Post on 04-Jan-2016
Module 01Climate Finance EssentialsLesson 2The Landscape of Climate Finance
Presentation Script
Climate Finance Essentials
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Climate Finance Essentials
Lesson 2 – The Landscape of Climate Finance Presentation Script
1. Home
Welcome to Lesson 2 of the eCourse on Climate Finance. Click Next to begin.
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Lesson 2 – The Landscape of Climate Finance Presentation Script
2. Introduction
In the previous lesson, you learned about the critical role that climate finance
plays in transitioning countries to a low-carbon and climate-resilient growth
trajectory. In this lesson, you will learn in more detail about the current climate
finance lifecycle so that you are more familiar with the multiple sources - both
public and private. You will also learn how climate finance flows and what are
some recent trends and which instruments are being used to mobilize climate
finance.
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3. Key questions addressed in this lesson
Some of the key questions that will be addressed throughout this lesson include:
How much climate finance is being mobilized and delivered? In what forms and
by whom? To which activities? And how do countries mobilize more finance
flows?
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4. Getting familiar with climate finance
Let's first get familiar with climate finance terminology. What are some of the
sources that you can think of which provide climate finance? Well, there are
public sector sources, private sector sources, and public or private
intermediaries that source climate finance. What are some of the instruments
which are used in climate finance? Some examples include policy incentives, risk
management instruments, grants, low-cost debt and capital instruments,
including project-level market rate debt, project-level equity and balance sheet
financing. This terminology makes up a large part of the “climate finance
spaghetti” that you will learn more about now.
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5. The landscape of climate finance
This lessons draws from the analysis completed in 2013 by partner organization
Climate Policy Initiative (CPI) which produces an annual inventory of the climate
finance that is flowing in, to and between countries each year. These inventories
have gained international recognition as the most comprehensive overviews of
global climate finance. The diagram you see here is the well-known “climate
finance spaghetti chart” that CPI has developed to illustrate the landscape of
climate finance flows along their life cycle for the latest year available, 2012.
Throughout this lesson, we will be examining in detail how climate finance flows
by utilizing this diagram as a guide. Public money is noted in bright blue, private
money in red. Public financial intermediaries are noted in purple, and private
financial intermediaries are in dark grey. Finally, capital investment and
incremental costs are noted by the dotted-line grey boxes. The width of the
arrows represents the relative size of the flows.
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To see the full CPI Landscape report from 2013, click on the spaghetti diagram.
6. Climate finance flows
Let us start by addressing a few key questions.
· What sources are providing the largest climate finance flows?
· To where is the majority of climate finance being channeled?
· What is the origin of most green investments?
· And what is the latest estimated volume of global climate finance?
Click on each of the highlighted arrows to learn more.
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7. Sources and intermediaries
Now let’s look at the main climate financial sources and intermediaries.
In the diagram displayed, you can see climate finance contributions from public
sources and intermediaries on the left, and private sources and intermediaries
on the right.
We will continue to learn more about this climate finance contribution.
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7.1 Public sources
Public sector climate finance originates from either public sources or public
intermediaries.
Total public sources represent 3% of total climate finance flows captured in the
CPI Landscape report. Ministries and Government Agencies are the most
important, contributing between 9 and 16 billion US dollars in 2012 to financing
low-carbon and climate-resilient activities. The largest part of this government
finance flowed from developed to developing. Half of this North-to-South flow
was channeled through national governmental bodies via bilateral cooperation
agencies and 7 percent was channeled through UN institutions. Bilateral
cooperation agencies and UN institutions work closely with recipient
governments to develop and implement national strategies and policy
frameworks conducive to investment.
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7.2. Public intermediaries
The other component of public sector sources of climate finance comes from
public intermediaries, including climate funds and also national development
banks, multilateral development banks, bilateral financial institutions - which
taken together are called Development Financial Institutions. Public sector
intermediaries have an array of financial instruments and specialized knowledge,
making them the cornerstone of efforts to manage and distribute global
resources for low-carbon and climate-resilient growth. Click on each public
intermediary in blue for further definitions.
