Estimates of Climate Change Financing Requirements

Manuel F Montes, South Centre

African Climate Policy CentreAddis Ababa , 13-17 August 2012

Main Messages

• Climate change financing needs of developing countries exceed by at least 5-10 times prospective flows

$600 to $1,500 billion a year vs $100 b/year• While there are methodological issues, research-

based estimates should guide political decisions • Climate financing delineated by existing

obligations of developing and developed countries

Methodology

• Greater precision with more detailed, sectoral studies but how to add up

• Many implicit, hard-to-measure, costs are ignored in overall estimates– Skills upgrading, local implementation capacity, etc. – Costs of adapting technology to local conditions

• Uncertainty in estimates of proportion of investment subject to climate change

• Many estimates are not independent of each other, partake of flaws in other studies

Mitigation –Estimates of Global Costs

• IEA (2010) “Blue Map” scenario up to 2030 $750 billion a year

2030-2050 $ 1,600 billion a year• Global Energy Assessment (2011) 2010-2050 $ 1,700-2,100 billion a year• Edenhofer et al. (2009) “RECIPE” up to 2030 $480 – 600 billion a year in 2050 $1,200 billion a year• Mckinsey (2009) Pathways to a Low-Carbon Economy in 2020 $ 660 billion a year in 2030 $1,000 billion a year

Mitigation - 1

• UNFCCC (2009) expert group on technology• Global additional financing required $300 to 1,000 billion a year until 2030 • Developing country share in costs of

technology deployment and diffusion (excl. research and development)

$182 to 505 billion a year +more with R&D+

Mitigation - 2

• World Bank Development Report 2010• Incremental mitigation costs in development

countries $140 to 175 billion a year• “Associated financing needs” $265 to 565 billion a year

Mitigation - 3• UNDESA (WESS 2011) • Global investments for energy transformation $1,800 billion a year

• Developing country requirements Energy transformation - $1,080 billion a year Agric. investment 20 billion a year Total $1,100 billion a year

Mitigation – Bottom Up Estimates

• India (Centre for Science and Environment 2010) - 6 key sectors

$10 billion a year for power sector alone • China (Human Development Report 2009/10) 2010-2050 $ 240 – 355 billion a year pattern of increasing cost as economy grows 2030 269 269 2050 523 1,584

Adaptation - 1

• UNFCCC (2007) developing country needs $27 to 66 billion a year • World Bank (2010) $75 to ~100 billion a year of which in a $102 b a year “wetter” scenario East Asia/Pacific - $29 b South Asia - 17 Latin Am/Caribbean - 23 Sub-Saharan Africa - 19 Europe/Cent. Asia - 11 Middle East - 4 (rounding errors)

Adaptation – 2

• Parry et. al (Imperial College 2009) Peer reviewed Evaluation of UNFCCC estimates (Parry former IPCC co-chair working group on impacts, vulnerabilities, and adaptation)

- missing important sectors – ecosystem services, mining, manufacturing, energy, retail, finance, tourism - underestimation by 2-3 times in each included sector• Water (adapting to floods not included)• Infrastructure – low infrastructure levels to continue in Africa

and LDCs• Residual damage (Dlugolecki 2007)

Adaptation - 3• More realistic estimate of adaptation costs• Fuller cost: 2 times top of UNFCCC range

$54 – 132 billion a year $132• Ecosystem services $65 – 300 billion a year

one half of maximum - 150• Residual damage - $450 billion a year 2/3 of maximum residual damage 300 Total 582 or approximately $ 550 - 600 billion a year • Still excluding mining, manufacturing, tourism, etc.

Adaptation – Indicators from Disasters

• Loss of life, homes, infrastructure, livelihoods • BP Deepwater Horizon - $ 7.8 billion (excluding claims from public sector entities)

• Pakistan 2011 floods, 14 million affected, $10-15 billion for reconstruction (MSNBC)

• Thailand 2011 floods, $46 billion (WB 2011) • US 2011 Mississippi flooding, $9 billion (WSJ)• Growing number of natural disasters and economic loss – 1999: $150 b;

2008: $260 b; 2011: $380 b (Geneva Report 2011) • Importance of expanding support for bottom-up approaches, such as the

NEEDS study (UNFCCC 2010) Costa Rica, Egypt, Ghana, Indonesia, Jordan, Lebanon, Maldives, Mali, Nigeria and Philippines

Mitigation & Adaptation

• Developing Country Needs

• Mitigation $500 to 1,100 billion a year• Adaptation 100 to > 550 billion

• Range 600 to >1,650 billion a year

Climate Finance under Convention

• Climate finance versus climate finance under the Framework Convention

• Climate finance or climate-related finance– ODA– FDI– Debt-creating instruments – Guarantees – Offsets that mobilize funding

• But many do not meet the obligations under the Convention

Climate Finance Obligations - 1

• Non-Annex 1 have obligations in mitigation, adaptation, and reporting under the Convention

• In meeting these obligations, Art. 4.3 says developed country parties and countries in Annex 2 “shall…provide such financial resources . . . needed by developing country Parties to meet the agreed full incremental costs . . .”

Climate Finance Obligations - 2• Article 4.7

• The extent to which developing country Parties will effectively implement their commitments under the Convention will depend on the

effective implementation by developed country Parties of their commitments under the Convention related to financial resources and transfer of technology

and will take fully into account that economic and social development and poverty eradication are the first and overriding priorities of the developing country Parties.

Implications Climate Finance Obligations - 1

• Full incremental costs of measures– means additional to Business as Usual (BAU)– BAU : social and economic development and poverty eradication

• ODA modalities, which are voluntary and conditional do not meet developed country obligations

• Financial resources must be – New (Bali 1(e))– Additional (Bali 1(e))– Adequate (Art 4; Bali 1(e) )– Predictable (Art 4; Bali 1(e) )

Implications Climate Finance Obligations - 2

• Resource transfers discharge the obligation– Grants, grant components of loans– Subsidy component of loans but not loans, which must be paid back – Not Private foreign direct investment– Public to public, not private, transfers– Not create obligations on part of recipient countries – such as guarantees on

loans from IFIs or investment insurance agencies

• Limits of private sector finance– Short-term; mitigation projects and technology change projects 5 years or more– Large scale projects exceed normal private sector capacity– High risk projects normally require steady public sector policy and public sector

insurance/guarantee

Limits of Private Sector Finance

• Long-term finance workshop, Bonn, July 2012

• Limits of private sector finance– Short-term; mitigation projects and technology change

projects 5 years or more– Large scale projects exceed normal private sector

capacity– High risk projects normally require steady public sector

policy and public sector insurance/guarantee

Innovative Sources of Financing

• Carbon taxes in developed countries• Special drawing rights • Tax cooperation

• Global public finance system for a global public good – Responsibility of developed countries – Developing countries can be supportive

Thank you

"I say ‘High’, you say ‘Low’You say ‘Why?’, I say ‘I don’t know’”

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