Public and private investment shares

Last Updated on Mon, 15 Oct 2018 | Sustainable Development

Financing for climate change mitigation technologies is dominated by private sources of finance (approximately 80 per cent, or US$112 billion to $184

billion in 2007); but those private investments are heavily dependent upon public investments and policy frameworks that provide the necessary incentives and market conditions that enable investment (UNFCCC, 2008b; New Energy Finance and UNEP, 2008). Therefore, the public share of investment necessary to address climate change will depend upon the extent to which

Table 24.2 Estimates of additional financing needed for the development of mitigation technologies (US$ billion per year)
(total spending: US$ billion)	Demonstration (total spending)	Deployment (additional cost of climate technologies)		Diffusion (additional cost of climate technologies)		Total
(total spending: US$ billion)	Global	Global	Global	Developing countries	Global	Developing countries	Global
Current total	15.8-70		30-45	n.a.	31.5-49	11.3-18.8	77.3164
Additional financing needed	50a 20-100b 10c 30-100d	200f 57-949 25-35h	10-120'	11001 379.5k 317811'	130-660m	3791436

Notes: n.a. = not available. a Stern et al (2006, p371); public finance only. b Doornbosch et al (2008, p5). c UNFCCC (2007, p7); public finance only.

d Nemet and Kammen (2007, Table 1, p752); US government energy R&D spending only. e Calculated from demonstration costs estimated in IEA (2008b, Chapter 3).

f Doornbosch, et al (2008); estimates assume a global carbon price of US$25 tonnes of carbon dioxide equivalent.

g UNFCCC (2007, p90), based on Stern (2006) and IEA (2008b) estimates of existing deployment support. h UNFCCC (2007, p6).

' IEA (2008a) estimates that about 60 per cent of investment is needed in developing countries. j IEA (2008b, p39 and Chapter 6). k UNFCCC (2007, Table IX-64, p175).

1 McKinsey (2009); lower figure is for 201 1-2015 and higher figure is for 2026-2030.

m For the low end of the range, the level of investment required in developing countries is calculated using the same investment share as estimated by the UNFCCC, which is 40.9 per cent in developing countries and 59.1 per cent in developed countries (UNFCCC, 2007, Table 4, Annex V, p214). For the higher end of the range the investment share is 60 per cent for developing countries and 40 per cent for developed countries as estimated by IEA (2008a, p240). Source: UNFCCC (2009)

public policies and investments can leverage the private sector. Figure 24.4 summarizes the private-sector leveraging potential of a wide range of public policy and financing options. On the vertical axis public policy and investment instruments are ranked according to their ability to leverage additional public and private sector financing.

As previously discussed, public financing for climate change may be restricted either because the new climate change agreement is unable to secure a full commitment from Annex II countries to provide the necessary financing for climate change, or because economic circumstances or the competing priorities for public financing do not allow for sufficient public financing to be provided.

In Table 24.3 the public and private shares of finance are estimated under three scenarios using the high end of the range for required total additional financing. In scenario 1, an estimate is made based on existing leveraging ratios3 that are currently common across the stages of technological maturity. In scenario 2, the public and private shares are estimated assuming that new policies and measures are adopted and a moderately enhanced leveraging ratio takes affect under the post-2012 climate change agreement. Finally, in scenario 3 a high performance mix of policy instruments is tested in which the leveraging ratios assumed are at the top of the range of what could be possible

Research & Development

Demonstration

Deployment

Diffusion

Regulatory Mechanisms for Energy Efficiency

Early-Stage Public PFAN Expansion Venture Capital

Green Municipal Infrastructure Funds

Expansion of PFAN

Inducement Prizes Tax Credits

Feed in Tariffs

Network of Innovation Centres

Price Guarantees

Renewable Portfolio Standards

Green Municipal Infrastructure Funds

GEEREF

Technical Assistance Grants Public Equity Fund

Sector No-lose Targets

Consumer-based Energy Efficiency

Credit Line Subordinate Debt II Subsidies & Grants I

GEF - World Bank

Leveraged Grants

Public-Private Partnerships

Advanced Purchasing Commitments Inducement Prizes Grants - Direct I Public/Private R&D Public Procurement

Direct Deployment and Production Subsidies

Loan Softening

Credit Line Subordinate Debt II Subsidies & Grants I

Credit Line Senior Debt

Tax Incentives

GEF - UNDP/UNEP

Source: Higham (2QQ9)

Figure 24.4 Leveraging potential of public policy and financing options for climate change

