Public and private investment shares
Financing for climate change mitigation technologies is dominated by private sources of finance (approximately 80 per cent, or US$112 billion to $184
billion in 2007); but those private investments are heavily dependent upon public investments and policy frameworks that provide the necessary incentives and market conditions that enable investment (UNFCCC, 2008b; New Energy Finance and UNEP, 2008). Therefore, the public share of investment necessary to address climate change will depend upon the extent to which
(total spending: US$ billion) |
Demonstration (total spending) |
Deployment (additional cost of climate technologies) |
Diffusion (additional cost of climate technologies) |
Total | |||
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
Source: Based on data in UNFCCC, 2009 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
Source: Based on data in UNFCCC, 2009 Source: Based on data in UNFCCC, 2009 |
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