COP23: Two Degrees, With Separation

Sense of Urgency Increases at UN Climate Change Meeting

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Posted: Wednesday, December 20, 2017 12:00 pm

In contrast to the euphoric Paris conference of 2015, where 195 countries agreed to limit global warming below two degrees Celsius, the 2017 United Nations Climate Change Conference (COP23) in Bonn, Germany was a more subdued event.

After a year of multiple extreme weather events around the world, some delegations expressed their growing sense of urgency for action, particularly small island states and developing countries.

Overall though, the Bonn conference, which was the 23rd UN Framework Convention on Climate Change, saw the parties rolling up their sleeves and digging into the important details and technicalities of implementing the Paris Agreement.

Where Will The Money Come From?

A key question for negotiators was how to convert political ambition into concrete actions, and in turn how to finance these. We've previously highlighted the gap between the political ambitions expressed in the Paris Agreement and the financings committed to support these ambitions. Our research found that 60 countries have so far disclosed a financing plan to achieve reductions in their greenhouse gas emissions (known as Nationally Determined Contributions or NDCs), out of the 170 countries that ratified the agreement. We also found that the $5.3 trillion cost estimated by these 60 countries is unlikely to be met from public-sector funding sources. It's no surprise then that climate negotiations have increasingly focused on how to mobilize private sector and multilateral finance, as countries start putting in place their NDCs.

The decision by the Trump administration to withdraw from the agreement, which leaves a $2 billion gap in the financing of the Green Climate Fund, a financial mechanism under the UNFCCC that helps fund investment in low-emission, climate-resilient development, gave further impetus to tackling this question.

The mobilization of private finance to transition to a low carbon economy differs in scale and speed between sectors. Overall, we have seen private financing emerge to support new business opportunities in mitigating the carbon impact of traditional sectors such as the energy and construction industries. In the energy sector, the private sector is contributing to the deployment of renewable capacity at a rapid pace, as shown by the $173 billion in outstanding green bonds in the green energy sector in 2017 (figure from the Climate Bond Initiative).

However, private financing still remains scarce in sectors with relatively high risks and limited opportunities for returns. For example, we have found that investments in energy efficiency projects have been historically limited by the small-scale and diversified nature of transactions as well as the long payback periods. The lack of private funding is even more acute in adaptation projects that aim to strengthen the resilience of buildings, infrastructure, and communities against the effects of climate change.

Supporting A "Just Transition" Through Blended Finance

How fast and at what scale private finance is being mobilized to fund the transition to a low carbon economy also differs across regions. One of the key challenges facing countries that are most exposed to the physical impacts of climate change – typically emerging and developing economies – is their limited access to financial markets, which is partly due to their lower creditworthiness. Still, these countries need significant investment to switch to a more sustainable development path from a carbon intensive one.

Recent extreme weather events have shown just how vulnerable these countries are, particularly if the frequency and intensity of these events increases through climate change, and the severity of the impact. For example, Hurricane Harvey is expected to cost the U.S. around 1 percent of its GDP, whereas the damage caused by Hurricane Irma is likely to cost some Caribbean Islands more than their annual GDP, according to reports.

Globally, the United Nations Environment Program (UNEP) estimates additional adaptation costs will be between $140 billion to $300 billion by 2030, and $280 billion to $500 billion by 2050. In other words, financing for adaptation in 2030 would need to increase by approximately 6 to 13 times over the international public finance available today to fill the gap according to UNEP. We expect that a significant amount of this will need to be directed to the most vulnerable countries with the least developed economies. Ensuring they can develop sustainably, while increasing their resilience to climate change will also be necessary to achieve a "just transition," supporting economies and communities in the move to low carbon economy.

Participants also identified blended finance as a potentially powerful instrument in achieving a "just transition." Blended finance refers to the provision of both public and private funding from a range of different sources, including sovereign, development, and multilateral lenders as well as private entities. It relies on financing structures where public entities provide hedging and credit enhancement mechanisms to reduce risks for private-sector funders. In parallel, the private sector can bring liquidity and sizing through standardization and securitization. In October 2017, the Organisation for Economic Co-operation and Development (OECD) estimated the number of new blended finance facilities created between 2000 and 2016 to be 167, representing $31 billion in financing commitments. We expect the deployment of blended financing solutions to play an increasing role in climate financing.

America's Pledge: We're Still In

Another key question at COP23 was the stance of the U.S., both officially and unofficially. This was the first COP since President Trump announced his intention to pull out of the Paris Agreement. The conference revealed the deep divisions among the U.S. participants at the conference on the solutions to fight climate change. On one side, the official U.S. delegation promoted investments in efficient fossil fuel technologies. On the other, a coalition of U.S. states, cities, and businesses showcased its transition away from fossil fuels and its continuing commitment to the Paris Agreement through the U.S. Climate Action Center.

Among the speakers, the Governor of Virginia Terry McAuliffe noted how the growing number of businesses making commitments to use 100 percent renewable energy was becoming a critical factor in the state's competitiveness.

This split within the U.S. between the supporters and detractors of the Paris Agreement illustrates the fierce debate around the disruptive potential of new low-carbon technologies.

While some predict that the transition to a low-carbon economy will be mostly based on improving existing technologies, others argue that the transition may result in unprecedented changes in companies' business models and operating environment, especially in the energy industry. This was the argument presented by the Carbon Tracker Initiative in their recently published "No Country For Coal Gen" report, which estimated that up to $104 billion in assets in the U.S. coal power generation sector would be stranded by 2035 under a two-degree scenario.

Coal continued to be a hot topic at COP23. In stark contrast to the U.S. stance, the U.K. and Canada led the creation of the Powering Past Coal Alliance with the objective of phasing out of coal power generation by 2025. This was met with enthusiasm from the parties and NGOs alike, with France announcing that it will aim to close all of its coal plants by 2021.

Looking Ahead To Katowice

COP23 demonstrated that countries remain committed to the targets set in the Paris Agreement despite the current U.S. administration's intention to withdraw. Efforts are now focusing on the concrete implementation of the Paris Agreement – the so-called rulebook – through blended finance, further negotiations to ratchet up targets, and a greater focus on adaptation, especially for the most vulnerable communities. The review of progress on these measures at next year's conference in Katowice, Poland, will show whether these efforts have been ambitious enough.

Beth Burks contributed to this article.

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