
Enhancing the resilience of communities
Positive investment Likely positive
investment
Neutral No investment
Projects that explicitly
increase resilience
(project by project
assessment)
• Projects that give
priority to vulnerable
countries/
communities
• Projects in certain
priority sectors
Projects that cause no
harm for future climate
vulnerability
Projects that worsen the
(future) climate
vulnerability of the
country/community
'No harm' principle
all projects should at least not worsen the (future) climate vulnerability of
the country/community (red category)
Climate funds should only fund projects in "positive investment" (dark green)
All development banks should have portfolio targets for "positive" (dark
green) and "likely positive" (light green) projects

18. Key messages
2°C investment criteria are necessary
Financial institutions use climate criteria but rarely linked to 2°C
2°C investment criteria for individual projects …
Can be developed from scenarios
Have to be sector specific
Need to strike a balance between complexity and manageability
Use of 2°C investment criteria can be integrated in the decision making
processes of international financial institutions
Criteria are also needed to reduce the risks to investments from and
increase the resilience of communities to climate change impacts
A coalition of “early adopters” could be formed

19. Next steps
Financial institutions may choose to respond in different ways to
the fact that for some individual projects there is a higher
certainty that they are 2°C compatible than for others
A coalition of “early adopters” could be formed bringing together
interested bilateral development banks and governments:
Support and accelerate the development of criteria in sectors
Road test the proposed criteria
Future research: other sectors, private banks, investments in
financial assets, portfolios

20. Key messages
2°C investment criteria are necessary
Financial institutions use climate criteria but rarely linked to 2°C
2°C investment criteria for individual projects …
Can be developed from scenarios
Have to be sector specific
Need to strike a balance between complexity and manageability
Use of 2°C investment criteria can be integrated in the decision making
processes of international financial institutions
Criteria are also needed to reduce the risks to investments from and
increase the resilience of communities to climate change impacts
A coalition of “early adopters” could be formed