Unlocking the Trillions Needed for the Paris Agreement
Emilie Prattico
Realizing the ambition of the Paris Agreement requires mobilizing significant volumes of finance. This in turn requires that we look beyond climate policy to other enabling factors.
Ahead of COP21, the We Mean Business coalition called for the Agreement text to ensure both public and private finance is mobilized at scale to act. With this central pillar of success in place in the Agreement and the direction of travel set, We Mean Business is now exploring what conditions will accelerate the journey.
Understanding the conditions for climate finance
The ambition of the Paris Agreement includes a call for new and additional climate finance at scale.
Article 2, where the core of the ambition of the Agreement is spelled out, also states a condition specific to finance:
(c) Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.
In the rest of the Agreement, the text references various conditions that will allow for this kind of finance to flow: “transparency” of adequate, consistent, and verifiable information, and an uptake of capacity-building, technology transfer, and research and development.
COP22 – a conference centered on implementation – started a conversation about what is needed to realize the ambition of the Paris Agreement on climate finance. This includes unlocking climate finance to build resilience and also involving companies in the process of ensuring climate adaptation is successful.
Going beyond the text of the Paris Agreement
Within the perimeter of international platforms such as the UNFCCC, developed countries have pledged to provide $100 billion per year by 2020. But other stakeholders, from countries to cities, regions and businesses, must all put into effect enabling policies and processes that will allow two key elements. Firstly to identify and define the magnitude and nature of the financial flows necessary. Secondly, to ensure that these financial flows are channeled to projects with an impact consistent with the ambition limiting temperature rises to a 2°C, with a stretch-goal to 1.5°C.
We need clear structures
Frequent and unexpected changes to policy schemes are harmful for private business investments and increase the complexity of business decision making. By designing governance of public bodies to be consistent with the required timeframes for investment, unexpected changes can be minimized. The five-year timeframe of national climate plans, to be revised upwards after that time, is a step in the right direction.
This is further strengthened by improved transparency, which includes the consultation of all concerned stakeholders during decision-making. Corruption and bribery are hurdles for economic growth and prosperity for all members of society and do not favor foreign investment. More transparent reporting measures will be key to unlocking climate finance for both governments and companies, who can also join international sector-wide initiatives that promote transparency in order to reduce the perception of a risky investment environment.
We need improved measurement
Without the ability to monitor climate finance flows at a given time, future needs cannot be predicted. This can prevent investors and financiers from planning finance allocation and assessing associated risk accurately. Thanks to improved measurement of financial flows and of their impacts, public authorities can develop more granular data to support private-sector investment decisions.
We need increased access
Climate finance must be accessible to the groups it targets and this accessibility can be understood in three ways.
Firstly, there has to be sufficient awareness of climate financing instruments and services that are available to support a project. Secondly, the cost of capital must be low enough to allow an attractive return on investment.
There are a host of other issues that need to be addressed for climate projects that need to tap capital markets, especially international ones. These include missing track records of project developers, insufficient collaterals, foreign exchange risks and costs, market concentration and insufficient size of the project.
Addressing these gaps must be at the center of financial regulation going forward if climate finance is to be scaled globally.
We need consistent trade agreements
Nationally determined contributions (NDC) to reduce greenhouse gas emissions cover sectors like energy, agriculture and forestry and are at the heart of the Paris Agreement. However, many countries that have submitted an NDC are also involved in trade agreements, such as the Trans-Pacific Partnership, which are not always favorable to renewable energy investments and that limit their purview to regulate the energy sector overall. In general, trade agreements do not take stock of the finance needs of addressing climate change or of NDCs. Countries must be prepared to align trade negotiations with their climate commitments.