By Thomas Kerr | 15 January 2013
(World Economic Forum) — We begin 2013 with record wildfires and heat in Australia continuing the pattern of extreme weather events that we witnessed last year. A growing body of scientists agree that extreme weather is the “new normal”. These weather events come at a huge – and rising – cost to our global economic system: climate change is contributing to the deaths of nearly 400,000 people a year and costing the world more than US$ 1.2 trillion, wiping 1.6% annually from global GDP. Without further action, scientists predict a world that is four degrees Celsius warmer by the end of the century, leading to a cascade of devastating impacts, including extreme heat waves, more intense tropical storms, declining global food stocks and a sea-level rise affecting hundreds of millions of people. By 2030, the cost of climate change and air pollution combined will rise to 3.2% of global GDP.
Within the climate crisis lies an opportunity. The past two decades have seen considerable progress in making the transition to green growth, with global investment in renewable energy up significantly, and developing countries rapidly becoming major investors. However, this progress is not enough. Global investment in fossil fuels is still higher than renewable energy, and emissions of greenhouse gases continue to rise, increasing the likelihood of a four-degree world.
To address this issue, the World Economic Forum today publishes the Green Investment Report, the first output of the Green Growth Action Alliance, a coalition of nearly 60 banks, public finance agencies, leading companies and NGOs that was launched at the 2012 G20 in Mexico with the goal of unlocking private finance for green investment. The report finds that private finance is the key to meeting these massive investment requirements. Green investment is becoming a mature sector – the report documents major growth in investment. It also finds that developing countries are increasingly becoming an important source of capital. Are these promising signs sufficient to address negative climate impacts? Can public finance agencies help to fill the gap? And what is the role of private investors? Here are 10 myths – and realities – from the Green Investment Report.
Top 10 myths about climate change and green investment
1. Reduced economic activity due to the financial crisis has resulted in a global reduction in greenhouse gases.
False – while some countries have seen emission reductions, the United Nations Environment Programme estimated global emissions in 2011 at 40 billion tonnes of CO2, 20% higher than 2000 levels.
2. The renewable energy market is in global decline.
Not true – the global renewable energy market has in fact been counter-cyclical to the economy: global investment in renewable power and fuels increased 17% to a new record of US$ 257 billion in 2011. The removal or roll-back of government subsidies has caused some firms to struggle. But other firms have maintained a positive gross margin and the expectation for 2013 is for a restructuring and emergence of a stronger, more focused industry sector.
3. Industrialized (OECD) countries are the leading clean energy investors.
Not true – in 2012, investment originating from non-OECD countries is set to exceed that from OECD countries. In fact, cross-border and domestic investment originating from non-OECD countries grew 15-fold between 2004 and 2011 at a rate of 47% per year. Most of this non-OECD finance is being used domestically.
4. The public sector is the primary source of funds for climate-friendly investments.
Untrue – while the international climate negotiations focus almost entirely on public finance, in fact, the Climate Policy Initiative documented that in 2011, only one-quarter of cross-border investment in climate change mitigation and adaptation was from public sources (US$ 96 billion); fully 75% came from private investors (US$ 268 billion).
5. Cross-border investment in clean energy is a bigger source of finance than domestic investment.
Again not true – in 2011, Bloomberg New Energy Finance reported that 70% of global investment in clean energy was from domestic sources. Interestingly, of this, more than 50% was from non-OECD countries.
6. We cannot address the climate challenge due to fiscal austerity and limited government budgets.
Untrue: While the International Energy Agency (IEA) estimates that US$ 700 billion per year in additional investment is needed to stabilize the climate at two degrees Celsius, the corresponding fuel savings make the transition much easier – between 2010 and 2050, the IEA predicts a net savings of US$ 5 trillion. Further, innovative public-private financing mechanisms have proved successful in reducing and distributing risks and drawing in private investment.
7. Renewable energy is the sector that requires the greatest investment.
This is false – the IEA estimates that more than half of the new investment required per year to 2030 to meet the climate challenge is needed for energy efficiency in the buildings and industrial sectors; 28% is needed for low-carbon transport and 21% is needed for clean power.
8. Investors do not have the right tools to manage the political risk associated with clean energy investments in emerging markets.
While investors have strong perceptions of risks, this is untrue. The Green Investment Report documents a number of existing products and solutions that development finance institutions (DFIs) are using to address investor risk, including loan guarantees, partial risk/credit guarantees and political and regulatory risk insurance cover. These tools are targeting new emerging markets where private lenders are not initially comfortable or familiar with green technologies.
9. It is difficult to mobilize finance for green growth in an uncertain economic environment.
False – the report finds that, despite the global economic slowdown, total new global investment in clean energy grew to US$ 257 billion in 2011. This represented a six-fold increase from 2004 and was 93% higher than in 2007, the year before the global financial crisis. In addition, the multilateral development banks made US$ 1.9 billion in investment through the innovative Clean Technology Fund, which has achieved mobilization of a further US$ 16.4 billion of private finance to date. This sort of leveraging effect has been seen in a number of instruments and can be replicated to scale up further private investment.
10. Institutional investors do not have the means to invest in green infrastructure financing.
Not true – green bonds have significant potential as a means to access deep pools of low-cost capital held by institutional investors for green and climate change-related projects. Institutional investors are natural buyers of green bonds, given their appetite for investment in low-risk fixed income products with long-term maturities that match their long-term liabilities. The Climate Bonds Initiative estimates the size of the global climate or “green bond” market at US$ 174 billion.
Thomas Kerr, Director, Climate Change and Green Growth Initiatives