Nations agree on $300B in climate funding. How will they pay for it? – Nationally
The question that exists these days is where the huge amounts of money needed to deal with climate change will come from, especially in developing countries.
Getting governments to tolerate more has been a major focus of the UN climate conference that wrapped up this week, but given the wave of criticism over weak financial commitments, other measures are needed.
“There is not enough money coming from government sources,” said Catherine McKenna, chief executive of Climate and Nature Solutions and a former federal environment minister, in an interview.
To help bridge the gap, there is a growing push to use something called blended finance, which uses scarce public dollars to finance projects enough to make sense for the private sector to invest.
“We need to innovate to get the right incentives to make it happen,” McKenna said before countries agreed over the weekend to pool at least $300 billion a year by 2035.
The model is especially needed in developing countries, where the risks are high and therefore the business case is difficult to make.
This helps explain why such a large group of countries only receive about 15 cents of every dollar spent worldwide on clean energy.
Aiming to reduce the stigma, FinDev Canada has announced an integrated financial platform just as COP29 begins. In partnership with Mitsubishi Financial Group and supported by investment from the Green Climate Fund, the platform has set itself a $1.5-billion financing goal to help 25 developing countries.
The fund would appear to follow previous, smaller efforts by Canada using pooled finance, such as a partnership that helped launch green energy in Uzbekistan.
In 2020, Canada put in a subsidy of US$ 17.5 million at low market rates, along with other organizations, to help get a 100 million solar project – Uzbekistan's first – out.
Once that hurdle was cleared, one of the co-investors then helped acquire a second solar project that more than doubled in size, with several deals. Soon after, the wind power project went ahead without any rebate funding at all.
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The funding model is designed to help make those difficult initiatives happen early and pave the way for more to come, says Nnamdi Igbokwe, director of thought leadership at Convergence.
“That is why financial consolidation has become very important, because it is a way that allows the promotion of private companies in a way that is not avoidable.”
Convergence, a Toronto-based group focused on increasing the use of crowdfunding, found that the model was used for US$18.3 billion in financing last year, up from US$8 billion the previous year.
Importantly, the total includes six deals worth more than a billion dollars each.
“We are starting to see smarter use, and more efficient use, of leverage where billion dollar deals are becoming the norm,” Igbokwe said.
This is important, because in order to reduce global funding by billions, there needs to be a continuous series of multi-billion dollar deals, said Igbokwe.
But upgrading the model is not easy at all.
Pooled funds add layers of complexity to financing deals. Community contracts come with a range of options, from low interest rates to agreeing to be the first to accept any losses, all of which must be negotiated on standard commercial terms.
The risk perception of projects and countries also makes it difficult for many private banks to invest at all, because regulations limit what kind of lending risk they can take.
There is also not enough sharing of data about how past projects have worked, Igbokwe said, which could help change those risk perceptions.
Then there's the challenge of finding projects that are promising enough, and big enough, to invest in, but don't meet the threshold for conventional funding.
Overall, these obstacles made the model scale much slower than Convergence and others had hoped.
“It's very complex,” said Susan McGeachie, CEO of the Global Climate Finance Accelerator.
Part of the problem is that each agreement is so customized that it is difficult to apply the terms to the next one, so it moves slowly, he said.
But it's still “very useful” to help fill the funding gap, and if it weren't difficult, the combined funds wouldn't be needed.
“The important thing is to deal with that market gap. “So if it's going to level off, any of the licensed players should have gone to something else that will address the new gap in the market,” said McGeachie.
He noted that it is not only useful abroad. There are also opportunities for indigenous communities and climate projects at home, as Canada makes better use of publicly funded lenders such as the Canada Infrastructure Bank.
BMO, for example, partnered with a community bank to provide low-cost loans to retrofit office buildings to reduce emissions.
Others, however, are concerned about the rationalization of private market use, and want direct lending for public projects from public banks.
“We've seen market-based approaches fail time and time again,” said Susan Spronk, an associate professor specializing in international development at the University of Ottawa.
Spronk helped found the anti-funding group, which is troubled by the poor record of privatizing water and other efforts to benefit some of the world's poorest people.
While renewable energy has a more straightforward business case, making a profit on adaptation projects like flood barriers and wildfire prevention is far from easy.
There is an increasing focus on adaptation efforts, including the FinDev platform which has put 70 percent on it, but Spronk is concerned that the pooled capital is not up to the task.
“It's going to be a very expensive way to try to do climate change.”
David Bhamjee, chief strategy officer at FinDev, said in a statement that the fund will help meet the demand for pooled funds and show others how to make it a success.
Many others like McKenna maintain that there is not enough government funding to go around, so it is important to figure out how these private deals can be made, even in challenging circumstances.
“People are going to have to work hard to find solutions, and make sure that money doesn't just go to easy places.”
