The plan to save the planet is leaking: it will cost 120 billion euros until 2050

The fight against climate change not only suffers from political shortcomings, but also financial ones.

If the latest evaluation of the national plans to reduce greenhouse gas emissions carried out by the United Nations climate change department showed that the planet is on the way to failing to comply with the Paris Agreements, the scenario is not more favorable in the economic chapter , as only between a fifth and a third of the funds considered necessary to achieve net zero emissions by 2050 are being raised. The main problem is that green projects in underdeveloped countries receive little private investment.

The money comes to them sometimes with a dropper.

From the comments of a dozen researchers and representatives of the public and private sectors collected for this report, it can be deduced that the biggest obstacle is the high debt that many of these states have assumed to deal with covid-19, added to the fact that the Collaboration structures between both sectors (public and private) have never been widespread enough.

A situation that, in the opinion of Paul Rosane, an analyst at the US think tank Climate Policy Initiative, can only be overcome with greater cooperation: "The climate goals will not be met without a massive mobilization of private capital, because development banks they do not have sufficient financial capacity to close the gap.

The task is enormous.

According to the International Energy Agency, the energy transition bill will amount to 125 trillion dollars (120 trillion euros), the equivalent of 1.3 times the world GDP, and paying it will cost 2.45 trillion euros per year until 2025. and 3.6 between 2025 and 2050, according to the breakdown carried out by the Campaign towards Zero Emissions, an initiative that brings together more than 10,000 companies and non-state public actors.

Some figures that contrast with the real investment.

According to the measurements of the main climate finance reports available, collected and analyzed by Citi in the document Perspectives and Global Solutions, from 2016 to 2020 between 600,000 and 900,000 million dollars were raised annually, that is, between 22% and 33% of what was estimated as necessary.

Elizabeth Curmi, one of the authors of this document, considers it essential that at least 70% of the resources be private, but today they barely account for 49%.

And in regions like Africa, where 85% of investment is missing, they are almost non-existent.

Debt is the most visible obstacle, but not the only one.

"The investor does not always have sufficient information about the markets and, sometimes, the projects are so small that they do not exceed the threshold from which the fund managers begin to consider them", illustrates the researcher.

This accumulation of bottlenecks is what makes it “essential” to develop blended financing.

The term refers to the different public-private joint venture schemes, from those based on insurance or guarantees to those that subordinate the loss of the private investor to that of the public or philanthropic.

Faced with announcements such as the one from the last climate summit, held in November in Sharm el Sheikh (Egypt) and in which developed countries agreed to create a fund to compensate those who suffer the most from the effects of climate change for damages and losses, Experts in this type of financing argue that the fundamental thing is to extend these structures, which also achieve direct involvement in projects by commercial banks and other private investors.

Fund Allocation

They are not exclusive approaches.

Developed countries have been allocating climate funds to emerging ones intensively since the Copenhagen Summit in 2009, when they made a commitment to allocate 100,000 million dollars a year until 2020, currently renewed until 2025, and a part is already being structured through financing mixed.

But organizations such as the OECD confirm that large investment flows are far from adequate, above all because there is a deficit of capital participations.

"In cases like Nigeria, 90% of the money raised is debt, which is especially worrying because it is a country whose resources come largely from oil and gas exports," says Rosane.

The incentives, in any case, are manifest.

According to the fund manager BlackRock, up to 49% of global energy capacity in 2050 will come from solar and wind installations in non-OECD countries, and the international initiative The New Climate Economy, sponsored by several governments, estimated in 2018 that the global economy can create an economic value of €24.5 trillion by 2030 with bold climate action.

This calculation is based on the fact that it is possible to avoid 700,000 deaths from pollution and create 65 million low-carbon jobs if governments manage to obtain 2.65 trillion euros per year from carbon taxes and reductions in energy-related subsidies contaminants.

To scale mixed financing in environmental matters, Convergence, a firm that studies combined investment, defends climate partnerships such as the one that has allowed BlackRock to raise 673 million dollars (635 million euros), of which a quarter is public financing or philanthropic and the rest private.

