Finance, technology transfer and capacity-building are three key kinds of international support developing countries call for to reinforce insufficient domestic resources in achieving climate targets.
Of these, positive developments have been seen in the finance and technology space in recent years.
Developments in finance
There is growing momentum for green financing among a wide range of financial players, including public financial institutions, commercial banks and long-term investors such as pension funds.
Multilateral development banks are the leading funders of green projects globally, with proposed combined commitments for annual climate financing to reach $65 billion by 2025. For example, the Asian Development Bank (ADB) has set a target of $80 billion to be spent from 2019 to 2030, with at least 75% of ADB’s commitment to support climate change and adaptation by 2030 and with the rest committed towards healthcare, education, sanitation and water drives among others. Similarly, the Asian Infrastructure Investment Bank (AIIB) intends to increase its share of financing for climate change mitigation in its annual operations to more than 50% by 2025.
The bond markets are also funnelling capital flows to green investments through green bonds, which amounted to $290 billion in 2020, growing steadily from $258.9 billion in 2019 and $171.2 billion in 2018, according to the Climate Bond Initiative.
The markets are currently attempting to source capital for much broader activities to align with the collective efforts under the Paris Agreement. The new concept, known as climate transition finance, focuses principally on the credibility of an issuer’s climate change-related commitments and practices. The funding opportunity is provided to issuers that implement its rigorous climate change strategy. Although efforts need to continue to counter scepticism about whether all proceeds are really used to create new projects that help mitigate climate change in the context of the Paris Agreement, market developments in green and transition finance will underpin green transition efforts by both the private as well as public sectors.
The ADB estimates developing Asia needs to invest $26 trillion in infrastructure from 2016 to 2030—or $1.7 trillion per year—if the region is to maintain its growth momentum, eradicate poverty and respond to climate change. The investment needs to include climate change mitigation and adaptation costs of $3.5 trillion, or $200 billion per year.
Although the amount of investment needed is large, some studies suggest such climate adjustments may eventually be justified as they will compensate for future costs resulting from the damages brought about by climate-related disasters and natural incidents. A World Bank study identifies the benefit of building climate resilient infrastructure, and estimates the net benefit of building more resilient infrastructure in low- and middle-income countries will be $4.2 trillion, with a $4 benefit for each $1 invested. The research provides encouraging evidence that additional investments in climate adjustments can still contribute to green growth in the long run.
The technology gap
There is lack of consensus between policymakers, the financial services sector, industry and academia regarding readiness around green technology, cost estimates and embedded risks. Nevertheless, the historical trajectory which points to technology developments resulting in cost reduction, is encouraging policymakers and the private sector to move quickly towards climate targets.
One study predicts that the costs of solar PV energy will decrease by 50% between 2020 and 2030, while onshore and offshore wind energy costs will fall by 25% and 50% in this period. Another recently published study provides encouraging evidence that taking into account the trajectory of technology developments and cost reductions seen in recent history, a greater transition than that envisioned by the International Energy Agency’s sustainable development scenario can be achieved at reasonable costs and without undermining future economic growth.
A long road ahead
The positive trends notwithstanding, several challenges remain in bringing these developments in finance and technology together.
First, quickly connecting the growing appetite of capital flows for green projects to areas where such investment is needed is not easy. Those projects must be designed such that they can attract affordable private capital flows effectively. Appropriate policy frameworks are critical to boost green investments, as witnessed in the growth of solar and wind power, where government-led incentives have driven market expansion, encouraging take-up of higher purchase prices than conventional energy through a guarantee of long-term fixed prices (known as a feed-in tariff).
A point of contention is to what extent a government should intervene in the market. International cooperation, including capacity-building and knowledge-sharing to build appropriate policy frameworks to mobilise green capital flows, will be particularly useful in this respect. In particular, the financial community has a pivotal role to play in advising about project structures, including public-private partnership frameworks, awareness of risks around new technologies, or other useful information that can help policymakers develop green policies.
Second, as the share of variable renewable energy such as solar and wind rises, its impact on the distribution system should be considered. For example, transmission lines should be newly developed to reach out to a range of locations suitable for renewable energy, which is different from locations of conventional power plants. Variable energy requires much higher reserve margins (extra capacity of power generation) and the total power supply system should be designed to ensure the reliable supply of electricity. One piece of analysis conducted by the UK government suggests that taking into account all system impacts, the marginal cost of each extra renewable energy unit on the system will keep increasing as its use increases. As a result, the levelised cost of electricity for renewable energy can be higher than conventional energy such as gas-generated energy, even with additional installation of carbon capture and storage systems (CCS) in a higher variable renewable scenario in the UK. The study provides an important implication for the future of renewable energy, although these results could vary from country to country.
Energy storage is an important part of the puzzle for variable energy to become more popular, either through a battery-system or generating a new energy source such as hydrogen, by using extra electricity from variable energy. In particular, hydrogen can be a game-changer enabling clean energy storage at scale, which can be used in a wide range of scenarios, including chemical or iron and steel industries, and fuel for transportation or power generation. Japan has been investing in this field for a long time including cross-border supply chain pilot projects with Australia and Brunei. The EU has also strengthened efforts to create a new hydrogen supply chain by forming the European Clean Hydrogen Alliance, which brings together industry, national and local public authorities, civil society and other stakeholders. The US Fuel Cell and Hydrogen Energy Association drew a road map that envisions Hydrogen will generate $750 billion per year in revenue and 3.4 million domestic jobs by 2050. Likewise, major economies such as China, Germany and the UK have been strengthening their hydrogen efforts.
In parallel with efforts to pursue energy storage options to maximise potentials of renewable energy, carbon capture and storage (CCS) might be a realistic option to reduce carbon emissions – given that the rapid increase of energy demand in developing Asia will not be met only by renewable energy. In this context, CCS is drawing great interest as a key tool to quickly get to carbon net zero. In Asia, the Asia CCS network is led by the Japan and Economic Research Institute for ASEAN and East Asia to pursue collaboration and cooperation on the development and deployment of CCS in the Asia region and among ASEAN and East Asia Summit region countries.
International collective action and cooperation to nurture innovative technology for energy storage or carbon storage is required to accelerate the commercialisation of such new technologies at economically reasonable costs.
New bilateral and multilateral cooperation formed recently including the Japan-US Climate Partnership on Ambition, Decarbonization, and Clean Energy, The Quad Climate Working Group (Australia-India-Japan-the US), US-China Climate Dialogue , US-India Climate and Clean Energy Agenda 2030 Partnership, the EU-India High-Level Dialogue on Climate Change, all highlight technology cooperation as a priority. If such cooperation is well organised and provides technology transfers to developing countries that aspire to green growth, more inclusive region-wide or worldwide green growth can be achieved.
Hiroki Sekine has been a visiting fellow with the Asia-Pacific Programme at Chatham House since January 2020. He has also been a non-resident visiting fellow at the Institute for Security and Development Policy in Stockholm since February 2020. He was director of the policy and strategy office for financial operations at the Japan Bank for International Cooperation (JBIC) from July 2016 until June 2019, and then served as a senior adviser to the corporate planning department at JBIC until December 2020. Between 2018 and 2019, Hiroki served as adjunct professor at Kyoto University, responsible for project finance.