C “Climate finance” will be the phrase uttered most often during the climate talks in Durban. The need for it, more of it, more quickly and smartly applied will be the substance of many discussions in plenary meetings and corridors.
In more ringing tones will be asserted the right of developing countries to it, and the responsibility of developed countries to deliver it: the accountability agenda in a nutshell.
The international Green Fund, a work-in-progress co-led by South African Minister in the Presidency, Trevor Manuel, is the main vehicle of choice to gather the money and put it to good use. $100-billion a year from 2020 is the target, announced with much fanfare in Copenhagen in 2009. This is a big number when set against current annual official development assistance of about $110-billion.
But it pales into insignificance when benchmarked against, say, recent worldwide public expenditure of about $5-trillion to soften the impact of the global recession (‘fiscal stimulus’), let alone the tens of trillions of dollars to date in lost economic activity resulting from the recession. The target number, furthermore, is frankly insignificant compared to the United Nations’ estimate of annual environmental costs from global human activity of about $6.6-trillion in 2008, equivalent to 11% of global GDP.
Likely available climate finance, that is public money allocated specifically to climate-related uses, bears little relationship to the investment needed annually over the next two decades for greening power systems, transport, buildings and land use. Most estimates, official and otherwise, put this number in the order of several trillions of dollars a year to 2030 if we are to successfully transition the global economy to a sustainable pathway.
The International Energy Agency estimates that $5.7-trillion must be invested in renewables alone by 2035 to avoid catastrophic climate change. Such astonishingly large investment needs are, of course, widely understood by folks designing mechanisms to finance this transition. Using public funds to attract, or ‘leverage’, private finance is at the heart of the vision of how to reach scale.
Fiscal incentives, feed-in tariffs, publicly-guaranteed insurance, green bonds, low-cost debt from countries that still have decent credit ratings (and so lower costs of borrowing) and other more exotic financial instruments are being crafted in an effort to use every scarce dollar of tax revenue to pull in as much profit-seeking, private investment as possible.
To date, around $21-billion has been raised from the public funds of developed countries. One assessment of this experience suggests that typical leverage ratios range from 3 to 1:15. On that basis, $100-billion a year could go quite a long way, but not nearly far enough.
Investing in the next generation of competitive companies and economies is where the big bets will be placed, rather than in reducing carbon emissions per se. And scale counts. It’s easy to buy windmills, and pretty straight-forward to make them spin around and generate green energy. But large-scale finance will not be secured by buying one windmill at a time.
Furthermore, one needs to buy a lot of windmills over a long period of time to get the upstream benefits of green jobs — and the income from building, servicing and exporting them, investing in research and development, and using their energy to green exports to increasingly environmentally-conscious, international buyers. The same of course it true for solar, trains and other elements of tomorrow’s green, competitive economy.
As South Africa’s Minister for Trade and Industry, Rob Davies, remarked at the World Economic Forum in Cape Town earlier this year, “We do not want in a decade’s time to be consuming other peoples’ sustainable products.” Private investors, manufacturers and technology providers will put down roots if they can see long-term market opportunities created by ambitious and predictable public policies, backed by strong leadership and credible institutional arrangements.
Renewables, more than anything else, demonstrate how scale counts in creating the business opportunities that can secure large-scale finance. China has the world’s most ambitious renewables programme, with plans to develop 500GW of renewable energy generation by 2020, and over $1-trillion allocated in its 12th Five Year Plan to 2015 for renewables and smart grids. And this investment is catapulting China into becoming the world’s leading provider of renewables infrastructure.
Morocco is advancing plans to build at least 5GW of renewables by 2020, which would deliver almost 50% of its overall power generation. Key to its plans is to sell its desert energy into the European market, establishing a new industry, creating jobs and growth. Denmark already obtains over 20% of its energy from wind, driven by a wind industry that employs tens of thousands of people, and recently announced ambitious plans to increase that percentage to 50% by 2020.