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7.3. Public intermediaries
In 2012, DFIs committed around one third - or USD 121 billion - of total climate
finance flows, more than half in the form of low-cost loans. DFIs also provided
critical support to adaptation measures, contributing about USD 18 billion and by
also managing and implementing some of the relevant adaptation funds.
Multilateral Development Banks alone contributed 31% - USD 38 billion of the
total finance from public intermediaries, 28% of which were in support of
sustainable transport projects.
National Development Banks and Bilateral Finance Institutions distributed the
majority of climate finance from public intermediaries, or about 69% (USD 84
billion) of intermediated climate finance. Renewable energy and energy
efficiency interventions attracted 65% of these flows.
DFIs, mainly National Development Banks, also play a role in distributing third
party resources valued at USD 2 billion from multi-donor climate funds, such as
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the Climate Investment Funds and the Global Environmental Facility. Blending
grants and loans at concessional terms from these climate funds with DFIs'
commercial financing has become a common practice in international climate
finance. DFIs' use of these resources can take the form of technical assistance,
interest rate subsidies, or direct investment grants to buy down the costs of
projects that would not otherwise happen. We just examined how National
Development Banks and climate funds are emerging as significant public
intermediary players in climate finance. We will learn more in the following
slides.
8. National Development Banks
National Development Banks are able to leverage private capital to finance
investment projects. Given their unique position, National Development Banks
can help to promote market development in new sectors and emerging
industries. National Development Banks have long-standing relationships with
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local private financial institutions, and hence understand the risks and barriers
that they confront when financing underserved sectors. Lastly, National
Development Banks can aggregate large numbers of small-scale projects by
adopting a portfolio approach when assessing credit risk, which allows for
streamlining the application process, minimizing transaction costs and
encouraging local financial institutions to participate.
9. Climate Funds
Climate funds are relatively new players on the global landscape and play an
important role via concessional resources, for example as they enable DFIs to
buy down the costs of projects by blending grants and loans at concessional
terms from these funds (or other donors) with DFIs' commercial financing.
Recently, a number of national, bilateral and multilateral organizations have set
up climate-specific funds. They are usually managed “off balance sheet” with
one or more national, bilateral or multilateral organizations providing trustee
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and administrative services. Each fund tends to have a finite lifetime, and a
specific sectoral focus, such as climate change mitigation, adaptation, REDD,
among others. Climate funds can be grouped into the categories displayed. Click
on each image to learn more.
10. Channels and mechanisms
This chart further categorizes the public intermediary channels of climate finance
we just reviewed by their key features, and well as the methods by which they
capitalize their funds and which instruments are mainly used in funding climate
finance flows.
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11. Private Sources and intermediaries
Now that we have learned about the public sources and intermediaries of
climate finance, let us turn to examine the private sources and intermediaries of
climate finance.
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11.1. Private sources
In 2012, the private sector invested $224 billion USD in climate financing, which
represents 63% of total climate finance flows or the lion's share of climate
finance, much of which was enabled by public investments. Just like the public
sector, private contributions to climate finance can also be organized by main
sources and intermediaries, and they range from single households to
multinational corporations. The majority of private climate finance, however,
flows from a few principal sources: project developers, corporate actors and
private households. We will now introduce each in more detail.
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11.2. Private sources
Private sources (not including intermediaries) provided around 56% of the
private sector climate finance. In 2012, project developers contributed the
largest single share of climate finance, approximately USD 102 billion or 28% of
total global climate finance flows. Click for a definition of Project Developers.
While private project developers are big players in climate finance, they also
represent actors still investing in high-emitting technologies, like new fossil fuel
generation. This is important to remember: the challenge remains to shift
project developers' existing financial resources towards low-carbon and climate-
resilient investments.
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11.3. Private sources
Private corporate actors, including manufacturers and corporate end-users,
contributed USD 66 billion or 19% of overall climate finance flows. As corporate
actors will not invest in low-carbon alternatives as long as they have strong
incentives to make business-as-usual decisions, continued prioritization of fossil
fuels represents both an opportunity cost, and more importantly, an opportunity
lost. Different models, such as cleaner production and industrial energy
efficiency, have been tested in many countries to help corporate actors to
reduce their environmental impact without sacrificing their productivity.
