SECURING CLIMATE FINANCE ANDCLIMATE FINANCE AND

INVESTMENT TO SUPPORT LOW CARBON ANDTO SUPPORT LOW-CARBON AND

CLIMATE-RESILIENT GROWTH

H l M tf dHelen MountfordDeputy Director, OECD Environment Directorate4 June 20134 June 2013Paris

Closing the emission gapClosing the emission gap

GHG emissions projection – 2010-2050

120130GtCO2e

Outlook Baseline 450 ppm Core3-6°C by 2100

90100110

607080

20304050

2°C by 2100

01020

2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

2 C by 2100

2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

2Source: OECD (2012), OECD Environmental Outlook to 2050, Image model

Delaying action is costly! I l k i b i i i fIt locks-in carbon-intensive infrastructure

Real income in 2050 (% deviation from baseline)

0%450 ppm Core 450 ppm delayed action

-3%-2%-1%0%

-6%-5%-4%3%

-9%-8%-7%

Delaying action to 2020 (ie the CPH/ Cancun pledges) will increase costs of a 450ppm pathway by nearly 50% in 2050

-10%

3

increase costs of a 450ppm pathway by nearly 50% in 2050

Source: OECD (2012), OECD Environmental Outlook to 2050, Baseline projection using ENV-Linkages model

Closing the investment gap to 2030Closing the investment gap to 2030

Global infrastructure in estments c ent

Global infrastructure investments needs BAU

Global infrastructure in estments needs 2°C 1 2

4

$2 tn $3.2 tn $2.7 – $3.5 tn

investments - current investments needs - BAU investments needs - 2°C scenario

1 2

3

3.5

ear

+60%?

2

2.5

D tn

/ ye +60%

?

1

1.5US

D

0.5

1

0

4

Source: Compilation based on OECD, IEA, ITF, Mc Kinsey, WEF, Kennedy,C.,Corfee-Morlot,J.Energy Policy(2013)Note: Infrastructure sectors including roads, rail, ports, airports, power, water and telecoms

1: Annual average based on global investments over the period 1996-20122. Annual average needs for the period 2012-2030

What can governments do? A Green Investment Policy Framework

1. Strategic goal setting and policy alignment

2. Enabling policies and incentives for LCR investment

4. Harness resources and build capacity

f LCR

5. Promote green business and

consumer b h i LCR investment

3. Financial policies and instruments

for an LCR economy

behaviour

Source: Corfee-Morlot et al., 2012.

How to integrate climate & investment policies in a green investment policy frameworkin a green investment policy framework

• Clear long-term and predictable policiesS Clear, long term and predictable policies• Align goals at all levels of governance• Engage the private sector

1. Strategic goal setting and policy alignment

• Put a price on carbon• Remove fossil fuel subsidies• Energy efficiency and product regulations

2. Enabling policies for green investment

• Financial regulations to drive long–term investments• Targeted subsidies with predictable phase-out • Leverage public finance (loans, guarantees, bonds)

3. Financial policies, tools and instruments g p ( g )

• R&D for green technology • Capacity building to support LCR innovation • Monitoring and enforcement

4. Harnessing resources and capacity • Monitoring and enforcement

• Climate risk and vulnerability assessmentand capacity

• Information policies• Consumer awareness programmes public outreach

5. Promoting green business and

6Source: Corfee-Morlot et al., 2012.

• Consumer awareness programmes, public outreach• Corporate reporting

business and consumers behaviours

Barriers to private sector engagementINCENTIVES

FOR CLEANER GROWTH

INCENTIVES TO LOCK-IN CARBON-

INTENSIVE GROWTH

Sources: OECD (2013), Inventory of Estimated Budgetary Support and Tax Expenditures for Fossil Fuels; IEA (2012), World Energy Outlook; IEA (2011) Clean Energy Progress Report; OECD (2013 forthcoming).

7

Preliminary analysis of effective carbon i i l t i it tiprices in electricity generation

400617 775800

300

350

bated

200

250

e of CO2ab

150

200

per ton

ne

50

100

2010

 EUR 

‐50

0

88Source: OECD (2013 forthcoming), Effective Carbon Prices

Institutional Investors as a source of di i l i fi inon-traditional private financing

70 000

80 000

$20.2 tn

$75.1 tnDirect investment in green infrastructure can deliver:- steady, inflation-linked, income

ith l l ti t th t

Pension funds50 000

60 000

lions

$20.2 tn- with low correlations to the returns of other investments

Insurance companies

30 000

40 000USD

bil

$24.3 tn

Investment funds20 000

30 000

$28.8 tn

0

10 000Other $1.8 tn

Source: OECD Global Pensions Statics and Institutional Investors databases 9

Challenges to scaling up institutional i t ti i ti li linvestor participation – policy lessons

