How Will the World Finance Climate Change Action Key Messages Climate negotiations can transform global and national financial landscapes Copenhagen is as much about finance and development as about climate. Finance, Economic and Development Ministers must be involved in key issues: How much additional finance is needed? How will the money be raised for different needs? How will resources be transferred to diverse recipients? How will processes and outcomes be monitored? Climate, finance and development are closely linked Climate finance is a catalyst to leverage private and public resources, open economic opportunities, and enhance development policy and finance. Policy, market and technology innovations are key to maximizing the impact. Economic stimulus programs can address climate action Response to financial crisis can facilitate or amplify climate action. Consider provision of incentives to developing countries for green recovery ahead of the negotiated post 2012 climate finance package. 2
What is climate finance? Climate Finance is a Catalyst Sources Uses Catalytic climate finance Climate finance can cover additional cost to Facilitate enabling policies, regulatory frameworks, institutions and markets in support of adaptation and mitigation Catalyze transformational private and public investments and development programs low-carbon technologies (renewable energies, energy efficiency in industry, water use, transport, buildings...) terrestrial carbon (agriculture and forestry) climate resilience (change practices and factor-in climate vulnerability in infrastructure planning, in agriculture...) Support research, development and deployment of new technologies 3
How Will the World Finance Climate Change Action TODAY S DISCUSSION Connecting Climate, Finance and Development Meeting the Diverse Needs Through a Portfolio of Instruments Mobilizing International Climate Finance Making Climate Finance Work at Home Take Away Messages 4
Connecting Climate, Finance and Development Climate: Urgent Action Versus Heightened Risks The 10-15 year window of opportunity is closing fast ) The world is committed to 2 o C warming above the preindustrial level. Adaptation efforts must be intensified to cope with unavoidable changes. IPCC estimates that exceeding 2 o C will undermine development prospects. Business-as-Usual is forecast to lead to 6-7 o C of warming, at an unprecedentedly rapid pace. Temperature change during the last ice-age was 8 o C over millenniums. Year Delaying action reduces development options for mitigation and adaptation and raises their costs. 5
Connecting Climate, Finance and Development Climate Finance: Additional Costs and Catalytic Impacts Total climate finance for developing countries over 2010-20: US$ 180 bln to US$ 250 bln p.a.* or 0.5 % of OECD GDP Additional investment needs over 2010-20 (US$ bln p.a.) US$ 250 bln p.a. Climate finance covers additional costs and serves as a catalyst Mitigation 550 ppm 450 ppm Global ~270 ~460 Developing countries ~150 ~220 US$ 4,620 bln p.a. (2008) Private Sector Investments National Development Budgets to leverage development investments Adaptation Developing countries ~30 ~30 International Development Assistance * UNFCCC, IEA, McKinsey 6
Connecting Climate, Finance and Development Comparative Costs, US$ bln. per annum, 2008 258 310 560 120 250 US$ bln Current Dedicated Resources Cover less than 5% of the Needs 7
How Will the World Finance Climate Change Action TODAY S DISCUSSION Connecting Climate Change, Finance and Development Meeting Diverse Needs Through a Portfolio of Instruments Mobilizing International Climate Finance Making Climate Finance Work at Home Take Away Messages 8
Meeting Diverse Needs Through a Portfolio of Instruments Developing Countries are Already Taking Action... drawing on a menu of instruments to match the diversity of needs Brazil: Reducing deforestation in the Amazon by 70% by 2020; expanding biofuel programs, energy efficiency Ethiopia: Integrating adaptation in sustainable land management, social protection, development of hydropower, and building capacity programs China: Energy efficiency, 20% reduction in energy intensity from 2005 to 2010; 15% renewable energy target by 2020; Clean technology R&D; sustainable transport India: Adaptation (drought, floods, cyclones, glacier melting), energy efficiency, hydro and new renewable energy, solar energy R&D, knowledge Morocco: Integrated approach to tackling climate change in water, agriculture, and urban sectors, Mediterranean Solar Plan Initiative Indonesia: Adaptation (coastal flooding), forest conservation programs, scaling-up renewable energy, low carbon development fund Caribbean Islands: Adaptation to increasing hurricanes and storms, catastrophic risk bond 9
Meeting Diverse Needs Through a Portfolio of Instruments Adaptation is Priority for Developing Countries Strengthening Climate Resilience in Country-led Development Processes Action Financing Examples Core Development Climate Resilient Development Adaptation Domestic Budgets plus ODA Increased ODA plus Additional Climate Finance New & Additional Climate Finance Investments in education & health, income- generation programs; etc. Accelerated agricultural diversification; climate resilient road construction & irrigation systems, climate forecasting; capacity building, etc. Seawalls; dikes; additional shelters & water-storage Adaptation requires additional finance to ensure development outcomes Win-win opportunities can help enable most effective and efficient adaptation Synergies in climate finance and development finance must be fully utilized 10
Meeting Diverse Needs Through a Portfolio of Instruments A Range of Tools is Needed to Realize Different Mitigation Potentials Lighting switch Industry: EE in cement Power generation from landfill gas GAINS from abatement COSTS of abatement Waste management Grassland management Reforestation Wind Solar Nuclear Abatement potential Coal CCS Tools: Policies and regulations; incentives for barrier removal; technical assistance Carbon market Stylized Marginal Abatement Cost Curve Public investment / subsidy, e.g. for new technology deployment Support for R&D 11
Meeting Diverse Needs Through a Portfolio of Instruments Managing Terrestrial Carbon can Help Climate and Development Land use change, forestry and agriculture account for almost 50% of emissions in developing countries Offer cost effective mitigation with significant co-benefits: improved livelihoods; reduced soil erosion; biodiversity 12
