Introduction: the climate finance challenge
The Fifth Assessment Report of the IPCC (IPCC AR5) underlined that limiting global warming to below 2°C is not only possible, it will also not cost much – ambitious action will slow down economic growth by no more than a tiny amount, with substantial benefits from e.g. reduced air pollution or avoided climate damages. Yet, meeting the challenge will require massive efforts to shift existing investments away from fossil fuels towards the expansion of renewable energies and increasing energy efficiency. According to CERES (2014) the world needs to invest an additional $36 trillion in clean energy by 2050, in order to limit global warming to well below 2°C. For the near term, this requires at least doubling investments in clean energy to $500 billion per year by 2020. Over half of these investments need to be made in developing and emerging economies.
On adaptation, the IPCC AR5 has recently highlighted that too little is being invested in adaptation and that in the absence of massive adaptation actions today, the cost of adaptation will increase massively in the future. According to the 2012 CPI report on climate finance, adaptation received only around $10 billion of public finance in 2011. This remains highly inadequate given that developing countries’ adaptation needs are estimated to cost between $60 and 182 billion each year by 2030 according to the UNFCCC. These numbers do not yet account for existing and future economic and non-economic loss and damage that may increase massively over time, especially if adaptation continues to receive much less than needed, meaning that vital actions cannot be taken, eroding entire socio-economic systems over time, leading to the world community failing in eliminating poverty and preserving livelihoods and ecosystems.
Shifting existing investment patterns and mobilising additional investments will require considerable efforts from developed countries as well as from developing countries, with the latter having the additional challenge to pursue sustainable development while at the same time overcome poverty as their first priority. Especially for mitigation, much of the required investments will be made by the private sector that however will need to be mobilised to adequately take on this challenge.
The right policy frameworks can be one tool to mobilise such additionally needed investments, if they are designed to pursue pro-poor sustainable development, respecting social and environmental safeguards and ensuring people affected by such actions are consulted and give their consent.
Another tool will be the provision of public finance to leverage additional investments that would not occur otherwise. For instance, public finance is needed to ensure that interventions that remain unattractive for the private sector, especially in lower income countries and in marginalized communities, receive the required support. Public finance can, for example, help promote micro, small, and medium-scale and off-grid sustainable energy solutions, lower the cost of renewable energy access for the poorest, ensure forest protection, and build capacity in developing countries. Public finance can help ensure private finance investments are not detrimental to and benefit the poorest and most vulnerable - if international best practice social and environmental safeguards (the do no harm principle for example) are applied.
Public finance will remain essential for adaptation e.g. to secure livelihoods systems including food production, health, land rights and political empowerment, water supply or disaster risk reduction, preparedness and management, and increasingly compensation for losses and damages – especially in the most vulnerable countries.
In this context, 2014 will be an important year to revitalize short-term financial support, send strong signals to the investment community, and prepare to give finance a central role in the 2015 agreement for strengthened action in the post-2020 period.