The fund is specifically aimed at emerging economies and has as partners twenty states, foundations, corporations and institutional investors, a name that brings together insurers, sovereign wealth and pension funds.

“It exceeds the $500 million threshold set by some investors, a rarity in climate or development finance;

five of its founders have put up more than 100 million dollars, something also very unusual;

critics

The instrument will allow the manager, which is criticized by environmentalists for not sufficiently promoting the green transformation of the companies it has in its portfolio, to reduce the risk of investments that are already profitable in developed countries.

"It will operate from four axes: the generation of clean energy, the development of infrastructure to store it, the promotion of energy efficiency in buildings and the development of electric transport," says Aitor Jauregui, head of BlackRock for Iberia.

This initiative will allocate funds to projects in Africa, Asia and Latin America, and will revolve around the so-called first-loss capital, a "fundamental instrument for scaling climate financing," says Juan Carlos Villena, director of Cofides' alliances area.

This Spanish state company, which has a development division and another to support the internationalization of Spanish companies, is one of the financiers of the Huruma Fund, which seeks to achieve the financial inclusion of farmers in Latin America, the Caribbean, Sub-Saharan Africa and Asia. and is endowed with 120 million euros.

In this project, the coverage is provided by the European Commission, and this has ensured the collection of private funds to invest in banks or NGOs that guarantee financial assistance to these workers.

They are not the only key tool.

"Guarantees, especially those that are on first demand, that is, those that are already executed just by showing non-payment, and technical assistance also accelerate investment," continues Villena.

This last concept refers to all kinds of actions that extend the capacities of the beneficiaries of the financing flows or of intermediary actors.

“Many times they are mere items to study projects or to train a potential energy regulator, to cite two common cases, but they can also be included in a combined financing project.

Sometimes you come across examples as bizarre as subsidizing an industrial cold chain to provide an outlet for the electricity that is sought to be generated through renewables.

The imaginative margin is very wide”, adds Villena.

Rafael Matos, director of sustainability at Cofides, believes that the public sector of the receiving countries should work on four fronts to favor the extension of these tools.

“The first are fixed, transparent regulatory frameworks that allow anticipating income.

The best way to attract a promoter in renewables is with a market where the State sets the electricity bill directly, as was the case in Spain until the mid-nineties.

Secondly, clear schemes for collaboration and risk sharing.

If they are already necessary for photovoltaic parks, in more capital-intensive projects, such as concessions for electrified public transport systems, they are essential.

Third, that there be fewer restrictions on foreign capital.

And finally, project aggregation.

In countries like Lesotho,

Photovoltaic cell solar panels at the Pavagada Solar Park in Karnataka, India. Abhishek Chinnappa (Getty Images)

The moment is pressing.

The capital required to close the north-south gap is so large that, if flows do not increase substantially, a large part of the world's population is at risk of being "caught in a spiral of climate vulnerability and unsustainable debt burdens", as described in an article for the

American Brookings Institution Ulrich Volz, director of the Center for Sustainable Finance at the University of London.

He refers to the fact that the greater the exposure to climate change, the more expensive it is to access capital, and the countries that suffer the most from the weather are precisely those that already have debt problems.

According to the IMF, up to 60% of the least developed countries have entered into a compromised position or are close to it, and Bloomberg estimated in July that several emerging countries, some the size of Egypt and Pakistan, could follow the path of Sri Lanka, which in April declared itself in default.

Redemptions

Faced with this situation, more and more nations are advocating debt swaps for climate actions, financial maneuvers that date back to the debt crisis that hit Latin America in the 1980s and that allow states to lower it in exchange for committing to preserve parks. natural or oceanic environments.

The Argentine president, Alberto Fernández, called during the penultimate climate summit, held in 2021 in Glasgow, for a global system to carry out these swaps, and the idea has been one of the most discussed during the climate summit that African nations held in August.

One of the last countries that has reached a swap agreement has been Barbados.

