CHANNELING GLOBAL INVESTMENT FOR GOOD

Nearly 200 countries signed the Paris Climate Agreement. RMI is helping the global financial system underwrite their climate actions

By David Labrador, Senior Writer/Editor at Rocky Mountain Institute.

In total, 197 countries made commitments in the Paris Agreement to contribute to the fight against climate change, and now it’s all got to be paid for. Suddenly, the whole globe is in the market for clean energy and energy efficiency, and Rocky Mountain Institute’s expertise in market-based solutions that shift away from fossil fuels is needed on a global scale. A young RMI program called Global Climate Finance (GCF) is emerging as a catalyst for the changes to the worldwide financial system needed to meet the challenge and enable the low-carbon transition globally.

“Now that we have the Paris Agreement and the rulebook has been agreed, it is critical we dedicate our efforts on implementation and ensuring countries have access to climate finance for adaptation and mitigation,” says Professor Prajapati Trivedi, the senior director of the Economic, Youth, and Sustainable Directorate of the Commonwealth Secretariat, who has worked closely with RMI’s GCF team. “Without RMI, the counterfactual is there for all to see — a lot of uncoordinated partners, with limited potential for a global program to assist countries with the financial structuring of climate change programs,” says Trivedi.

RMI’s GCF Program was founded by Paul Bodnar, a key architect of the Obama Administration’s international climate policies who served in various capacities, including at the National Security Council and as part of the US negotiating team for the Paris Agreement. Soon after the agreement was in place, Bodnar left the White House and joined RMI as managing director. “I see RMI as the ideal catalyst for global action because it’s built to translate breakthrough ideas into concrete action,” Bodnar says.

Angela Whitney, one of the early recruits to the GCF Program, says RMI’s f ledgling climate finance team was focused in the early days on the urgent questions swirling around the Paris climate targets: “Are the systems in place to allow for finance to f low? Do countries have access to the finance they need? And are private investors sufficiently engaged to supply investment into countries?” The team set to work answering them.

CLEANING UP THE CLIMATE BALANCE SHEET

Within days of the GCF Program’s formal launch in May 2017, RMI convened three-dozen leading climate finance experts and diplomats with partners World Resources Institute and Climate Analytics. They posed the fundamental question of whether the world was paying sufficient attention to tracking both “clean” and “dirty” financial flows, or what Bodnar termed “net climate finance.”

What most people think of as climate finance — boosting clean energy and efficiency investments — is only half of the story. Shutting off investments in dirty fossil-fueled assets and shutting down existing dirty assets are just as important if we’re going to transform the world economy from one that runs on dirty power plants, steel mills, vehicles, and the like to a clean, low-carbon economy. “Globally, we’re still funding much more fossil energy and high-carbon technology than we are low-carbon technology,” explains Whitney. “Net climate finance is about making sure we are not touting the exemplary cases while ignoring the messy and harmful projects being developed.”

Six months after the program’s launch, the net climate finance concept had gained enough currency that an event was held on the topic on the sidelines of COP23 in Bonn, Germany, without RMI. “This, in our view, was the optimal outcome,” says Caroline Ott, a manager in the GCF Program. “We got the idea out there and others began to pick it up.”

The global climate finance system needs to function faster, better, and at larger scale on both the clean and dirty sides of the energy ledger, and RMI is already having a marked impact on the whole system. In developing countries, most of the GCF Program’s successes are related to boosting clean finance f lows by building more powerful climate finance institutions to harness the flood of available dollars (more on that below). In advanced economies, the program has had an impact on speeding the retirement of fossil-fueled assets by helping asset owners and regulators manage their exit.

CASH FOR CLUNKERS

No fossil fuel releases as much climate-forcing carbon as coal, and coal plants are still supplying nearly 40 percent of the global power mix. But even though coal power increasingly can’t compete economically as the price of power from wind and solar falls, coal plants aren’t closing as fast as you’d expect because they are often insulated from market forces. In the regulated US states, for example, electricity ratepayers keep paying for them. Regulatory structures and political considerations are keeping coal-fired plants burning around the world, including in China where the average age of its 1,000 gigawatt coal fleet is 10 years. It’s not a simple thing to layoff workers, zero out the equity of investors, and write off project debt. Workers can be retrained, but there’s a lot of capital tied up in coal plants and the owners and lenders of that capital don’t want to lose it.

“When we talk about the coal transition, we talk about layoffs but not so much about write-offs,” says Jeff Waller, a principal with RMI’s Global Climate Finance Program. It’s vital to manage the exit of capital from coal plants so that capital destruction — the loss of investments because a plant’s useful life has just begun, or before full depreciation — is minimized. It’s not just that capital should be preserved in its own right; the threat of capital destruction drives opposition to climate action. “At heart, it’s not so much a climate issue for them as it is a business issue,” says Waller. “Most of the anti-climate policy push from energy companies is not so much about whether or not they believe in climate change but about what they stand to lose in terms of their investments.”

“Most of the anti-climate policy push from energy companies is not so much about whether or not they believe in climate change but about what they stand to lose in terms of their investments.”

Like it or not, the coal transition is happening all over the planet, and if policymakers and owners don’t get ahead of it, the risk of stranded assets will be realized. The GCF Program is working to give global stakeholders the right financial and policy tools to manage the accelerated exit of capital from coal plants. In September 2018, RMI published Managing the Coal Capital Transition, the first global survey of strategies that can help ease capital destruction for asset owners and their shareholders while offering policymakers a clearer path toward transitioning the power sector to clean energy.

