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Directing climate finance where it’s needed most
“The climate finance growth outlook is positive, but there's major differences between where the investments are needed and where they're flowing at the moment.”
Dec 14, 2022
12 minutes
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Dr. Barbara Buchner, Managing Director of the Climate Policy Initiative, believes the energy crisis has highlighted that investment in clean energy is the fastest road to resolving issues such as price stability in energy markets and energy access and independence for countries. But critically, capital must be mobilised, especially public finances in emerging and developing economies, to start matching the huge capital requirements needed for the energy transition.

In this audio interview, Buchner joins Megan Wright, Head of Audio at FT Longitude, to discuss how the energy transition can be financed and capital flows directed effectively to where they will have the most impact.

Barbara Buchner:

Climate finance has increased at a cumulative average annual growth rate of about 7%. But I think what that does not show you is that current levels of increase are unfortunately not on track to meet a 1.5 degree Celsius or the internationally agreed temperature scenario. And what we need to make happen is to really ensure that we get to scale very quickly. So, just looking at the latest information, we need an increase of at least 590% or 4.3 trillion US dollars in annual finance flows by 2030, in order to really meet internationally agreed climate objectives and avoid the most dangerous impacts of climate change.

 Transformation • Technology • Powers • Sunstainability •
Megan Wright:

Dr. Barbara Buchner is a leading voice in global energy transition finance. With experience advising leaders on climate, energy, and land use investments around the world, Barbara was named one of the 20 Most Influential Women in Climate Change by the International Council for Science.

Today, Barbara combines her finance and policy expertise as Global Managing Director of the Climate Policy Initiative, an independent, not- for-profit organisation, that helps governments, businesses, and financial institutions drive economic growth while addressing climate change.

Barbara also directs the Global Innovation Lab for Climate Finance, which has mobilised over 3.3 billion US dollars for action on climate change and sustainable development. I'm Megan Wright, and I'm delighted to have Barbara joining me today.

Has the energy security crisis in Europe impacted on how you're advising governments, businesses, and financial institutions on their transition strategies?

Barbara Buchner:

I think the business case remains the same, that transition might look a little different. So, we need to be realistic and realising that in the short-term we will be maybe using more of some of the traditional energy sources, because we obviously need to put people at the centre and make sure that we are having a just and sustainable energy transition.

The average cost of really climate action, but not only climate action, of really a real transition of energy security and energy access, is just lower by really focusing on the opportunities that we see of renewable energy and clean energy more generally. So, while there might be a short-term implication, I think ultimately, the energy security crisis makes the overarching argument and the approach even stronger.

 Transformation • Technology • Powers • Sunstainability •
Megan Wright:

And actually, natural resource rich countries are now experiencing windfall profits from oil and gas again. The IEA just said that we'll see peak oil in this decade. So, is this the last chance to make the most out of oil? Are oil-rich countries effectively reinvesting profits in the energy transition?

Barbara Buchner:

We really need to have better transparency and disclosure of all that is going on at the moment, and then really making sure that you are coming up with revenue models that really ensure that whatever profits there are actually going back to more investments in research and development on the clean energy side. So I think the point on just being much more transparent and having a much better understanding of how financial institutions and governments are currently basically, both factoring and disclosing climate-related transition physical risks, but then also how their investments and their overall portfolios are aligned with specific sustainable development goals, and using taxonomists that are already existing or using, developing those for the specific regional needs. It's really the whole financial ecosystem that needs just to be stepping up and being better on being transparent and being clearer on how they can be implementing some measures that are addressing the risks or better balancing or manage some of the risks.

Megan Wright:

Do you think then we need to be more realistic about the necessity of using fossil fuels in the near-term? Or perhaps about how quick the transition can actually be, even if everything does go right?

Barbara Buchner:

Well, I think we do need to acknowledge that there is a little bump in the road. Again, I do think having this focus on people, having this focus on a just transition is extremely important. So I think we need to be, yes, realistic just to acknowledge we will not be able to change all our energy systems within the next year or so. But I think we can really put in place a plan and with clear milestones to make everyone basically accountable for getting towards the transformation, still in the fastest way possible. And I think another piece of the solution here is about how we can better use domestic capital. So I think half the financing that is needed at the moment for an energy transition, in emerging and developing countries, could come from domestic resource mobilisation, and that would require incremental public resource mobilisation efforts, which are relatively small compared to then the GDP of these countries. It's less than 3%.

Megan Wright:

The FT recently reported that between 2019 and 2021 there were only $14 billion of so-called climate-blended finance deals. So structured deals that use public money to de-risk green investments for poor countries. How do you think governments can help to de-risk large energy infrastructure projects or new energy technologies?

 Transformation • Technology • Powers • Sunstainability •
Barbara Buchner:

I think public funding for clean energy innovation plays really a crucial role in helping new technologies. I think there are a lot of needs to cross the valley of death between prototype stage, so where there’s very high investment risks, to early commercialisation, where there's lower investment risk until really the private markets can take off. So this funding, funded by the public sector, I think, could be of help to ensure that the startups have enough working capital to continue their development.

But also, we really see that grants for small demonstration pilots or even public-private partnerships for first-of-its-kind large projects, like the infrastructure projects that you mentioned, could be really important. The risk sharing and re-managing the risk in the best way to really allocate the risks to the ones who can take them on, depending on their particular type of capital, I think, is just really important.

So I think there, public funding will be key just to drive this next phase of innovative technologies, and to really help, in a way, also build the capacity in emerging and developing countries. So really have more of a focus on technical assistance and making sure that there are the right project developers or entrepreneurs, that then can really focus more also on the domestic capital mobilisation that I mentioned. So I think you mentioned also blended finance. I think scaling up of spending that needs to happen is certainly unprecedented, but I think it's feasible through strategies.

There's one called the grant match financing strategy where you basically have ambitious investment programmes, but they're supported by robust policy frameworks and a balanced mix of both domestic and international finance. So really thinking about how can you work together with different types of financiers across the ecosystem and use public finance, both the international one, but also domestic one most effectively to really take on basically the right types of barriers and really ensure that you create the enabling environment in country and you build the market knowledge and expertise in country that can then really enable a transformation of the energy markets.

Megan Wright:

Thinking then about all those different organisations and sectors that you work with as well as your experience, obviously mobilising across borders, what do you think are the biggest blockers to action today when it comes to driving the policy change that's really needed?

Barbara Buchner:

The climate finance growth outlook is positive, but there's major differences between where the investments are needed and where they're flowing at the moment. And I think the key barrier that we have seen is, while there is this significant potential to develop clean energy in emerging markets, the cost of capital for clean energy projects is very high due to a number of real but also perceived investment risks. And they include political risk of specific countries, but actually very often also across the board they include foreign exchange risk as very often some of these, the larger projects in particular are still done in hard currencies like in US dollars, but then paid back in local currencies but they also include credit risks.

So just as some more concrete information here, the cost of capital for solar PV projects in 2021 in emerging and developing markets is on average at least two to three times higher than in advanced economies and it can be up to seven times as high. And that obviously is a huge key barrier just to really get into scale quickly and that is a problem.

 Transformation • Technology • Powers • Sunstainability •
Megan Wright:

Thinking about the next decade ahead then, how do you see this playing out over the coming 10 years?

Barbara Buchner:

I think it's a challenge, but also it's a huge opportunity for investors to really scale up their action on clean energy, on climate. I think hopefully that is something that we can demonstrate more. I think we all see just strategy, renewable energy investment, clean energy, just as the clearest path towards most of the issues and the domestic agendas such as price stability, energy, independence, and energy access that I think the current energy crisis certainly has highlighted more.

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