La finanza per il clima: opportunità per le imprese Roma, 22 Marzo 2017 GREEN FINANCE AND CLIMATE FINANCE: STRUMENTI ED OPPORTUNITÀ Carlo Carraro Vice Chair, IPCC WG III Ca Foscari University of Venice
The Paris Agreement represents a significant shift in terms of ambition on climate finance: Recognizing that the long-term temperature goal should be to hold [ ] the increase in the global average temperature to well below 2C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 C (Article 2.a) Calling for making finance flows consistent with a pathway towards low greenhouse gas emissions and climate resilience development (Article 2.c). 1
Investment flows to achieve the 2 C target Median values for power generation: 100 billion USD per year until 2030 400 billion USD per year between 2030 and 2050. (400 billion USD per year are equivalent to 0.5% of gross world product (GWP) in 2013. However, assuming a 2.5% growth rate from now to 2050, the incremental investments will be equal to just 0.2% of GWP in 2050) Median values for energy efficiency: 600 billion USD per year in 2030 800 billion USD per year in 2050 Median value for energy R&D: 50 billion USD per year in 2030 (0.08% of global GDP in 2030 and to about 0.07% in 2050) About 750 billion USD per year until 2030 Source: IPCC AR5 - WG3 "The Mitigation of Climate Change", ch. 16, 2014
How to fill the financing gap for energy transition? Carbon pricing Reallocating portfolios towards low carbon energy by replacing fossil fuel stocks with energy efficiency and renewable energy investments. This requires positive returns on climate related investments (clean energy investment has grown rapidly in recent years: In 2014 USD 270 billion was invested in RES and the world added more low-carbon electricity capacity than fossil fuel capacity). New financing vehicles: green bonds Technological innovation (the costs of low-carbon technologies continue to fall) 3
What reference price for carbon? The answer depends on: - Technology availability - Timing of actions - Architecture of the agreement - Distributional implications 4
Data sources IPCC WGIII AR5 data base, publicly available at https://secure.iiasa.ac.at/webapps/ene/ar5db/dsd?action=htmlpag e&page=about 15 IAMs 1000 scenarios, spanning different climate targets and different policy architectures, and technological availability LIMITS MIP (Tavoni et. al, Nature Climate 2015) 6 IAMs 2 non cooperative scenarios with different pledges (mimicking INDCs) 2 fully cooperative scenarios (450 and 500 ppm eq) 3 burden sharing schemes (tax, per capita convergence, equal costs) All data publicly available 5
2020 2030 2040 2050 2020 2030 2040 2050 $/tco2 $/tco2 Global carbon prices for different climate objectives 500 430-530 ppme 500 530-650 ppme 450 400 ~ 210 450 400 350 300 250 ~ 120 350 300 250 ~ 75 ~ 180 200 200 ~ 60 150 100 150 100 ~ 20 ~ 30 50 0 50 0 ~ 45 6 Boxplots of model results: the central mark is the median, the edges of the box are the 25th and 75th percentiles, the whiskers extend to approx 5-95%
2020 2030 2040 2050 2020 2030 2040 2050 $/tco2 $/tco2 Global carbon prices: first best scenarios 500 430-530 ppme 500 530-650 ppme 450 450 400 400 350 300 ~ 150 350 300 ~ 100 250 200 150 ~ 60 100 ~ 100 250 200 150 ~ 20 100 ~ 35 ~ 60 ~ 30 50 0 50 0 7 Boxplots of model results: the central mark is the median, the edges of the box are the 25th and 75th percentiles, the whiskers extend to approx 5-95%
Expected revenues from carbon ricing in the EU Total EU ETS allowances in 2020: about 1500 Million Tons of CO2eq Average target price: 20 euro per ton of CO2 Auctioned share: 57% Total expected revenue: about 17 billions => Need to broaden tax base to non ETS sector
Reallocating portfolios: the surge of climate finance -Large investments driven by return on renewables power plants, now competitive. About 400 billions invested in 2014 -New financial instruments are available: green bonds, insurance schemes -Public-private partnerships -Divesting strategies by several major investors
Global climate finance flows reached at least USD 391 billion in 2014 as a result of a steady increase in public finance and record private investment in renewable energy technologies. In 2014, public actors and intermediaries committed USD 148 billion, or 38% of total climate finance flows.
Uses of Climate Financing 93% mitigation Renewable energy generation Energy efficiency in industry and buildings Sustainable transport AFOLU & livestock management 7% adaptation Water supply management Climate-resilient infrastructure Coastal protection Disaster risk reduction AFOLU & natural resource management
Breakdown of total public mitigation finance by sector in 2014 (USD Billion) Mitigation accounted for 93% of total climate finance in 2014, or USD 361 billion, 81% of which went toward renewable energy.
Breakdown of total adaptation finance by sector in 2014 (USD billion) Most resources devoted to water and wastewater management. Investments in adaptation remain too small.
Breakdown of total climate finance by instrument, 2012-2014 in USD billion Private actors relied primarily on their own balance sheets to finance renewable energy projects, which accounted for USD 175 billion or 72% of total private investment in 2014. Mostly, they relied on balance sheet financing to invest in solar PV projects in high-income and upper-middle income countries such as Japan, the US and China.
Green Bonds Green bonds are labelled bonds specifically issued to finance environmental protection, sustainability or specific climate mitigation and adaptation measures. They can be issued by governments, development banks, commercial banks or corporations. The majority of issuances have tenors over 10 years, reflecting the long-term nature of climate assets, such as energy infrastructure bonds. 16
Green Bonds
Green Bonds: Distribution by issuer type and geographic area 19 Source: Climate Bond Initiative (2015)
Corporate Bond Issuance by Region 20 Source: Bloomberg New Energy Finance
21 Corporate Bond Issuance by Technology
Green Bonds Green bonds play also a very important role as refinancing tools, which is key especially during higher risk construction phase of renewable energy projects, with the aim to ensure investors and developers that once operational the asset can be refinanced through bonds. Green bonds are looking increasingly attractive to insurance companies (e.g. Zurich bought a USD34 million, 30-year fixed-rate green bond issue from the World Bank in February 2015). 22
Technological Innovation reduces Mitigation Investments 0.12% Public energy R&D expenditure 0.10% 0.08% 0.06% Decarbonization 0.04% 0.02% Efficiency 0.00% 1970 1980 1990 2000 2010 2020 2030 2040 2050 Historical Tot Energy R&D A1 CC BAU Energy Intensity R&D A1 CC Roughly 50 bln dollars a year of energy innovation investments in the next two decades at the world level. EU: 11,3 billions; Italy: 1.2 billions (300-400 millions on En. Eff)
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