Issues with ▪ Direct investing challenges infrastructure investments

1 ▪ Regulatory and policy issues- illiquidity and direct investment restrictions e.g. capital adequacy rules

(Solvency II, IORP II)- uncertain new policy application e.g. Solvency II for pension funds?p y pp g y p- accounting rules e.g. mark to market for illiquid assets

▪ Lack of project pipeline and quality historical data- Compounded by exit of banks (Basel III/deleveraging)

Issues particular to greeninvestments

2▪ Risk/return imbalance

- Market failures: insufficient carbon pricing and presence of fossil fuel subsidies

▪ Unpredictable, fragmented, complex and short duration policy supportp , g , p p y pp- Retroactive support cuts, switching incentives or start and stop (PTC)- Use of tax credits popular with insurers can discourage tax exempt

pension funds- Unrelated policy objective discouragement e.g. EU unbundling

▪ Special species of risk e g technology and volumetric require expertise and

Lack of suitable

▪ Special species of risk, e.g. technology and volumetric require expertise and resources

▪ Issues with fund and vehicle design▪ Nascent green bond markets no indices or funds no market for illiquid

10

Lack of suitable investment vehicles

3▪ Nascent green bond markets , no indices or funds, no market for illiquid

vehicles ▪ Challenges with securitisation▪ Credit and ratings issues

Green Bond Universe = USD $16 – 86 billionGreen Bond Universe USD $16 86 billion 4.0USD $ Billions

Moody's S&P Fitch

Long-term

Short-term

Long-term

Short-term

Long-term

Short-term

Aaa AAA AAA Prime

• Credit Rating Tiers

SovereignCorporate$30-70 Bn??

3.0

3.5

US Qualif ied EnergyConservation Bonds

USD $3.2 Billion

P-1

A-1+ F1+Aa1 AA+ AA+

High grade

Aa2 AA AA

Aa3 AA- AA-

A1 A+A-1

A+F1

Upper medium grade

A2 A A

A3P-2

A-A-2

A-F2

B 1 BBB+ BBB+ L

Supranational

2 0

2.5WorldBank

US Clean Renewable Energy Bonds $2.4

$2.3

Baa1 BBB+ BBB+ Lower medium grade

Baa2P-3

BBBA-3

BBBF3

Baa3 BBB- BBB-

Ba1 BB+

B

BB+

B

Non-investment gradespecul

Ba2 BB BB

Ba3 BB- BB-

1.5

2.0

EuropeanInvestment Bank

Asian

$1.6

B B ative

B1 B+ B+Highly speculative

B2 B B

B3 B- B-

Caa1 CCC+Substantial risks

ABS

0.5

1.0

CRC BreezeAlta Wind

s aDevelopmentBank

InternationalFinanceCorporation

AfricanDevelopmentBank

$0.7$0.6

$0 2

$0.7

$0.3

Not prime

C CCC C

Caa2 CCC

Extremely speculative

Caa3 CCC- In default with littleprospeCa

CC

0.01 2 3 4 5 6 7 8AAAAAABBBBBB BB-

S&P CreditRating.

Andromeda Solar Nordic

InvestmentBank

$0.2$0.2 prospe

ct for recovery

CaC

C

D /

DDD

/In default

/ DD

/ D

Source: Calculations derived through OECD analysis using the Climate Bonds Initiative database, Daiwa research, Bloomberg New Energy Finance and Energy Hedge Magazine

Next steps in OECD work

• Assessing experience with Green Investment Policies and

Next steps in OECD work

• Assessing experience with Green Investment Policies and Instruments for infrastructure – country case studies

• Assessing the scale & impact of policy restrictions on g p p yinternational investment in clean energy

• Further work on institutional investors: lessons learned from ifi di h “ ” d l (i i h i h specific case studies on how to structure “green” deals (i.e. with right

risk-return profile) and role of policies.

• Combining BNEF and OECD databases for empirical • Combining BNEF and OECD databases for empirical analysis of the impact of government policies on leveraging (“crowding in”) private finance to green infrastructure.

• Broadening the tracking of climate finance: non-concessional finance, export credits, loan guarantees; definitions of private finance flows; leveraging effect of bilateral ODAfinance flows; leveraging effect of bilateral ODA...

Th k !Thank you!

www oecd org/env/cc/financingwww.oecd.org/env/cc/financing