The challenges posed by climate change cannot be met without transforming the development model of our economies. To achieve this, we need to come up with solutions to finance that transformation process and, more generally, to support countries and local authorities towards the development and implementation of new public policies.
What drivers for change?
This new development model requires massive investments in installing renewable energy generation, reconverting the capacity of the most emissive energy production, and implementing more energy-efficient technologies in all sectors (industry, transport, construction…).
The challenge is made more complex by the fact that the lifespan and hence structuring effects of energy infrastructure contribute to limit the implementation of changes.
This “transformational” or “transitional” issue entails:
- Major changes in the public policies and budget allocations of national governments and local authorities. These changes can and must take place with economic, social and environmental costs that are acceptable for countries, economic stakeholders and populations;
- A rapid and substantial redirection of global financing towards investments and technologies with the greatest climate co-benefits and, at the same time, a reduction in financing investments with the highest greenhouse gas emissions. Current estimates show that climate finance does not exceed USD 300bn, whereas thousands of billions of dollars are invested every year in infrastructure and generation capacity with high or very high levels of greenhouse gas emissions.
Mobilization of all actors
Public international climate finance at large, or an instrument like the Green Climate Fund are bound to redefine the objectives and modalities of traditional Official Development Assistance. However, in view of the challenges at stake, international Official Development Assistance institutions, cannot alone address the need to redirect public and private investment massive flows towards low-carbon investments, while allowing economies to adapt. The involvement of national and regional public financiers, which are legitimate in supporting the development trajectories of their countries and have technical and financial capacities that can in no way be compared to those of international financiers, is of crucial importance.
The complementarity and synergies of financiers is one of the priorities of the climate finance architecture. The International Development Finance Club – IDFC (set up in 2011 and which includes 22 major international, regional and national development banks) proves that change is possible and feasible. With some USD 87bn of financing invested in projects that contribute to the fight against climate change, these banks are demonstrating their capacity and willingness to contribute to a solution.
Yet given the scale of investment needs,the role of international or national public finance is also increasingly to becomecatalytic in nature: it must promote the redirection of private investment flows towards investments with climate co-benefits.
Change in global paradigms
In addition to the necessity of financing the ecological transitions of countries, two other dimensions need to be considered:
- valuating and reviving climate services rendered by certain natural resources (forests and soil), which act as carbon sinks: these natural capacities have dramatically declined over the past decades and major investments for conservation and replenishment are required. Climate finance can help to promote these highly effective climate investments at a rather low financial cost;
- The capacity of countries, local authorities, economic actors and people, to adapt to the consequences of an inevitable climate change. The climate challenge lie as much in the capacity of populations and countries to bear more frequent and more violent extreme events as in their capacity to make provisions for and establish policies to anticipate the impacts of climate change and be more resilient to them. The cost and financing of these measures are complex to assess, while the consequences that need to be faced have not yet been established.
Adapt the behavior of financial institutions
To address the climate challenge, public financiers, and more specifically development banks, must pursue their efforts to mainstream the climate issue into their strategies. This effort is necessary both to increase financing flows and to give financial incentives to redirect investment flows. During the Climate Finance Forum in Paris on 31 March 2015, the multilateral development institutions and IDFC club agreed to promote better practices in terms of mainstreaming the “climate” dimension and building a more standardized and operational framework for climate finance.
They must also seek ever greater transformational impacts by supporting national or territorial public development policies that integrate the issue of the fight against climate change and the objective of achieving impacts in terms of mobilizing and redirecting investments and financing flows. This includes supporting the innovations required to give incentives to financial markets, providing solutions to local finance in order to help stimulate energy upgrading in SMEs, assisting the climate action plans of local authorities and governments to make them more ambitious or economically and socially acceptable…
Finally, greater support to the poorest countries and the most vulnerable to climate change is required in order to finance appropriate development, robust to the consequences of climate change. This can be implemented in three phases:
- Prepare and support countries (governments, local authorities, economic actors…) for the definition of new and appropriate policies for development and land-use planning;
- Finance these new development policies and support the upgrading of infrastructure and sectors to make them resilient;
- Set up and finance natural disaster prevention and risk management mechanisms.
The fight against climate disruptions requires major changes in terms of behavior, development policies and actors. They will mostly be anticipated and integrated, or mostly endured. Public financiers have developed significantly in recent years and will have a major influence on the other actors in this field. The second stage will be to further strengthen the effectiveness of their action.