The financial paradox blocking efforts to combat climate change

The annual United Nations Climate Change Conference is underway in Dubai, and a complex, bitter international battle over money revolves around the COP28 negotiations:

• How much capital is available to help developing countries transition to renewable energy and cope with extreme weather events?

• Where will that investment come from?

• And crucially, what interest rates will lenders charge?

It is no exaggeration to say that the answers to these questions will help determine the fate of the planet.

The average temperature on Earth has already risen about 1.2 degrees Celsius above pre-industrial levels. Without a rapid shift away from fossil fuels, scientists warn that catastrophic warming will destroy coastal cities, devastate farmland and endanger millions of lives.

And yet there is a baffling economic paradox that is hampering efforts to create a more sustainable world: it is relatively easy to find financing for the dirty projects that the world needs less of, but insanely difficult to finance the clean ones. to finance projects that the world needs more of.

This mismatch shapes projects around the world. In the United States, rising interest rates are causing major companies to cancel plans for massive sustainable developments. But the disconnect is especially acute in developing countries, and especially in Africa, where many people have little or no access to electricity.

Financial institutions and development banks typically view investments in these countries as excessively risky, causing lenders to become more conservative. And central banks’ efforts to curb inflation are producing particularly high interest rates in Africa.

“The world is talking about a big game to green the African continent,” says Jacqueline Novogratz, the founder of Acumen, an impact investment fund. “And yet the kind of capital we deploy is usually too expensive, too low-risk and too short-term.”

That is, if lenders make the loans at all. In many cases, projects simply cannot be financed.

Take the case of Kofie Macauley, an engineer from Sierra Leone who is working to build a small hydropower project that would cost $80 million – a pittance in terms of project financing. He has courted dozens of equity partners, large and small, from around the world for years, as my colleague Max Bearak reported. But after ten years of effort, no one will put up the money.

Given the choice between a new coal-fired power plant and an equally powerful new wind farm, most countries would choose the wind farm. In the long run, the absence of fuel costs makes sustainable projects much more economical. This means that there are unique opportunities in developing countries.

“Unlike other countries where the infrastructure is well developed and you have to roll it back and make it green, Africa can take the leap from the start and develop a green energy infrastructure,” said Bilha Ndirangu, the CEO of Great Carbon Valley. development company based in Kenya.

Efforts to make better financing options available to developing countries are emerging. The World Bank is under pressure to lend more money for climate projects at more competitive rates, and the hope is that as development banks take on more risk, huge amounts of private capital will disappear from the sidelines. So far, these reforms have been slow.

When the money shows up, the energy transition could happen with surprising speed. Just look at the United States.

Over the past year, the Inflation Reduction Act has sparked a boom in wind, solar, battery and electric vehicle production that is reshaping the U.S. economy and allowing one of the world’s biggest polluters to say it really is on its way to reducing emissions.

“This transition is underway,” said Peter Gardett, executive director of climate and clean technology at S&P Global. “What surprised us is the speed and scale of the investment.”

Formal negotiations at COP28 are likely to focus on renewed commitments to limit global temperature rise. Yet any reasonable chance of achieving these goals will depend on the efforts of global and business leaders the trillions of dollars needed for a large-scale redesign of the world’s energy infrastructure.

That could mean development banks taking on more risk, private lenders accepting lower returns, new public-private partnerships or more subsidies and tax breaks. But there is no chance of solving the problem of climate change without also solving the money problem. – David Gelles

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IN CASE YOU MISSED IT

Leaked documents suggest COP28 host is using the event to promote fossil fuels. The choice of the United Arab Emirates, a leading oil producer, to host the climate talks angered environmentalists. That anger increased after the Center for Climate Reporting And the BBC has obtained documents showing that the country planned to lobby for oil and gas deals during the summit.

Nations pledge about $550 million to a new climate damage fund which will help vulnerable countries affected by climate disasters. Some activists criticized the United States’ pledge of $17.5 million as too low. And the overall fund still has a long way to go before it can significantly contribute to covering climate-related damage, which is expected to cost developing countries $280 billion to $580 billion per year by 2030.

An Emirati financial company is joining US asset managers in a new climate fund. Lunate Capital, a new firm controlled by Abu Dhabi’s royal family, plans to invest at least $30 billion in the fund, along with a handful of prominent asset managers including TPG, BlackRock and Brookfield Asset Management, according to people familiar with the matter with the plans. Lunate launched several months ago with at least $50 billion in assets.

Net what again?

Hundreds of companies have gone out of their way to announce their climate commitments in recent years, usually by setting net-zero targets: dates by which they plan to remove the equivalent of all the carbon they emit from the atmosphere.

Following that goal is harder than setting it. Despite years of COP discussions, the world has yet to agree on a standard audit method to measure progress toward curbing global warming. And that can make it extremely complicated to hold companies and countries responsible in the climate fight, writes Vivienne Walt for DealBook.

Only around 4 percent of companies with a net zero target meet the minimum criteria set by top experts appointed by the UN. said John Lang, the project leader in London Net Zero tracker, which uses around 40 indicators to assess the climate strategy of countries and companies. Companies rarely include end-use, or scope 3, carbon emissions in their calculations; indicate how much their progress depends on the use of compensation, such as tree planting; or publicize their use of emerging technologies such as carbon capture and storage. Until last year’s COP, the definition of “net zero” was unclear. Now the UN’s criteria include making Scope 3 emissions public and using offsets only for residual carbon, exposing weaknesses in some companies’ plans. “All we’re asking for is clarity,” Lang told DealBook.

Offsets are not measurable. Companies are increasingly offering customers ways to balance their polluting habits, such as air travel, with environmental gestures called offsets, which are then deducted from companies’ carbon emissions; for a small additional fee, the company will contribute to projects such as planting new trees or preventing existing forests from being cut down.

But there’s no good way to determine how well these initiatives are working, or even whether these actions are ever taken. “No one knows whether ten people count the same forest, or whether it will burn down in the next fire,” said Ian Goldin, professor of globalization and development at the University of Oxford. “There is no regulation or accountability.”

It is too early to count on carbon capture or storage, technologies that prevent carbon from escaping into the atmosphere in the first place. Oil companies in particular have promoted the future use of the technology as a way to maintain fossil fuel production while adhering to their climate goals. This is what Saudi Aramco, the largest oil company in the world, says CCS technology allows carbon to be reused its chemical production, and that it will bury other used carbon under forests of mangrove trees, which act as natural carbon sinks. Yet it is not yet clear how effective these techniques will be if they are deployed on a large scale. “It’s really overkill as a solution, in terms of the amount of carbon you’re removing,” Goldin said.

A global hodgepodge of regulations has made tracking progress even more difficult. The United States remains deeply divided over climate action, with 11 states this year passing laws limiting how many investment funds use environmental indicators in financial decisions. This is in contrast to the European Union, which will be needed from 2025 onwards all companies – inclusive some great Americans companies doing business in Europe – to report the environmental impacts of their activities.

“You probably have 500 different frameworks, ratings, star ratings, whatever,” says Emmanuel Faber, chairman of the International Sustainability Standards Board, a multinational body created after the 2021 COP talks to set climate accounting standards . Faber told DealBook that he had spent the past few months scouring the world to secure agreements from countries to follow ISSB rules. “The work has been done to put an end to this alphabet soup,” he said.

Thank you for reading! See you tomorrow.

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