Meeting Diverse Needs Through a Portfolio of Instruments Policies and Market-based Incentives Will Over Time Catalyze Most of the Investment Flows Financing the First Phase Developed countries: aggressive and integrated cap & trade markets Developing countries: major role for carbon offsets and international funds for adaptation and mitigation All countries: reflecting climate externalities in policies, taxes and incentives Financing the Second Phase A global cap & trade market As incomes and living standards rise, developing countries migrate from offset markets to cap & trade Policies, taxes and incentives reflect climate externalities International funds mostly for adaptation and capacity building Collaborative R&D efforts, international support for adaptation and clean technology access to poorest countries 13
Financing needs Meeting Diverse Needs Through a Portfolio of Instruments Evolution of Climate Finance Needs and Mechanisms for Developing Countries Catalytic climate finance Multilateral, mostly developed country funding International climate funds Cap-and-trade Market-based Instruments to leverage development investments CDM Carbon offsets & other performance-based schemes Post-2012 ~2050 Domestic developing country funding This is a stylized, illustrative picture, not intended to show the exact sizes of various mechanisms 14
How Will the World Finance Climate Change Action TODAY S DISCUSSION Connecting Climate, Finance and Development Meeting Diverse Needs Through a Portfolio of Instruments Mobilizing International Climate Finance Making Climate Finance Work at Home Take Away Messages 15
Mobilizing International Climate Finance Potential of carbon markets Expanding Carbon Markets Leverage investment through multiplier effect; facilitate technology transfer; create global price signal for carbon; lower costs of compliance with targets Scaled-up markets for carbon offsets can generate significant financial flows for developing countries Markets for carbon offsets can only achieve full potential provided: Adequate developed countries targets and provisions for offsets: up to US$ 30 bln under currently proposed developed countries targets for 2020 while stricter targets can facilitate up to US$150 bln. Progress with reforming CDM and introducing REDD, sector crediting and other performance-based mechanism Auctioning emissions rights under cap & trade systems in developed countries can be a useful additional source Could generate up to US$ 30 billion and close the adaptation financing gap for developing countries or be used for both adaptation and mitigation in developing countries 16
Mobilizing International Climate Finance Other Financing Tools US$250 bln p.a 450 ppm. US$180 bln p.a 550 ppm. Gap: $ 70 bln Carbon markets can reduce the financing gap significantly yet need to be complemented by other instruments, particularly for a 450 ppm trajectory Adaptation, capacity building, new technology R&D and transfer, and market barriers require a portfolio of tools Specific Financial Proposals Under Discussion Include: Gap: $ 190 bln 60 180 0.5-1% GDP contribution by developed countries US$ 150-300 bln (G-77 / China) Contribution by all countries based on GDP, GHG and population US$ 10 bln initially, with potential scale-up (Mexico) International tax on aviation and/or shipping up to US$ 40 bln (Various) $30 bln Offset Market $150 bln Offset Market plus $30 bln. from auctioning Levy on GHG emissions over 1.5 ton/capita US$ 18 bln in net transfer to developing countries, mainly for adaptation (Switzerland) Tax on international financial transactions US$ 15-20 bln. (Tobin tax) 17
How Will the World Finance Climate Change Action TODAY S DISCUSSION Connecting Climate, Finance and Development Meeting Diverse Needs Through a Portfolio of Instruments Mobilizing International Climate Finance Making Climate Finance Work at Home Take Away Messages 18
Making Climate Finance Work at Home Enabling Domestic Policy Environment is Key Incentives Rationalize energy, water and agricultural price, tax incentives, fiscal and expenditure policies Public Outreach Regulations Efficiency standards; codes, zoning; climate screening/ proofing of investments Institutions Capacity of public, private and financial sector institutions to assess and act on climate risks and new business opportunities Markets Improve investment climate; deepen financial and capital markets; new markets (cap & trade, CDM) Public Outreach Education, raising awareness and promoting change in consumer behavior and preferences 19
How Will the World Finance Climate Change Action TODAY S DISCUSSION Connecting Climate, Finance and Development Meeting Diverse Needs Through a Portfolio of Instruments Mobilizing International Climate Finance Making Climate Finance Work at Home Take Away Messages 20
Take Away Messages Decisions needed from climate negotiations Targets and actions Emissions targets for developed countries Criteria for recognizing and crediting mitigation action by developing countries Finance CDM reform Expanded coverage and scale of offset markets Sector crediting, REDD, agriculture Stable and predictable additional resources Financing for adaptation must be provided as priority Technology transfer and collaborative R&D Governance Arrangements for transfer and monitoring of funds, verification of results, evaluation of effectiveness 21
Take Away Messages Negotiation outcomes will transform development cooperation and finance Climate Agreement Will significantly affect how market economies operate Will require new policies, revenues and investments Will create new global market mechanisms Finance Economic & Development Ministers need to be involved To develop a portfolio of tools catalyzing sufficient investment into adaptation, mitigation, technology To establish effective and efficient international finance transfer mechanisms To maximize synergies with development finance and leverage on private sector investment Delay increases costs Accelerating support to developing countries will help make green investments at a critical and opportune time of economic recovery 22
Take Away Messages What the World Bank Group can Offer Economy-wide support to governments for sustainable development and policy reforms (e.g. energy pricing) Capacity and experience in development finance Major lender to renewable energy and energy efficiency Climate risk management in water, agriculture and disaster risk reduction programs Extensive partnerships: UN agencies, other MDBs, private sector, NGOs, research community Leveraging GEF resources Expertise in leveraging climate finance Spearheading the carbon market and developing robust Carbon Finance business Climate Investment Funds (CIF) Financial innovations on the capital markets 23