In 2012, private households contributed a significant share of global climate
finance, or approximately USD 33 billion or 9% of climate finance, investing in
distributed energy and heat for their own use. Click for a definition of Private
households.
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12. Mechanisms supporting households investments in renewables
To further illustrate the CPI landscape findings on household investments, the
following are examples of innovative climate finance mechanisms that support
private household investments in renewables, like microfinance for energy,
property assessed clean energy and Pay As You Save programs. Households can
also act as retail investors of renewable energy, thanks to the emergence of new
renewable energy investment vehicles and business models, like publicly-traded
investment funds and the cutting-edge crowdfunding for pooling private
resources for green investments. Take a moment to read these descriptions, and
click on the icons on the right to learn more.
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13. Private intermediaries
The remaining private resources for climate finance are comprised of
contributions from private intermediaries. Commercial financial institutions,
venture capital, private equity and infrastructure funds together intermediated
about 6% of global climate finance in 2012, and played an important role by
providing financial structures to address specific investor needs.
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14. Barriers for institutional investors
A recent report by the International Finance Corporation of the World Bank
Group looks further at barriers to institutional investors' climate finance activity.
As part of in-depth interviews with institutional investors, these six types of
barriers surfaced which prevent these institutional investors to scale up green
investment. Please take a moment to consider them, and click on the report icon
on the left to read the full report.
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15. Instruments
Now that you are familiar with the various actors from public and private sources
and their intermediaries, let us take a closer look at the various instruments
these actors use in climate finance. Private and public investors channel
investments to low-carbon and climate-resilient projects via a range of policy
and financial instruments.
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16. Instruments
There are five major categories of instruments utilized in climate finance: policy
incentives, risk management, grants, low-cost debt and capital instruments,
including project-level market rate debt, project-level equity and balance sheet
financing. In general, mitigation projects tend to be financed with a mix of equity
and loan instruments (both concessional and non-concessional) supported by
various types of policy incentives. Click on the light bulb to read more.
On the other hand, investments in climate resilience tend to be supported with
grants and low-cost loans due to the generally higher incremental cost
component.
Let us take a closer look at each instrument's definition and examples.
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17. Instruments by actors
How do climate finance actors select which instruments to use? For public
actors, the choice of instruments used reflects the goals, strategies and risk
appetite of different institutions. For example, DFIs provide mainly loans, around
96% of their overall climate finance funding, while governments and climate
funds use a mix of grants, concessional loans and equity for capacity building,
reducing financing costs, and promoting early stage technologies. Policy
incentives and risk management instruments are provided by public actors to
incentivize private investments.
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17.1. Examples of Instruments
Here are examples of the five important climate finance instruments and
accompanying case studies featured to learn more.
Examples of policy incentives include: Feed-in tariffs are policy mechanisms
designed to accelerate investment in renewable energy technologies by offering
long-term contracts to renewable energy producers, typically based on the cost
of generation of each technology. Government agencies, utilities and others
offer a variety of tax incentives such as tax credits or rebates to support energy
efficiency, encourage the use of renewable energy sources, and support efforts
to conserve energy and lessen pollution. Renewable Energy Certificates (RECs)
are tradable, non-tangible energy commodities in the United States that
represent proof that 1 megawatt-hour (MWh) of electricity was generated from
an eligible renewable energy resource (renewable electricity). Generation
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technologies that qualify as producers of RECs include solar photovoltaic or
thermal, wind, geothermal, hydropower and biomass.]
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18. Role of instruments in mobilizing funds
Instruments not only help to channel investments to low-carbon and climate-
resilient projects, but serve an important function for public climate finance
actors in mobilizing climate finance and achieving climate investments at scale.
There are various examples of instruments that can address investor-specific
needs, align public and private interests and enable scaled-up low-carbon and
climate-resilient investments, the magnitude of critical mass needed to achieve
transformational shifts toward climate-friendly investment decisions. National
and international public actors can utilize these options to help increase climate
finance.
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19. Where does climate finance flow?
So who gets all this climate finance? We've covered how much climate finance is
flowing, and who's behind it in the public and private sectors. Let's explore to
whom, to where, and to which activities climate finance is flowing.
