Overview of Climate Finance

Jacqueline Tao YujiaMFA-NTU Green Climate Finance Workshop

Energy Studies Institute, National University of Singapore24 November 2014

Definitions• Lack of universally accepted definition of climate

finance

• Climate Finance• local, national or transnational financing• public, private and alternative sources of financing• both mitigation and adaptation financing

• Carbon Finance• Financing generated through the pricing of the resultant

emissions reductions for mitigation projects

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Climate Finance

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Carbon finance

Flow of Finance

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• Key themes: • Revenue raising• Revenue disbursement • Oversight /MRV

Sources of Climate Finance

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Sources of International Climate Finance

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Source: Climate Funds Update. http://www.climatefundsupdate.org/about-climate-fund/global-finance-architecture

Intermediary agencies

• Global Environment Facility (GEF)▫ operating entity of the financial mechanism of the

UNFCCC• Green Climate Fund (GCF)

▫ operating entity of the financial mechanism of the UNFCCC

• Climate Investment Funds (CIFs)▫ champions innovative country-led investments ▫ supported by public finances and leveraging of other

sources• Indonesian Climate Change Trust Fund

▫ Harmonize all sources of finance to ensure that they are aligned with national development plans

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Size of Climate Finance

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Source: Climate Policy Initiative report on “Global Landscape of Climate Finance 2013”Accessed at: http://climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2013/

Further action

• Scaling up much needed climate finance• Spending the limited finance efficiently and effectively

▫ Mitigation v Adaptation▫ Domestic v International▫ MRV

• Encourage private sector investments▫ Addressing barriers to private investment

Domestic and International public policy efforts▫ Leveraging Private Finance▫ Functioning carbon market

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De-risking of Climate Change Investments

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Risk Instruments

Project Risk Cost Risk • Due diligence• Commercial

insurance• Public guarantee

Resource Risk

Technology risk

Country Risk Regulatory Risk • Rule of Law• Policy certainty,

clarity, longevity• Political Stability

Sovereign risk

Financing Risk Debt/equity availability • Financial support mechanism

• Established capital markets

Public Support for Private Climate Finance

• Conducive policy environment▫ Long term price signals

• Financial support instruments▫ Loans/Grants▫ Subordinated debt / Mezzanine financing▫ Guarantee / Risk-sharing products▫ Feed in tariff (Renewable energy)

• Other forms of support▫ Technical Assistance

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Leveraging Private Finance

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Source: International Finance Corporation report on “Climate Finance: Engaging the Private Sector ”Accessed at: http://www.ifc.org/wps/wcm/connect/5d659a804b28afee9978f908d0338960/ClimateFinance_G20Report.pdf?MOD=AJPERES/

Thailand: Energy Efficiency Revolving Fund (EERF)

• aimed to stimulate EE investments in large-scale energy consuming industrial sectors and leverage commercial financing in EE projects

• EERF provides capital to Thai banks to fund EE projects, banks then extend the credit in the form of low-interest loans to EE projects in industries and buildings

• Yield significant results in terms of reduced demand for oil imports and power

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Carbon Finance

• A strong price signal is essential to establish the right incentives and to direct financial flows away from carbon-intensive growth to low-carbon investments.▫ Carbon as an asset/commodity/factor of production

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Carbon Finance Innovations

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Use Type of Instrument

Innovations

Capital Raising

Debt Carbon/green bondsCarbon asset backed loans/securities

Equity Green stocksESG/SRI IPOs

De-risking Insurance Project-based (CDM/JI) insurances

Derivative Carbon derivatives forwards, futures, options, swaps

Others Project guarantee

Concluding Remarks

• Climate finance is critical Scaled up, new, additional, predictable and adequate funding is required FAST for both mitigation and adaptation

• Combination of public and private financing sources required

• Role of public sector:▫ Kick-start the market/ Leverage private sector finance▫ Provide strong long-term enabling policy assurances▫ Supply much-needed finance in critical areas of

adaptation that private funds are less suited for• Rapidly evolving structure: much room for public and

private innovations

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Thank you!

Energy Studies Institute 29 Heng Mui Keng Terrace Block A, #10-01 Singapore 119620

Jacqueline TaoTel: (65) 6516 6692Email: esity@nus.edu.sg

Indonesia Public Climate Finance 2011

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Source: Climate Policy Initiative 2014 report on “Landscape of Public Climate Finance in Indonesia”

Carbon Pricing

• can be achieved through markets or taxes, and different instruments will be appropriate in different countries for different sectors of the economy.

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Existing/Potential Carbon Pricing Initiatives

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China’s Pilot ETS

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Guangdong Shanghai Tianjin Beijing ShenzhenEmission Covered

43%-50% About 50% About 60% About 40% 38%

Covered Sectors

Energy intensive industriesTransports and buildings (public, commercial) construction are part of the newly released regulation

16 sectors: including both industrial and service sectors

Energy intensive industries

Electricity providers, heating sector, manufacturers (automobile, cement, petrochemicals) and major public buildings

Almost all sectors.Transport inclusion under consideration.

Allocation methods

Grandfathering based on 10-12 emissions, considering sectors’ characteristics.

Grandfathering for 2013-2015 based on 2009-2011 emissions, growth considered.Whenever possible, benchmarks will be used

Existing entities: GrandfatheringNew entities: Benchmark

Grandfathering based on 09-12 emissions or carbon intensity (corrected by a sector-specific factor) declining with time. New entrants: benchmarks.

Grandfathering based on firms’ historical emissions, performance and future activity level.

Offset mechanism

Up to 10%, 70% of which must stem from local projects.

Up to 5% Up to 10 % Up to 5%. At least half must originate from local projects (except certain types of projects owned by liable entities)

Up to 10 %

Chile’s Carbon Tax

• Stationary sources: power sector▫ $US5/tCO2 for generators operating thermal plants with

installed capacity equal or larger than 50 megawatts (MW)

▫ thermal plants fueled by biomass and smaller installations exempted

▫ Measurements of emissions in 2017 and the new tax would be levied from 2018.

• Mobile sources: vehicles▫ additional tax on import of light diesel vehicles

• Local pollutants such as NOx and PM are also taxed at US$0.1/t of pollutant

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Adaptation Fund

• established in 2001 to finance concrete adaptation projects and increase climate resilience of developing country Parties to the Kyoto Protocol that are particularly vulnerable to the adverse effects of climate change.

• Financed by 2% of share of proceeds of CERs and others sources of funding

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Green Bonds

• Broadly defined as debt instruments that are applied exclusively towards projects with significant environmental benefits

• Growing market: USD40 billion (2014)▫ Steady demand (many issues are oversubscribed)▫ Diverse supply

• Offset climate risks of portfolio• Uncertainty

▫ lack of standardization on the definition of green bonds

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