Ontario, Canada’s most populous province, recently announced a multi-billion dollar renewables procurement programme in association with the Korean company Samsung, intended to catalyse the emergence of a revitalised, green economy. India has accelerated its renewables ambition after a relatively slow start, with its flagship programme, the India Solar Mission. They intend to establish 20GW of renewables within a decade, thereby attracting $50-billion in new investment.
And finally, Germany, the global icon of policy-driven renewables, has met its target of renewables generating 12.5% of its electricity and created hundreds of thousands of jobs, with the stated vision established following Japan’s nuclear catastrophe of achieving 100% renewables in due course.
The common thread among these diverse economies and societies is their ambitious, almost audacious, game plans, which are realising major economic benefits through credible, long-term commitments and rapid scale-up to realise them. Each has demonstrated the political will to shape institutions and policies, and to raise their citizens’ consciousness of the importance of green energy as a backbone for any successful, 21st century economy.
And for the record, investing in green energy and securing economic benefits along the way is tough. Coordinating energy, industrial and economic, and climate policies looks easy on paper, but it is not so in practice. Attracting international capital and technology, while finding ways to bring, often immature, domestic businesses into the mix is always a challenge. Betting on today’s technologies with considerable uncertainty as to their future pathways involves bold decisions in placing a lot of public money.
South Africa’s Integrated Resource Plan sets the stage for a game-changing increase in renewables, with plans for 17.8GW by 2030. And the eagerly-awaited bidding process for an ambitious 3.7GW that is intended to attract private investors and technology providers is now underway, with the expectation that people with shovels will start digging holes for windmills and building factories to make solar panels over the next 12 months.
South Africa is also advancing both policy development and institutional reform to provide comfort to private investors that the opportunities that they think they see are indeed the opportunity that they will get. And South Africa has increased domestic electricity tariffs by a painful 25% in the last 12 months and is striving to continue that astonishing rate of increase over the coming two years to bring them up to the full financial cost of coal-fired energy. And that brings us back to the matter of finance.
The South African Renewables Initiative, a government-led, international partnership supporting South Africa’s scaled ambitions for renewables and green growth, estimates that the extra cost of delivering the renewable energy set out in the current Integrated Resource Plan — over and above alternatives — would be up to $9-billion in net present value.
Were South Africa to raise its ambitions even further, to a technically feasible 24GW by 2025, thereby increasing investment in renewables from an estimated $36-billion under the current Integrated Resource Plan to about $50-billion, the extra costs would rise to up to $14-billion. This is a lot in context, roughly equivalent to the entire average annual income of well over a million South African citizens.
Not surprisingly, South Africa has made the point loud and clear that it needs help in paying this bill. Blending international public finance with private capital can help to bring down these major additional costs. Low-cost debt in sufficient volume from governments and international public financing institutions, combined with insurance instruments that reduce commercial risks, could reduce the incremental costs of current plans to about $6-billion.
Remaining is still a number to be reckoned with, but one that is much easier to digest domestically in return for the economic benefits that will flow along with additional tax receipts and foreign exchange earnings. There is huge potential for international co-operation to deliver such ambitious plans, with resulting economic and climate benefits, in South Africa and also elsewhere. Realising such potential, however, requires a stepwise shift in mindset and practice.
Current international public debt and equity financing for renewables is not of the right order of magnitude. Piecemeal international support and uncertain domestic plans create a vicious circle of low ambition and opportunity, weak leadership and distrustful investors who will, as a result, charge more for doing less.
Turning the vicious into a virtuous circle that delivers ambitious renewables development, accelerated climate mitigation and upside economic benefits will require the international community to make larger-scale, longer-term, more credible commitments, and likewise domestically.
The forthcoming climate talks will have been a success if they can get beyond the narrow lens of drip-feeding climate finance, and embrace the need and opportunity for financing green growth. Through such a lens, COP17 would acknowledge, celebrate and advance suitably entrepreneurial, lighthouse initiatives, imbuing the climate talks with action commensurate with the challenges we are in Durban to address.
Simon Zadek is an independent advisor on climate and broader sustainable policies and strategies, and is a Senior Visiting Fellow at the Centre for International Governance Innovation and the Global Green Growth Institute.
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