Wanted: a climate finance cookbook

Designing a financial package that will drive low-carbon, resilient growth in emerging economies lies at the heart of the Durban negotiations. The focus is on raising and then deploying smart public funds that can mobilise private capital at both scale and speed.

Institutional investor involvement: Perhaps for the first time in the climate negotiations, institutional investors have been identified as a potential source of funds for the transition to a low-carbon economy. The draft negotiating text released at the weekend highlights that "institutional investors, such as pension funds, sovereign wealth funds and insurers control trillions of USD seeking long-term investment opportunities." This follows rising institutional investor support for "investment grade" policy, with $US20 trillion in assets under management backing this year's investor statement on climate change (see "Plan D for Durban").

Fund flow fidelity: On a global level, we estimate that $US10 trillion in capital expenditure will be required in 2010-2020 for low-carbon energy alone; the funds required for adaptation of agriculture, forests and infrastructure would be additional. The focus in Durban is on what needs to flow from the industrialised to the developing world. To date, $US32 billion has been pledged in so-called "fast start finance" by industrialised countries, above the $US30 billion committed at Copenhagen in 2009. Of this, $US20 billion has now been allocated.

However, this is just a fraction of the total flow of finance. Indeed, the Climate Policy Institute estimates that current annual flows amount to $US97 billion ­ tantalisingly close to the $US100 billion that needs to be delivered by 2020 per annum. Of current flows, the private sector accounts for over half at $US54 billion, public finance for $US39 billion, and carbon offsets at just $US2 billion. Looking ahead to 2020, the World Bank estimates that private financial flows could expand to $US150 billion, with carbon offsets providing another $US20-100 billion.

Practical private provisioning: Much of the discussion here in Durban is on the launch of the Green Climate Fund, which is intended to have a ‘private finance facility' alongside traditional government-to-government allocations (see DURBAN: 50 varieties of negotiation). However, the reality is setting in that even if the Green Climate Fund is established this week, then practical realities will likely limit its impact for a number of years. It will take at least 12 months to set up – and the appraisal process means it will probably not be spending until 2015. Equally critical, if governments want to leverage private capital, then one needs a lever, and no funds have yet been provided for its capitalisation.

One mechanism that is gathering interest is a carbon tax on global shipping. According to the report "Out of the Bunker" (WWF & Oxfam), a $US25 per tonne tax would potentially raise $US25 billion per annum by 2020 and increase the cost of shipping by just 0.2 per cent – considerably less than the impact climate change, partly caused by uncapped emissions from ships, could have on food prices.

Debt, duration, discussion: For the immediate future, climate finance will therefore be driven by using existing ingredients – and mixing them in a more creative way to deliver speed and scale. Two key questions are dominating discussions. The first is how can public and private debt best be blended to drive down the costs of investing in low-carbon growth. The South African Renewables Initiative (SARi) provides one approach, identifying the need for $US36 billion in investment through to 2030 to deliver 19GW of solar and wind capacity. Low-cost loans and insured equity are critical parts of the package, along with $US2 billion of international public funding, which will be provided on a ‘pay-for-performance' basis. This would work out at about $US10/tonne of carbon abated, so that each dollar of public funding would leverage $US13 of private investment.

The second issue is how to attract long-term 'patient capital.' Much of the required investments will be in long-dated assets, but the tenor of available financing can be relatively short term. Tapping debt-capital markets is one option through sovereign, corporate or project bonds focused on low-carbon and climate resilient infrastructure. Again, public finance guarantees may be needed to attract private funding in certain developing countries. Beyond these fundamental questions lies a more practical problem: there is currently no common methodology for defining and tracking climate finance, making it hard to measure either the quantity or quality of flows. Whatever happens here in Durban, expect intensifying dialogue between institutional investors, corporates and policymakers to deploy practical packages of blended funding to accelerate action in key emerging economies.

Nick Robins is head of the Climate Change Centre at HSBC

This is an extract from the HSBC Global Report, "Dispatches from Durban – Wanted: a climate finance cookbook." Reproduced with permission