This small island in the eastern Caribbean obtained a loan in September to buy back more expensive debt thanks to a guarantee of 100 million dollars from the Inter-American Development Bank (IDB) and another of 50 million from The Nature Conservancy (TNC), a philanthropic organization dedicated to the conservation of biodiversity and the natural environment.

In exchange, it acquired the institutional commitment to allocate the 50 million savings that it expects to generate with the conversion operation to protect 30% of its territorial waters.

For Gianleo Frisari, senior climate change economist at the IDB, it is an instrument that will gain prominence in the current scenario of rising rates and credit restrictions.

In addition, he believes that guarantees are not even needed for these operations.

"Mere advice is already a very powerful tool, because sometimes States have access to credit markets and what they need is to know how to place sovereign bonds as sustainable," he says from Washington, mentioning that in the last five years the IDB it has promoted more than 70 thematic emissions, a denomination that also includes the social ones, worth 30,000 million dollars.

Green bonds are still very minority products, but the international climate finance organization Climate Bonds Initiative estimated that in 2021 the emissions of this product increased by 89%, to 578,000 million dollars (546,000 million euros).

A boom that is developing in parallel to the number of companies that are joining the Science-Based Targets, an initiative of several foundations backed by the United Nations to promote climate practices in companies.

Until August, 1,340 large firms, which represented 20% of the total market capitalization, some 20 billion euros, had committed that their processes would not contribute to an increase in temperature of more than two degrees.

But if there is an exchange that condenses the benefits of this financial instrument, it is the one carried out by Belize.

This Central American nation managed to reduce its public debt by more than 10 points, up to 74% of its national GDP, thanks to the repurchase of a Eurobond of 553 million dollars that was listed at a discount.

The operation was possible because the State and the TNC issued blue bonds worth 364 million dollars, backed by a guarantee from the main US development bank, which allowed very favorable conditions.

In exchange, Belize committed to allocate four million dollars a year to marine conservation until 2041.

Despite the variety of financial tools, a fundamental problem persists: most of the capital continues to go to projects to reduce emissions, those known as mitigation, but not adaptation ones, that is, those that respond to the havoc that climate change is already wreaking—typically coastal defenses or infrastructure to bring water to drought-stricken areas.

Citi's data refers only to the former, despite the fact that, in regions such as Africa, the latter require some 58,000 million euros per year in addition to the 200,000 needed for the energy transition.

matter of adaptation

In fact, in some areas "climate change is above all a matter of adaptation," says Juan José Nieto, director of Ciifen, an international center that studies the phenomenon of warming in the eastern equatorial Pacific, known as El Niño, from Guayaquil.

Neither this event nor La Niña, its cooling phase, are due exclusively to the increase in polluting gases, but their appearance cycles are being affected by them.

On the coast of Ecuador, the main effect of La Niña is reduced rainfall, which can ruin entire rice plantations, and it has occurred consecutively for the last three years, when it has been occurring every seven years.

“To adapt, we need better weather forecasts, new tools to communicate with farmers,

Adaptation needs will grow in the coming years.

Although the Paris Agreement obliges to keep the increase in the planet's temperature "well below" 2 degrees and establishes an increase of 1.5 degrees as a "preferable" objective, the World Meteorological Organization warned in May that due to feedback of climatic phenomena there is a 50% chance that between 2022 and 2026 this lower limit will be exceeded (the increase is already at 1.1).

The climate arm of the United Nations concluded in August that, even if the objectives set by the States were met, the increase would be 2.5 degrees in 2100. The planet, in fact, has not even reached its peak of emissions: those of carbon dioxide carbon, the most numerous, grew by 0.6% in 2021, to 415.7 parts per million.

Nieto uses a term typical of the fight against the coronavirus, the new normality, to refer to the climate scenario that Ecuador and the Caribbean nations have been facing for a few years.

“There is a succession of alterations that is modifying the profile of all activities in its entirety.

Construction, agriculture, fishing… And yet we find ourselves with very few funds and with a climate discussion that is too focused on the energy transition”.

