Introduction to economics of climate change Ankara, 5 September 2016
Climate finance There is no widely agreed definition of what constitutes climate finance, but estimates of the financial flows associated with climate change mitigation and adaptation are available.
Components of climate finance
Investment Flow An investment flow (IF) is the capital cost of a new physical asset with a life of more than 1 year Limited to new physical assets, because of climate change implications for the duration of the operating lives of the facilities & equipment purchased
Financial Flow A financial flow (FF) is an ongoing expenditure on programmatic measures; financial flows encompass expenditures other than those for expansion or installation of new physical assets. Primarily operation & maintenance (O&M) costs: salaries, raw materials, equipment maintenance, depreciation, utilities, rent, insurance, taxes etc.
Operation & Maintenance (O&M) costs of new physical assets The physical assets purchased with investment flows will have operation & maintenance (O&M) costs associated with them Can vary considerably among investment flow types & have a significant effect on the total cost of an investment
Estimates of financial flows Accoridng to the IPCC AR5, current annual financial flows whose expected effect is to reduce net GHG emissions and/or to enhance resilience to climate change and climate variability show USD 343 to 385 billion per year globally. Out of this, total public climate finance that flowed to developing countries is estimated to be between USD 35 and 49 billion per year in 2011 and 2012. Estimates of international private climate finance flowing to developing countries range from USD 10 to 72 billion per year including foreign direct investment as equity and loans in the range of USD 10 to 37 billion per year over the period of 2008 2011
Paris Agreement Financial resources of 20 billion USD per year by 2020 100 billion USD (minimum) per year thereafter
Role of private sector In many countries, the private sector plays central roles in the processes that lead to emissions as well as to mitigation and adaptation. Within appropriate enabling environments, the private sector, along with the public sector, can play an important role in financing mitigation and adaptation The share of total mitigation finance from the private sector, acknowledging data limitations, is estimated to be on average between two-thirds and three-fourths on the global level (2010 2012). In many countries, public finance interventions by governments and international development banks encourage climate investments by the private sector and provide finance where private sector investment is limited.
Role of private sector (cont) The quality of a country s enabling environment includes the effectiveness of its institutions, regulations and guidelines regarding the private sector, security of property rights, credibility of policies and other factors that have a substantial impact on whether private firms invest in new technologies and infrastructures. Dedicated policy instruments and financial arrangements, for example, credit insurance, feed-in tariffs, concessional finance or rebates provide an incentive for mitigation investment by improving the return adjusted for the risk for private actors. Public-private risk reduction initiatives (such as in the context of insurance systems) and economic diversification are examples of adaptation action enabling and relying on private sector participation.
Financial resources for adaptation Financial resources for adaptation have become available more slowly than for mitigation in both developed and developing countries. There is a gap between global adaptation needs and the funds available for adaptation. Potential synergies between international finance for disaster risk management and adaptation to climate change have not yet been fully realized. There is a need for better assessment of global adaptation costs, funding and investment. Studies estimating the global cost of adaptation are characterized by shortcomings in data, methods and coverage.
According to the UNFCCC, global climate finance in all countries ranges from USD 340 to USD 650 billion per year. Several sources of climate finance are not fully captured by these estimates, so the total may be higher. Some of the sources included report the full investment rather than the climate component. If estimates were limited to incremental costs, the totals might be lower.
Energy emissions and C markets Source: IEA/OECD
Renewable energy Renewable technologies are becoming increasingly cost competitive in a number of countries and circumstances, but public support schemes are still required to support deployment in many others. Source: IEA/OECD
According to the IEA, neither the scale nor the composition of energy sector investment in the INDC Scenario is suited to move the world onto a 2 C path. Cumulative investment in fossil-fuel supply accounts for close to 45% of the energy sector total, while low-carbon energy supply accounts for 15%. Source: IEA/OECD
Access to electricity In 2012, nearly 1.3 billion people had no access to electricity and 2.7 billion people relied on the traditional use of biomass for cooking. The majority of people without access to modern energy live in sub-saharan Africa and developing Asia. According to the IEA scenarios, the number of people with access to electricity rises by 1.7 billion people until 2030, while access to clean cooking devices rises by 1.6 billion. Still leave almost 1 billion people without access to electricity in 2030 and 2.4 billion people without access to clean cooking, given the pace of growth of the world s population. Source: IEA/OECD
Costs and benefits Costs Initial investment (land purchase, installation, construction, etc) Fuel costs Operation and maintenance Benefits Environmental (emissions reductions) Financial Societal Health
Next We will discuss aspects of the carbon markets