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19.1. Where does climate finance flow?
This diagram clearly shows that the majority of climate finance in 2012 went to
mitigation uses: USD 337 billion out of the total USD 359 billion was invested in
mitigation. In comparison, on average, USD 22 billion went toward adaptation
interventions. Let us take a closer look at both mitigation and adaptation
activities receiving climate finance.
With mitigation receiving 94% of climate finance, the largest investments were in
renewable energy generation alone attracted 74% of the total climate finance
flows with USD 137 billion going toward solar (including PV, thermal and
households' investments). USD 85 billion was distributed to wind energy, both
onshore and offshore.
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19.2. Where does climate finance flow?
Energy efficiency attracted USD 32 billion or 9% of the total amount of climate
finance. Note that the CPI Landscape report does not capture energy efficiency
finance from private actors. Other mitigation measures receiving climate finance
in the amount of USD 40 billion total included sustainable transport, and
agriculture, forestry, land-use and livestock management.
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20. Finance sources to mitigation and adaptation
This chart presents a breakdown of finance to mitigation and adaptation uses
based on which source funded the activities. As you can see, the significant
investment in mitigation was sourced from private actors: project developers,
corporate actors, and households. From the public sector, Development Finance
Institutions contributed over 90% of the overall public sector finance sourced to
mitigation. Let us take a closer look at the breakdown of DFIs' contributions to
mitigation.
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20.1. Finance sources to mitigation and adaptation
Development Finance Institutions in 2012 allocated USD 36 billion to renewable
energy, USD 31 billion to energy efficiency and USD 37 billion to other mitigation
investments. The investments in energy efficiency and other mitigation activities
are significant because they represent 66% of DFIs' overall mitigation support,
and also around 94% of total public investments in energy efficiency and other
measures.
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20.2. Finance sources to mitigation and adaptation
According to the CPI Landscape report, in 2012, only 6% of total climate finance -
or just USD 22 billion on average - was invested in activities with adaptation
objectives, mostly through international finance invested in developing
countries. Out of that 22 billion dollars, 10 billion went to activities related to
water supply and management and 3 billion to agriculture. As noted before,
there are large knowledge gaps about adaptation finance. Agreement on the
sectoral boundaries for defining adaptation would improve the ability to mark,
track, and monitor the effectiveness of these flows.
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21. Geographic distribution/dispersion
Examining climate finance trends from a geographical perspective, we see that in
2012, roughly 50% of total international climate finance, or 182 billion, flowed to
developing countries. Of that amount, there was also a strong domestic
preference, for over 70% or USD 131 billion stemmed from domestic sources.
Examining the North-South flow of climate finance, developed country
governments committed between USD 4-11 billion in climate marked flows to
developing countries, 45-56% of which was channeled through government
bodies such as bilateral aid agencies or UN organizations. In total, public sector
finance committed by developed countries to developing countries reached
about USD 39-62 billion.
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22. Summary
Let us summarize the key points from what we have learned about the current
landscape of international climate finance. First, global climate finance flows
have plateaued at USD 359 billion in 2012. Significant investments are needed -
above and beyond the status quo - to support the global transition to a low-
carbon and climate-resilient future. There are opportunities to scale-up climate
finance - incentivizing both the public and private actors' participation. New
instruments and enabling environments can tap into private sources of finance.
Both public and private flows are critical to mobilize. In the next lesson, you will
learn how countries can get ready to effectively use climate finance from both
public and private contributions.
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23. Climate finance tracking and data availability issues
The task of tracking climate finance is quite challenging, and due to some
important information gaps, there is a limitation on what can be tracked and
captured annually in the Landscape report. Climate finance tracking, although
improving, remains imperfect. This is all the more important on the private
finance tracking side where tracking ultimately relies on voluntarily-disclosed
data (press releases, financial statements, presentations, etc.) or the existence of
public support mechanism that require disclosure of project details (clean
development mechanism, renewables tender, etc.). Click to learn more about
CPI's climate finance tracking methodology.
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24. References and resources
This is the end of Lesson 2. Visit these links for additional information.