A ship unloads coal at the port of Lianyungang, China.Future Publishing (Future Publishing via Getty Imag)

Different models for energy change

Developed regions are also failing to meet their financial climate targets.

According to the market analysis firm BloombergNEF, Europe captures each year only 200,000 of the 500,000 million euros to which it should aspire until 2025 (from then on it should increase that amount to 800,000 million).

United States, barely 70,000 million euros per year, less than a fifth of what is estimated as necessary, although it is mostly private capital, and this anticipates that with the 348,000 million euros in strategic investments that the Law of Reduction of the Inflation Rate (IRA), the largest climate initiative in the nation's history, that amount will rise.

The project, which has generated a commercial launch with the European Union (EU) due to its protectionism —limits, for example, tax credits for buying electric cars to those manufactured in the country—, clashes with the climate model of the Twenty-seven, which It is not based on direct incentives, but on the trading of polluting emissions and the regulation of polluting sectors.

Both partners have committed, in any case, to reaching net zero emissions by 2050: the EU, reducing them by 55% by 2030 compared to 1990 levels, and the US, by 50%-52% compared to the 2005 levels on the same date.

The scenario is different in China, the largest global polluter and responsible for 27% of greenhouse gases, which plans to achieve climate neutrality in 2060 and continues to open coal plants.

In 2021 it adopted its own carbon market, but, unlike the European one, which covers 50% of the continent's emissions by monitoring 11,000 plants from various industries and airlines, it does not establish an emissions cap.

It only measures the rate at which it is contaminated, in such a way that those companies that are more efficient than the average of the industry to which they belong receive credits.

This has led some experts to point out that it does not seek to reduce emissions, but to close the least efficient facilities.

However, its enormous size —triple that of the European one, despite the fact that it only includes power generation plants, responsible for 40% of national emissions— makes it a decisive instrument in the global climate fight.

"It is one of the key pieces with which China aspires to meet its climate commitments," says Lucie Qian Xia, an environmental policy researcher at the London School of Economics, who however considers that it currently has a very limited capacity, as it accuses a Second shortcoming: "Allocations to emit are granted free of charge, hence it may not be effective to achieve the transition to renewables."

Emissions trading systems have the advantage over other instruments that they are a secure source of income.

And they serve States on a platter the possibility of allocating them to green financing.

The European generated 31,000 million in 2021 and the Commission is trying to ensure that 25% of its annual collection is allocated to the EU budget with the aim of co-financing a social climate fund aimed at addressing poverty that may result from the energy reform of buildings or the electrification of mobility.

However, as Thibaud Voïta, an energy policy researcher at the French Institute for International Relations, a think tank, points out, "what works in the EU may not work in the US or Brazil, and vice versa."

And if we talk about a system that destroys polluting industrial activity,

alternative solutions

That is why solutions such as the Just Energy Transition Partnership are emerging, with which the US, the UK, France, Germany and the EU allocate 8,000 million in subsidies and low-cost loans to South Africa to promote its decarbonisation.

In a country where unemployment is 30% and the mining sector employs 200,000 people, the instrument, which is also being deployed in Indonesia and has been designed for other countries such as Senegal and Vietnam, seeks to prevent these workers from being excluded from employment.

For Voïta, it is a matter of tackling the key issue of reducing emissions in emerging countries: that it destroys employment faster than it creates it.

“The process involves closing facilities and leaving people stranded, which generates discontent and protests,” he says, and believes that tools like this allow governments to repeat what happened in developed nations where labor was confined to irrelevance to large population groups.

"They offer funds and formulas so that energy transition programs take into account the social and labor dimension of the policies."

The analyst considers, however, that the fundamental thing is that the US and China consolidate their models, something that he doubts will happen.

“The IRA suffers from two weaknesses: it is the result of intense negotiations, so its main function is to fight inflation, not the weather;

and can easily be abandoned by the next Administration.

And Beijing is in the opposite situation: it has tools, but not an ambitious enough plan given its emissions.

The only positive, in a way, is that you can use measures considered authoritarian in the West to speed up the process."

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