Citi Suggests Global Climate Investment Goals

On the surface, Citi’s recommendations of global climate investment goals, published in August in the report “Energy Darwinism II: Why a Low Carbon Future Doesn’t Have to Cost the Earth,” look deceptively simple. But a closer look at the patchwork of international regulations, legislation, and carbon markets reveals that financing clean energy in developing nations may be quite challenging to accomplish. Solar panel in Chiang Mai, Thailand

The representatives meeting at the United Nations Climate Change Conference, COP21, in Paris this December are discussing ways of keeping climate disruption below an overall worldwide increase of 2°C above pre-industrial levels. But how this goal could be implemented is still nebulous.

“With the global economy improving post-crisis, interest rates low, the large emitters coming to the table, investment capital keen, and public opinion broadly supportive, Paris offers a generational opportunity; one that we believe should be firmly grasped with both hands,” the report’s authors said.

During the global economic crisis, interest in clean energy quieted substantially, but the recovery has renewed investors’ appetite for climate-friendly financial opportunities, said Jason Channell, global head of alternative energy and cleantech research at Citi. “The backdrop is looking slightly less positive than it might have been a few months ago. We are in a better situation than we were five years ago.”

What Investment Goals Can Transform the Global Climate?

The report recommends increasing solar investment by $2.3 trillion. It places a heavy emphasis on energy efficiency, advising $19.4 trillion of investment. This would include $11.5 trillion of investment in transportation and $7.9 trillion of investment in buildings and industrial enterprises.

Where will this money come from? In concrete terms, international climate agreements such as COP21 and national decisions would need to drive financing innovation at an unprecedented level to make this scenario achievable.

Financing appears to be the missing link that – if put in place – could enable the transfer of massive and lucrative volumes of deals from investors in the developed world to businesses in the developing world. This would put the developing world on a trajectory toward a low-carbon future, averting the many forms of damage climate change could create.

According to the report, this global investment would pay for itself. Because the cost of renewable energy is dropping and energy efficiency recoups substantial savings, moving investment funds into clean energy would be a sound decision from a global business perspective. The initial investment would yield considerable returns. And the human, societal, ecological and economic costs of climate disruption would also be immensely reduced.

With such a profitable worldwide deal on the table, why might investors refuse? Unfortunately, access to these investment opportunities is currently often blocked by problems in the markets of developing nations. These markets tend to be smaller, less stable, more risky, and less liquid than the markets of developed nations are. This holds back investors from seeking out profitable opportunities.

Emerging markets use more energy and emit much more carbon per unit of GDP than developed markets do, Channell said. “That’s because they’re more manufacturing-based than service-based. Most of the energy demand growth you’re going to see is from emerging markets. Global GDP is set to almost triple by 2060.”

An emerging market is defined as a country that has some of the traits of a developed market, but does not meet the full set of requirements to be considered one.

What Steps May Emerge from COP21?

So how could climate negotiators and their respective nations move funds toward a sustainable future? Given these existing obstacles, what can international stakeholders do? The answer is not simple.

“We think a single global carbon market is unlikely to be the outcome from Paris,” Channell said. “It’s too complicated to put together. You’d have to have everyone working on the same basis. You’re more likely to see individual country schemes or groups of schemes and hopefully… inter-tradability.”

Other standards, legislation and regulation may also play an important role. Channell said efficiency standards, vehicle emission standards, transport-related legislation, and incentives could all help to bridge the gap.

What Technologies Can Lead the Way?

How can financing support these shifts in technology? The answer depends on the industry.

In the transportation industry, Channell said, a shift toward energy efficiency in cars and trucks is already underway. According to the report, Toyota has issued a green bond to fund sustainable automotive manufacturing; other manufacturers may follow.

A large number of technical innovations, outlined in the report, can help drive the automotive industry into a leadership position in the fight to reduce climate change. These include low-resistance tires, lightweight materials, direct fuel injection, turbochargers, variable valve timing, thermal management, new combustion techniques, electromagnetic clutches, automatic manual transmissions, dual clutch transmissions, continuously variable transmissions, start/stop systems, and hybrid or electric vehicles.

“If you look at the split of emissions coming out of energy-related sectors, 42 percent is power and heat and 23 percent is transport,” Channell said. “Put transport and power together; those will be the areas of focus.”

The power sector faces a different situation with regard to financing and new technologies. Citi has been involved in some financing innovations in the United States that are helping to move this sector forward. However, the political realities in various nations – and the need for international investment in the developing world – mean that new solutions may have to be developed to fund clean energy in emerging markets.

It is unclear which industrial energy efficiency developments policymakers should consider high-priority. Channell said Citi is considering researching industrial energy-efficiency opportunities in the future. This research may yield guidance for policy developers and investors.

Looking at the complicated landscape of developed and emerging markets reveals that COP21 will only be the first step toward successfully averting the worst ravages of climate change. If negotiators can settle on a viable set of goals, that will only be the beginning of the work that remains to be done.

Will News Reporters Explain the Financing Gap?

According to The Conversation, there is a danger that news reporters covering COP21 will oversimplify their articles, framing the event as a success or a failure without really discussing the facts in depth.

For example, reporters may emphasize the climate goals without covering their implementation or discussing the financing obstacles that remain. Blithely reporting a positive negotiation as a success story may lull readers into believing that all is well.

But the Citi report and other publications on clean energy finance show we have a long way to go to put the necessary financing tools in place to avert high degrees of climate change. Investor demand is ready, the global economy is on a sound footing, and reducing climate change is profitable - but without a foundation of low-risk financing structures to build upon, it is difficult to leverage the demand that exists.

Can the Green Climate Fund Provide a Solution?

The Green Climate Fund, which was created at the United Nations Climate Change Conference in 2009, is intended to help bridge this divide. Its target is $100 billion, which is intended to be used to fund climate-safe development in emerging markets. So far, only $10.2 billion of this total has been raised. The goal of the fund is to raise this financing by 2020.

Channell said one option would involve leveraging the Green Climate Fund to provide credit enhancement. “One of the things about renewable energy investment is that since it has relatively low operating variability, it lends itself well to credit financing. There’s a vast amount of assets out there that want to gain exposure to these themes. If you could use the $100 billion in some way to provide credit enhancement … that could help to break that logjam.”

Who is Responsible for Climate Resilience Costs?

There appears to be a schism between developing and developed nations that COP21 will need to address. A question has come up: who is financially responsible for the current state of the planet? And who is accountable for paying the costs of climate resilience?

The report takes a strong stand on this issue. “The view that developed markets are doing their part by spending more per MW on new generation capacity in the form of renewables – and that emerging markets will be responsible for the future growth in emissions and hence should pay – is in our view too simplistic. It ignores the fact that the existing levels of carbon in the atmosphere were put there by the developed world in becoming ‘developed’ – i.e., they used the same cheap and dirty power to get richer in previous decades. Hence to adopt a holier-than-thou attitude to emerging markets is disingenuous.”

“Indeed, there is an argument that developed markets are responsible for more than their share of the residual carbon in the atmosphere, given that emerging markets are at least attempting to go for a balanced and less-emitting energy complex than developed markets did historically,” the authors said.

But regardless of who is financially accountable for climate change, the report makes clear that investing in clean energy with a focus on developing nations is profitable, wise, and fiscally intelligent. The real challenge lies in how to get the money there.

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