Green Funding

Global climate financing crosses the half-trillion dollar mark

Four years after world leaders negotiated the Paris climate agreement, national policies and markets have started reflecting the  need for increased financing and for low-carbon development to mitigate the effects of climate change. Apart from this, a push at the national level will be needed to drive climate action.

The Climate Policy Initiative’s (CPI) report, “Global Landscape of Climate Finance 2019”, provides a comprehensive overview of the primary investments made in global climate change action. It also highlights the investment trends in the renewable energy sector and how significantly they differ from investments in the fossil fuel industry. Renewable Watch presents the key findings of the report…

The annual tracked climate finance in 2017 and 2018 crossed the $0.5 mark for the first time. The average annual investment inflow rose to $579 billion over the two-year period, representing a 25 per cent ($116 billion) increase over 2015-16.

The flow of climate finance reached a record high of $612 billion in 2017, driven by renewable energy capacity additions in China, the US and India, as well as increased public commitments to improve land use and energy efficiency. This was followed by an 11 per cent drop in 2018 to $546 billion. Changes in the lending pattern due to a regulatory shift in the East Asia and Pacific region, the global economic slowdown and a significant decline in renewable energy costs resulted in reduced public investment in low-carbon transport and private investment in renewable energy in 2018.

While climate finance has reached record levels, bolder climate action is needed to limit global warming to 1.5 °Celsius. The supply-side investment required to achieve a low-carbon economy is estimated to range from $1.6 trillion to $3.8 trillion annually between 2016 and 2050. The Global Commission on Adaptation estimates adaptation costs of $180 billion annually during 2020-30.

Public finance

The average annual public climate financing totalled $253 billion in 2017-18, representing 44 per cent of total commitments. The spending on transport again exceeded renewable energy spending. The transport sector received $94 billion to become the largest beneficiary of public finance.

The domestic, bilateral and multilateral development finance institutions (DFIs) continued to account for the majority of public finance and increased their average commitments in 2017 and 2018, but economic developments in 2018 led some major players to reduce their investment. Among DFIs, the national DFIs continued to be the largest providers of climate finance, but national DFI financing flows remained steady at an annual average of $132 billion during the two-year period. In contrast, in 2015-16, their commitments almost doubled from 2013-14.

The tracked climate finance from governments as well as government agencies doubled to $37 billion in 2017-18. A major reason for the increase in finance is the improved availability of data on government activities, particularly on electric vehicle charging infrastructure investments and bonds issued by regional and municipal governments.

Private finance

Private finance, which reached $326 billion on an average annually in 2017 and 2018, continued to account for the majority of climate finance at around 56 per cent. Of this, the renewable energy sector accounted for 85 per cent, followed by low-carbon transport at 14 per cent while other subsectors accounted for the remaining 1 per cent.

While private corporations continued to account for the majority of private investment, commercial financial institutions also assumed a greater role than before, increasing financing by 51 per cent from 2015-16 to 2017-18.

The financing flow from institutional investors and small funds increased more than fourfold from 2015-16. The increased financing from investors that do not typically provide primary finance for infrastructure indicates that the renewable energy market has gained maturity and the perception of risk in these projects has reduced.

Instruments

Debt was the most preferred climate finance instrument in 2017-18, averaging $316 billion annually. An additional $64 billion was issued as low-cost project debt, bringing the total debt issued for climate financing in 2017-18 to an annual average of $380 billion, or 66 per cent of total tracked finance. As expected, much of the low-cost project debt (93 per cent) originated from public sources, as DFIs provided the bulk of concessional loans for climate-related projects. The second-largest instrument type as a percentage of tracked climate finance was equity at 29 per cent, averaging $169 billion annually.

Grants accounted for an additional $29 billion per year, or 5 per cent of total climate finance. As in previous years, almost all grants were issued by the public sector, with a focus on geographies and sectors that were underserved by commercial financial investors. Nearly 78 per cent of public grants were directed to non-OECD (Organisation for Economic Co-operation and Development) regions.

Contribution to the renewable energy sector

The renewable energy sector remained the largest beneficiary of climate finance, with investments reaching an all-time high of $350 billion in 2017. This represents a 30 per cent increase from 2016 levels. The growth was particularly high in China where renewable projects received $157 billion in financing in 2017, predominantly directed towards solar PV ($73 billion), wind ($48 billion) and large hydropower ($22 billion). The US received the second highest volume of finance for renewables, with 98 per cent of US-bound finance in 2017 directed towards either solar PV ($32 billion) or onshore wind ($20 billion). It was followed by India, which received $15 billion in 2017 for renewables financing.

However, the total finance for renewable electricity generation decreased in 2018. This is because the average renewable energy technology costs continued to decrease during the year, owing to a decline in installed capacity costs and the levellised cost of energy for solar and wind projects over the previous year.

The levellised costs of solar PV and onshore wind decreased 12 per cent and 14 per cent from 2017 levels respectively. The lower capacity addition in 2018 as compared to 2017 can be attributed to a decline in Chinese solar investment and a slow growth in global wind capacity, outside of China and the US.

A big positive is that in 2017 and 2018, finance for renewable power generation continued to exceed the financing for fossil fuel power generation. In 2015 and 2016, global investment in renewables at $295 billion was more than double the total financing in new fossil fuel-based power generation capacity. This increased further in 2017 and 2018. The average annual finance for renewables of $336 billion was more than two and a half times the investment in fossil fuel generation, which stood $130 billion.

However, the opposite trend emerges if investment in fossil fuel supply infrastructure is included. In 2017 and 2018, average annual finance for fossil fuel supply included $468 billion investment in upstream oil and gas, $253 billion in downstream oil and gas, and $79 billion in coal mining and related infrastructure. Although some of this does not directly flow into the energy sector, such as financing for the production of plastics and industrial lubricants, the flow of funds in fossil fuel projects still outweighs clean energy finance.

Conclusion

The analysis of the global climate finance landscape in 2017 and 2018 reveals several positive trends, including continued increase in financing for renewables, a surge in public finance flows towards low-carbon transport, a strong upward trend in public finance for adaptation, and early signs of mainstreaming climate finance across a larger set of private financial institutions.

However, increasing climate finance commitments is not enough. It is also crucial to phase out investment in the fossil fuel supply chain, from exploration to generation, which far exceeded finance for renewables generation in 2017-18. The continued financing for fossil fuel supply infrastructure would reduce the chances of meeting abatement targets and increase the transition risks related to stranded assets. Moreover, it is not in line with the goals set under the Paris Agreement.

The commitments to phase out fossil fuels, such as the Powering Past Coal Alliance, are gaining momentum. However, an economy-wide shift is required to redirect high-carbon investment into green infrastructure projects, not only in energy systems, but also in other crucial sectors that impact the climate.

Based on the “Global Landscape of Climate Finance 2019” report by Climate Policy Initiative

 

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