Climate Finance: What is Needed? Prepared for “Bridging Climate Change Policy Gap” Conference Daniel Radov Director, NERA Economic Consulting Stockholm 21 November 2016

Contents Targets and investment needs Defining climate finance Barriers to private climate finance Reducing the barriers to private climate finance Conclusions and discussion

Targets and investment needs IEA estimates that total energy investment needs for 2015-2030 amount to $36 trillion COP21 pledges require $13.5 trillion investment in energy efficiency and low-carbon technologies in 2015-2030 period (also according to the IEA) Meeting “below 2°C” goal requires additional “green energy” investment… (plus other sectors) Current investments in renewables, energy efficiency range between $390-740 billion/year In 2010 developed countries pledged $100 billion/year by 2020 for climate-related investment in developing countries. 2016 “Roadmap to US$100 billion” reaffirmed this target ahead of COP22. Total expected energy investment, 2015-2030, is $36 trillion (IEA 2015) Based on total 2014 investment of $740 billion (UNFCCC, 2016) Based on total 2014 investment of $390 billion (CPI, 2016) Gap for private finance

Defining “Climate Finance” Wide definition: All investments made globally to reduce emissions or promote climate resilience Narrower definition: Focus on specific technologies, and/or on developing countries. Targets of Financing: Developed Country Projects: Renewable Energy Energy Efficiency Adaptation … Developing Country Projects: Investment Sources of Financing: Developed Countries: Public Sector Concessional Non-concessional Private Sector Multilateral Development Banks (MDBs) Developing Countries: Policy debate often focuses on increasing “developed to developing” flows But “internal” and “developed to developed” are just as significant for reducing emissions – if not more so

Barriers to (private) climate finance 1 Riskiness of climate investments: Regulatory risks: Future evolution of policy, including risk of policy reversal Allocation risk: Level and duration of subsidy awarded to projects (under given policy regime) Technology risk: Uncertain performance characteristics of underlying (often new) technology Market risks: Fluctuation in market prices and volumes/demand affecting project revenues and costs Counterparty risk: Counterparty actions and characteristics Refinancing risk: Refinancing possibilities for investment, including risk of low market liquidity for “exiting” investment Insufficient investment returns given risks Diffuse and immature market opportunities: E.g. search for investable markets in energy efficiency Inadequate investment structures and procedures: E.g. tenor mismatch as barrier for institutional investors 2 3 4 Where does international arbitration (commercial / investor-state) fit? Regulatory risk: Governments may renege on prior commitments (“bait-and-switch”). Investors may want “change of law” provisions built into contracts. Domestic and/or e.g. Energy Charter Treaty disputes linked to policy reversals have so far not tended to go in favour of investors. What is it reasonable for investors to expect they are protected from? Market risk: Long-term contracts and foreseeability of market developments an important source of disputes

Reducing the barriers to private climate finance 1 Riskiness of climate investments: Various policies exist to de-risk investments: First-loss tranches taken by public entities; CfDs protect against market risk; “Danish model” in offshore wind etc. Insufficient investment returns given risks: Government subsidies; UN Clean Development Mechanism (CDM) or similar crediting mechanisms, concessionary finance. Diffuse and immature market opportunities: Public finance can draw in private finance, with government funded or backed “green investment banks”. Inadequate investment structures and procedures: Financial innovation provides responses: Yieldcos in the US and UK, Green Bonds, EPC wraps to protect against risk of cost overruns and delays etc. The above measures can also increase scope for disputes due to increased contractual complexity E.g. renewable support policies, carbon credit disputes, use of government to government funds 2 3 4 CDM Mobilisation Rates (UNFCCC, 2014) UK GIB Mobilisation Rates (NERA, 2015)

Conclusions and discussion There is a potentially large climate investment gap for private finance to fill Barriers to include regulatory and market risk Various policy interventions and market innovations can lower existing barriers …But these may give rise to additional disputes (and stranded assets…) Dispute resolution procedures can help to distribute risk / reward Economics can help quantify the value of policy interventions, risk/reward trade-offs, and whether / how unexpected it is when things go wrong Additional points for discussion Infrastructure is “easy”… and current infrastructure investment mainly helps with mitigation Other sectors may be harder Passenger transport Building retrofits Agriculture (payments for land stewardship, resilient crop varieties, land reform…?) …and what about adaptation? Is there an investor “return” ?

Contact Us Daniel Radov Director NERA London +44 20 7659 8744 daniel.radov@nera.com © Copyright 2016 NERA UK Limited All rights reserved.

Measuring climate finance Sources of Financing (2014, US$ billion) Investment Flow – Geographical (2014, US$ billion) Investment Flow – Type (2014, US$ billion) Targets of Financing (2014, US$ billion) Source: Climate Policy Initiative, Global Climate Finance – An Updated View on 2013 & 2014 Flows, October 2016

Investment needs in context IEA estimates total energy investment needs (2015-2030) are $36 trillion COP21 pledges imply $13.5 trillion investment in energy efficiency and low-carbon technologies from 2015-2030 UNFCCC estimates 2014 investment in renewables, energy efficiency around $740 billion – implying $11 trillion cumulatively over 15 years Source: UNFCCC