Incubators

Grants

Table 24.3 Three leveraging ratio scenarios for public and private investment shares
	US$ billion	Total	R&D	Demonstration	Deployment		Diffusion and commercial
	US$ billion		Global	Global	Global	Developing	Global	Developing
	Total annual additional	1247-1436	20-100	27-36	100-200	60-120	1100	660
	finance
Scenario 1	Estimated existing		1:0.5	1:1	1:4	1:2	1:10	1:10
	leverage ratio
	Private	1086-1191	7-33	14-18	75-150	40-90	990	594
	Public	162-245	13-67	14-18	25-50	20-30	110	66
Scenario 2	Moderately enhanced		1:1	1:3	1:5	1:5	1:10	1:10
	leverage ratio
	Private	1155-1227	10-50	20-27	80-160	50-100	990	594
	Public	92-379	10-50	7-9	20-40	10-20	110	66
Scenario 3	High performance-		1:2	1:5	1:10	1:10	1:20	1:20
	enhanced leverage ratio
	Private	1853-2006	15-75	22-29	90-180	54-108	1045	627
	Public	114-152	5-25	5-7	10-20	6-12	55	33

Source: Based on data in UNFCCC, 2009

in the post-2012 environment. Even under the most optimistic scenario for leveraging private-sector investment, an additional US$114 billion to $152 billion per annum would need to be made available by the public sector for investment into climate change technologies.

The reverse can also be tested by asking what leveraging ratios would be necessary if public investment is limited to perhaps US$50 billion or US$100 billion per annum. In order to test this scenario it is assumed that actual investments are roughly proportional to the investment needs across the various stages of technological maturity. In scenario 1 it is assumed that total additional public investment in research and development increases by US$5 billion per annum, demonstration investments by US$5 billion per annum, deployment investments by US$15 billion and diffusion investments by US$25 billion. In scenario 2, where US$100 billion are allocated per annum, US$10 billion per annum is allocated for research and development, US$10 billion per annum for demonstration, US$30 billion for deployment and US$50 billion for diffusion. The results are presented in Table 24.4.

While crude, under these scenarios it may be achievable to meet financing needs for climate change if public financing is limited to an additional US$100 billion per annum; however, it appears to be beyond the capability of prospective policies and measures to leverage the private sector sufficiently if only US$50 billion per annum of public investment was available. In the later case, leveraging ratios for diffusion of technology would need to increase to about 1:40, which could mean much greater levels of regulatory intervention than currently envisaged, or politically feasible.

It might be feasible to set and work towards a target for enhancing the leveraging ratio of the convention. By making larger public endowments to be invested in climate change technologies in the early years, the expectation is that as public policies become more refined and effective through the process of learning by doing, the public investment can be reduced and private investment can take a stronger role.

It is yet to be seen how the policies surveyed may be able to be scaled up, as this would have a significant bearing on where at the international level the greatest effort should be made. Ideally, total investment scale of each policy would be estimated and together with leverage ratios and other factors in mind, a more useful assessment of financial needs could be made. It is clear that a mix of policy instruments is required for international climate change policy, but the exact mix in different regions is not well known.

The research undertaken in support of the post-2012 climate change negotiations has estimated the scale of financing needed, where that investment is needed, what innovative financing options are available, and how effective public policies are and could be in leveraging the private sector. But what policy options are available, and how can they be combined to form a coherent strategy for a low-carbon, climate change-ready world?

Table 24.4 Implications of restricted public funding for leveraging ratios if total investment continues to meet IEA (2008b)

estimates of additional financing needs for technology to 2050

Table 24.4 Implications of restricted public funding for leveraging ratios if total investment continues to meet IEA (2008b)

estimates of additional financing needs for technology to 2050

	US$ billion	Total	R&D	Demonstration	Deployment		Diffusion and commercial
			Global	Global	Global	Developing	Global	Developing
Scenario 1 - US50 billion public investment per	Total annual additional finance Required leverage ratio	1247-1436	20-100 1:3-19	27-36 1:5-6	100-200 1:6-12	60-120 1:6-12	1100 1:43	660 1:43
annum	Private	1197-1386	15-95	22-31	85-185	51-111	1075	645
	Public	50	5	5	15	9	25	15
Scenario 2 - US100 billion public investment per	Required leverage ratio		1:1-9	1:2-3	1:3-6	1:3-6	1:21	1:21
annum	Private	1147-1336	10-90	17-26	70-170	42-102	1050	630
	Public	100	10	10	30	18	50	30

Source: Based on data in UNFCCC, 2009

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