Financial paradox is blocking efforts to fight climate change

The annual UN climate change conference is underway in Dubai, and revolving around the COP28 talks is a complex, bitter, international battle over money:

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

• Where will that investment come from?

• And critically, what kind of interest rates will the lender charge?

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

Average global temperatures have already risen by about 1.2 degrees Celsius above pre-industrial levels. Without a rapid transition away from fossil fuels, scientists warn that catastrophic warming will destroy coastal cities, devastate agricultural land and put millions of lives at risk.

And yet there is a glaring economic paradox that is hampering efforts to create a more sustainable world: It is relatively easy to find financing for the dirty projects the world needs less, but it is extremely difficult to finance those clean projects. Which the world needs more.

This mismatch is shaping projects around the world. In the United States, rising interest rates are prompting large companies to cancel plans for huge renewable developments. But the disconnect is particularly acute in the developing world and especially Africa, where many people have little or no access to electricity.

Financial institutions and development banks generally consider investing in these countries to be extremely risky, causing lenders to be more conservative. And central banks’ efforts to tame inflation are leading to particularly high rates in Africa.

“The world talks about the big game of greening the African continent,” said Jacqueline Novogratz, founder of Acumen, an impact investment fund. “And yet the type of capital we deploy against it is typically highly priced, low risk and extremely short-term.”

That is, if lenders give loans at all. In many cases, projects may not be funded.

Take the case of Kofi Macauley, an engineer from Sierra Leone who is working to build a small hydroelectric project that will cost $80 million – very little in the scope of project finance. As my colleague Max Bayerk points out, he has spent years building relationships with dozens of large and small equity partners from around the world. But even after a decade of efforts no one will invest money.

Given the choice between a new coal plant and an equally powerful new wind farm, most countries will choose the wind farm. In the long run, the absence of fuel costs makes renewable projects far more economical. This means there is a unique opportunity in developing countries.

Bilha Ndirangu, CEO of the Great Carbon Valley Project, said, “Unlike other countries where the infrastructure is well developed and you have to turn it around and make it green, Africa can take the leap and go green from the start.” Can develop infrastructure.” Development company based in Kenya.

Efforts to provide better financing options for developing countries are gaining momentum. The World Bank is under pressure to lend more money to climate projects at more competitive rates, and the hope is that if development banks take on more risk, large amounts of private capital will come in from the sidelines. So far those reforms are proceeding slowly.

When money manifests, energy transformation can occur at an astonishing rate. Just look at the United States.

In the past year, the Inflation Reduction Act has triggered a boom in wind, solar, battery and electric vehicle production that is reshaping the US economy and allowing one of the world’s biggest polluters to say That’s really on track to reduce emissions. ,

“This transition is underway,” said Peter Gardette, executive director of climate and clean tech at S&P Global. “What has surprised us is the pace and scale of the investment.”

Formal talks at COP28 are likely to focus on renewed commitments to limit global temperature rise. Yet any reasonable chance of achieving those goals will depend on world leaders and trade executives raising the trillions of dollars needed to wholesale rebuild the world’s energy infrastructure.

This 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 possibility of solving the problem of climate change without solving the money problem. -David Giles

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In Case You Missed It

Leaked documents reveal COP28 hosts are using the event to promote fossil fuels. The choice of major oil producer the United Arab Emirates to host the climate talks angered environmental activists. Anger grew further after documents obtained by the Center for Climate Reporting and the BBC revealed that the country planned to lobby on oil and gas deals at the summit.

Nations pledged nearly $550 million for 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 total fund has a long way to go before it can make a significant contribution to covering climate-related losses, which are expected to cost developing countries $280 billion to $580 billion per year by 2030.

An Emirati financial firm joins US asset managers in a new climate fund. Lunet Capital, a new firm overseen by the Abu Dhabi royal family, plans to invest at least $30 billion in the fund with some major asset managers including TPG, BlackRock and Brookfield Asset Management, according to people familiar with the plans. Is. Lunet launched just a few months ago with assets worth at least $50 billion.

Net what, again?

Hundreds of companies have rushed to announce their climate commitments over the past few years, mostly by setting net-zero targets: dates by which they intend to remove carbon equivalent to all the carbon they emit from the atmosphere.

Keeping track of that goal is more difficult than setting it. Despite years of COP negotiations, the world has not yet agreed on a standard auditing methodology to measure progress toward curbing global warming. And that could make holding companies and countries accountable in the climate fight extremely complicated, writes Vivienne Walt for DealBook.

Only 4 percent of companies with net-zero targets meet the minimum criteria set by top experts appointed by the United Nations, said John Lang, project lead in London for the Net Zero tracker, which uses about 40 indicators to assess the climate strategy of countries and companies. Companies rarely include end-use, or Scope 3, carbon emissions in their calculations; Point out how much their progress depends on the use of offsets such as tree planting; Or disclose their use of new technology such as carbon capture and storage. Until last year’s COP, the definition of “net zero” was unclear. Now, UN criteria include disclosing Scope 3 emissions and using offsets only for residual carbon – highlighting a weakness in some companies’ plans. “We’re just asking for clarity,” Lang told DealBook.

The offsets are not measurable. Businesses increasingly offer customers ways to offset their polluting habits, such as air travel, with environmental tokens, called offsets, which are then deducted from the 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 those initiatives work, or even whether those actions are ever taken. “Nobody knows if 10 people are counting the same forest, or whether it’s going to burn in the next fire,” said Ian Goldin, professor of globalization and development at Oxford University. “There is no regulation or accountability.”

It is too early to rely on carbon capture or storage, technologies that prevent carbon from escaping into the atmosphere in the first place. Oil companies in particular have promoted future use of the technology as a way to maintain fossil-fuel production while sticking to their climate goals. Saudi Aramco, the world’s largest oil company, says CCS technology will allow it to reuse carbon in its chemical production, and it will bury other used carbon under forests of mangrove trees, which act as natural carbon sinks. Work in. Still, it’s not yet clear how effective those technologies will be when deployed on a large scale. “In terms of the amount of carbon you’re removing, it’s really overhyped as a solution,” Goldin said.

The global mess of regulations has made it even more difficult to track progress. The United States is deeply divided on climate action, with 11 states passing laws this year limiting how much investment funds use environmental indicators in financial decisions. This is in contrast to the European Union, which will require all companies, including some large US corporations, doing business in Europe from 2025 to report the environmental impact of their operations.

“You probably have 500 different frameworks, ratings, number of stars, whatever,” said Emmanuel Faber, chair of the International Sustainability Standards Board, a multinational body formed after the 2021 COP talks to set climate accounting standards. Faber told DealBook that he has traveled the world in recent months to obtain agreements from countries to comply with ISSB rules. “The work was created to end this alphabet soup,” he said.

Thanks for reading! well see you tomorrow.