11 months ago

Climate Action 2011-2012


Climate Policy, governance & Finance emerging markets © Flickr/Rodrigo_Amorim Policy is critical to creating a level playing field for largescale investments in renewable technologies. Financing climate change investments in the developing world 34 By Stephanie Pfeifer, Executive Director, Institutional Investors Group on Climate Change (IIGCC) Much debate in the developed world, particularly in Europe, and most recently in Australia, has focused on the need for stable policy and well-structured mechanisms to stimulate private investment into lowcarbon and renewable technologies. There has been less focus on the conditions necessary to enable the private sector to line up behind funding such investments in the developing world. This, of course, is crucial for many developing market economies, some in places where the impacts of climate change will be felt more strongly than in many developed countries. Policy is critical to creating a level playing field for largescale investments in renewable technologies, infrastructure and utilities. Investors will consider the risk-return characteristics of any given investment and evaluate them against other investment opportunities. Uncertainty, lack of clarity and, worst of all, retroactive policy, are all significant barriers to private sector investment. The importance of credible regulatory frameworks and low-carbon domestic policies for attracting substantial investment applies to both developed and developing markets; and although progress is being made, there is still a long way to go before these conditions are met. The good news is that there are clear signs that when an appropriate policy infrastructure is put in place, investors commit capital. In some emerging economies, however, investors will face additional challenges which make an accurate risk-return assessment difficult. These extra risk factors could include limited transparency, strong third party dependency, higher transaction costs, low liquidity, fewer possibilities to re-use competences, and greater financial and political uncertainty. Most of these risks are not specific to climate change investments. High perceived risks translate into higher return expectations. Therefore, reform that reduces these risks is necessary before investors can commit at scale to funding climate change solutions. Uncertainty, lack of clarity and, worst of all, retroactive policy, are all significant barriers to private sector investment. Progress in emerging markets There are promising developments in some emerging market countries. For example, in June 2008 the Indian government revealed its ‘National Action Plan on Climate Change’, the country’s first attempt to tackle climate change in a strategic manner. Eight ‘missions’ were established, including for solar energy, energy efficiency and improved knowledge of climate

Investment in renewables in India in 2010 increased by 25%. © Flickr/Warrenski are put in place, it is too early to judge the likely long-term impact of these changes. Investors will necessarily be cautious while policy frameworks are still in the early stages of development, and will need to be convinced that policy commitments are stable – as well as seeing finance continue to flow from domestic and international sources. It is, however, a promising start. High perceived risks translate into higher return expectations. change. Since then the country has set a series of low carbon policy targets which include the reducing of carbon dioxide emissions per unit of GDP by 20-25 per cent from 2005 to 2020 and increasing the proportion of electricity from renewables to 15 per cent by 2020. Stricter building standards for lighting, heating, ventilation and air conditioning have also been set and demand side management initiatives promoted. The evidence so far suggests that there has been some success in India, with investment in renewables growing by 25 per cent in 2010 alone. While this indicates what can be achieved when credible and comprehensive climate change solutions eFFeCtive PoliCy measures Lessons from other regions and other major development efforts, such as the Marshall Plan, the preparation for EU accession and sub-national infrastructure development programmes, suggest that the risks associated with investments in climate solutions in developing countries can be substantially reduced through a combination of policy and capacity building measures and the provision of public financing mechanisms. The latter should be based, as far as possible, on existing mechanisms such as export guarantees or lending arrangements by development banks and must be adapted as domestic policy frameworks are strengthened and carbon markets develop. It is also critical that any policy programmes are embedded within mainstream policy frameworks so that climate finance becomes more than just a niche activity for a small number of investors. Another country taking positive steps on climate change policy is South Africa. The South African government last year announced the South African Renewables Initiative (SARi), which aims to determine how South Africa’s renewable ambition could be substantially increased as part of its broader economic and industrial strategy. SARi has identified the potential for international sources of finance to stimulate privately-led investment in renewables through the provision of a combination of concessionary debt and risk guarantee instruments from international sources. It addresses the constraints on government finances in a realistic manner and acknowledges that it will take more than a well-designed policy mechanism, such as a feedin tariff, to stimulate significant private investment. However, it is encouraging that the government is undertaking a comprehensive review and many investors are hopeful that it will lead to positive action on policy and infrastructure. the international dimension When it comes to specific investments, national, regional and even local policy frameworks are key. However, progress at the international level would also send a convincing signal to investors that there is strong global resolve to implement relevant policy measures. Therefore, in addition to progress in individual developing economies, investors continue to support positive action at international level, including a binding international climate agreement which sets the framework for robust action on climate change. In addition, international agreement could provide an overarching global system of monitoring and review which registers, oversees and evaluates national action plans – and as such provides an important influence on and a guarantor of stable domestic policy. Any international agreement should also support the development of robust carbon markets and a strong, sustained carbon price. Assigning a relatively high price to carbon sends a clear signal to companies and investors that reducing greenhouse gas emissions is a policy priority. Carbon markets also offer opportunities for companies to identify the most cost-efficient options to meet emissions reduction targets. 35