(Author’s photograph of the Flame Towers at sunset in Baku, Azerbaijan)
We have been running up a tab. For generations, we have been incurring costs associated with the use of our natural resources in air, water and land. But, who pays the bill?
COP29 is catalyzing many events designed to “divvy” up the account, coax national parties to pay their fair share and, at the same time, create innovative strategies to facilitate the flow of funds on an equitable, international basis.
New Collective Quantified Goal
(This image is from the ODI Global website.)
A key outcome of COP29, the “Finance COP,” will be an agreement on the amount of the bill. It is known as New Collective Quantified Goal on Climate Finance (NCQG). The NCQG figure is the estimated annual amount of global financing required to meet specific climate goals.
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The new NCQG will facilitate the channeling of funds to urgently needed climate action in developing countries.
“It will support implementation of low-carbon, climate resilient solutions in energy, transport, agriculture and other vital systems. By increasing financial support, it should enable developing countries to step up their climate ambitions in the next round of Nationally Determined Contributions (NDCs), which are due in 2025.”
Experts estimate that “US$6.5 trillion is needed on average per year by 2030.”
The ultimate NCQG will be a big number arising from complex calculations, but the financial context is recognizable in our daily lives:
- What is the need?
- What is the cost of addressing the need?
3. How do we fund the need?
Climate Action Innovation Zone
While COP29 delegates deliberate about the NCQG, which concerns the need and the cost of addressing that need, there is another task. Conference participants must evaluate “how” to meet that need with international capital.
For example, Climate Action hosted the Sustainable Innovation Forum on Wednesday, November 13, 2024 and Thursday, November 14th in the Climate Action Innovation Zone.
A keynote address, entitled “An International Financial Framework Fit for Purpose,” offered innovative approaches to climate investment funding.
Eric Usher, CEO of the United Nations Environment Programme’s Finance Initiative, noted that not all green investments or financing opportunities are the same. And they should be supported by different frameworks to facilitate the flow of funds.
He identified three types of climate financing and urged delineation of corresponding metrics to guide related funding decisions:
1. “Dark Green Projects” – Traditional climate finance with direct positive impacts on nature and climate. These are “very straight forward” for public and private finance sources to evaluate and fund.
2. “Many Shades of Green” Projects – Aligned with the Paris Agreement of 2015 and consistent with low emission pathways. These are “transitioning industries within hard to abate sectors,” such as heavy-duty trucking, shipping, aviation, iron and steel, and chemicals and petrochemicals. These require different metrics to measure the environmental effectiveness of finance to drive the transition of these industries.
3. Transformational finance. “A finance that aims at rethinking and aims for change across entire systems. Reorienting the larger financial flows in line with the country’s climate priorities and longer term pathways.”
Amani Aboud Zeid, Commissioner for Infrastructure and Energy with the African Union, appeared to favor transformational finance – the third category of climate financing – for Africa.
Zeid explained in the session entitled “Driving Ambition Through Public-Private Collaboration,” that private finance is not incentivizing public finance into action on the African Continent. “[Multilateral organizations in the private sector are] not adequately equipped as such within the current structure.”
In Africa, she noted, “more than half of our continent does not have access to electricity.” So, the cost of electrifying to meet climate energy goals is about “$1.3 trillion dollars.”
“For us in the African Union, we have an energy master plan and we are putting clear targets for energy but also for other sectors.
For multilateral institutions to think this will be provided through the usual channels – meaning loans – on top of the levels of debt already existing even with the private sector contribution, this cannot happen.”
She underscored a need for transformational finance, within a framework that is more realistic in assessing and delivering climate capital to the African continent.
Financial Times Pavilion
(This image is from the Financial Times)
Financial Times editors probed various aspects of international climate finance during week one of COP29. Yet, for many sessions, the fundamental questions remained the same: (1) What is needed? (2) Who will pay for it? (3) And how?
Simon Mundy, Financial Times Moral Money Editor, moderated “Climate Finance: Moving from Pledges to Implementation.” The focus was on the “how” – how to galvanize the capital to pay for the necessary climate mitigation, adaptation and resilience investments.
Linda-Eling Lee is Founding Director and Head of MSCI Sustainability Institute, which provides data and analytics to financial institutions.
Lee noted that as of the 2015 Paris Agreement, the bulk of the climate emissions was coming from developed countries. In 2024, however, the bulk is coming from developing countries. So, the funds need to flow there. However, the data indicate a blockage in the financial system due to the current metrics used in evaluating transition funding for transition climate investments in developing countries.
Mundy sought to define the term “developing countries” while noting that it seems to include most of the population of the world. Given that ubiquity, the characteristics of countries within that category vary and so might suitable responses to their needs.
The session included an excellent exchange between two panelists from developing countries, one panelist from Africa and one from India. Together, they shed more light upon the finance issues raised by Eric Usher and Amani Aboud Zeid in the Climate Action Innovation Zone.
Amandou Hott, is a former Minister of Economy in Senegal and former Vice President & Special Envoy of the African Development Bank. He is currently a candidate for the Presidency of the African Development Bank.
Hott explained some of the complexities of securing sufficient funds for climate investments in Africa:
1. Lack of Standardization – There are 54 countries on the African continent and each has unique standards and procedures for securing climate funds. There is a need to somehow unify the continent to attract financing opportunities.
2. Technical Assistance Gap – Many African governments need technical assistance for research and guidance in the negotiation and development processes to engage equitably with potential funders, who arrive with a deep knowledge of venture capital, private equity, multinational and/or development banking.
3. “Africa Risk Premium” – “In Africa, the big elephant in the room is the cost of capital.” Even when a country secures funding, the interest rate includes a premium for doing business on the continent. For example, he compared a recent loan to Iraq, which was given a 4% interest rate, and a loan to Nigeria, which was given an 8% interest rate.
4. Local Developer Deficit – There is an insufficient number of local developers who can take on large scale development projects.
5. Lack of Continuity – Loans to African countries can be inconsistent. Longer term commitments are needed.
6. Lag Between Financial Commitment & Distribution of Funds – The implementation gap can be as long as several years, which is especially hard on populations in emerging markets within developing countries.
7. Differentiation of Climate Investments – Funds for mitigation are easier to secure than funds for adaptation, so more concessionary capital from the public sector and more grant funding are needed for adaptation projects. At present, most adaptation climate investments include the “Africa Risk Premium,” so that is another impediment.
Arunabha Ghosh is CEO of the Council on Energy, Environment and Water, a policy research institute based in New Delhi, India.
Ghosh, and Mundy, noted key differences between India and the African continent. India’s population is unified into one nation with a major international business base, including powerful companies such as Reliance Industries Limited and the Tata Group. There are strong domestic markets and a significant amount of domestic capital being deployed. The cost of capital for clean energy projects is a fraction of what it was just eight years ago. The massive scale of the climate investments slated for the next ten years in India is “larger than the Inflation Reduction Act.”
Ghosh recounted the history of the financial infrastructure for climate investments in India:
1. The early emphasis was to “de-risk the programs rather than the projects.” The focus was to provide concessions or guarantees to clean investment categories. At times this included double guarantees between the federal government and the state governments.
2. There was a “line of sight” to scale up clean investment categories. Targets were set and then policy continued to be revised to support the various stages of the development of India’s climate investment infrastructure.
3. Stages 1 and 2 led to investment opportunities that are beginning to be recognized internationally. This attracts funds into India.
4. Stages 1, 2 & 3 are enabling India’s creation of a green investment hub that may benefit neighboring Asian countries to fund projects within the region. He cited the example of GIFT City, India, a Multi-Services Special Economic Zone.
Ghosh urged that discussion about NCQG move from the ultimate number or “quantity” of investments to the “quality” of those investments. Quality investments must be catalytic to stimulate additional investment, they must be consistent over time and convenient as well as timely implemented.
Ghosh shared a final observation that different segments of the new green economy are attractive to different kinds of investors. India’s experience was that renewables were interesting to public and private equity; early stage startups like e-mobility attracted venture capital and “over the horizon” green hydrogen investments drew international conglomerates.
(This image is from the Financial Times.)
The exchange between the two gentlemen from Africa and India inspired additional thoughts. Mundy mused whether climate investment risk is being overrated in some developing countries. So might this perceived risk actually be a buying opportunity for a private equity investor and a way for funds to flow where needed? Or must credit rating agencies first change their approach in evaluating risk in developing countries in Africa and elsewhere? Or must multinational and development banks or other sources of funds step in to de-risk the investments first by offering concessions and guarantees?
We are moving forward at COP29. It is anticipated that the official determination of the New Collective Quantified Goal on Climate Finance (NCQG) will be announced soon. It is quite clear that analysis of how best to deliver those funds to developing countries will continue at COP29 and beyond.
[Author in the Climate Action Innovation Zone on November 13, 2024]
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