Waller says that, “It’s really about pulling together the right mix of tools and approaches for a particular context. What are alternative energy sources and what are their costs? Are there funds available from carbon taxes or other sources that would help offset some of the losses? Is the coal local or imported?” If the coal is local, then the solution must help miners and the part of the economy that depends on the mines.

A panel of existing green bank practitioners reflect on how green banks operate in practice during one day of the Green Bank Design Summit in Paris, March 2019.

The same issues arise all over the world about the impact on ratepayers and on the local investment environment, or about how much cost should be borne by the government versus the owners. “There is a moral hazard of payment for the full value of an early closing coal plant, because what if other industries want the same?” explains Waller.

While there is no one-size-fits-all solution, ways to find the right balance have been found, and Managing the Coal Capital Transition provides a playbook for stakeholders. It’s based on the hard-earned experience of first movers. These include the Canadian province of Alberta, which is implementing a coal phase-out through a negotiated settlement, and Chile, which announced a coal phase-out date and mapped out the issues it must navigate in the coming years. In Colorado, the utility Xcel shut down two coal plants in a process that brought together 13 stakeholders in an unlikely alliance, including utilities, regulators, and climate advocates.

“The playbook outlines the 10 different policy and financial tools that we’ve seen used around the world and creates a framework to help policymakers think through different ways to deal with those issues,” says Waller. “If you manage the exit of capital from these coal plants, then the owners would be basically indifferent to whether you close them early or not,” he says. “That would be a way to get these coal plants to close earlier than their scheduled retirement dates in order to meet the climate goals of the Paris Agreement.”

THE DOUBLE BOTTOM LINE

Getting money to drain out of dirty assets like coal plants is one half of the task RMI’s GCF Program is tackling. The clean half of the task — getting money f lowing to investments in clean energy, energy efficiency, and sustainable transport throughout the global economy — is better known and better funded, but it’s even more difficult.

Estimates of the total finance available in 2016 for climate mitigation and adaptation projects range as high as $681 billion. That money can be invested efficiently in only a relative handful of places because only a portion of the 197 countries that signed the Paris Agreement have functioning markets for carbon-reducing projects like wind farms or electric vehicle fleets. In Tajikistan, for example, you can invest confidently in a bicycle factory but not in a large solar array on the factory’s roof, because no one is certain of the costs or risks or revenues of such a project in that context.

The higher risk of doing business in emerging markets has made it harder to get private capital f lowing at scale into low-carbon investments. This has meant that international public funders (bilateral, like USAID, or multilateral, like the World Bank or the Green Climate Fund) are usually the early investors in climate-related projects in developing countries. But, given the scale of the investments needed, public money and international institutions can’t handle the task.

“Combining the current raft of multilateral frameworks with local ownership and that local ability to drive decisions is going to be much more efficient in reducing carbon emissions than relying on the frameworks alone,” says Gavin Templeton, head of sustainable finance at the Green Investment Group (GIG). The problem is that local investors in most geographies have no experience in climate-related markets, and foreign investors who do are hamstrung by their ignorance of local markets. “The private sector can be quite a cautious beast,” says Templeton.

“The whole Paris Agreement architecture passes the locus of responsibility to national processes, and we need public financial institutions capable of helping deliver a low-carbon economy at the national level. We don’t have that kind of institutional framework across all different kinds of countries,” says Ilmi Granoff, the director of ClimateWorks Foundation’s Sustainable Finance Program.

RMI and the Commonwealth Secretariat convened 25 climate finance experts at Marlborough House in London to discuss implementation of the Climate Finance Access Service in March 2019.
“Local ownership and that local ability to drive decisions are going to be much more efficient in reducing carbon emissions than relying on the current multilateral frameworks.”

RMI’s GCF Program, like Granoff and Templeton, has identified green investment banks as an important answer. A green investment bank is a public or quasi-public institution specifically designed to lower risk and attract private investment to support domestic low-carbon infrastructure. Green banks can make two critical contributions. They create country-level ownership over climate finance in place of project development by foreign donors, while proving in-country viability of technologies and financial innovations to make investment there more attractive to private investment. Whitney says, “Green banks don’t just fund one-off projects that are good from a climate standpoint, they build the capacity of a country to do more projects, and get new investors interested and engaged within a country.”

Green banks have been successful in developed economies. Before it was privatized, Templeton’s GIG began its existence as the United Kingdom’s national green investment bank with £3.8 billion of taxpayer money and a double bottom line of profit and positive environmental impact. Among other successes, its investments in UK offshore wind drove down costs in that sector and turned a tidy profit. Now the group, a part of investment banking giant Macquarie, the world’s largest infrastructure investor, is keen to see green banks do the same in other countries to create new investment opportunities. “If there’s a way to de-risk that market sooner, that for us presents opportunity,” says Templeton. “If there’s a deployment of capital from a green bank, if it is able to take a different slice of the capital risk and take a different position, that can unlock new markets.”

RMI’s Angela Whitney speaks at the Green Bank Design Summit.

Until quite recently, the problem was that countries interested in the green bank model had very little communication with each other and didn’t know where to find technical assistance or funding. These were the problems RMI set out to solve in March 2019, when the GCF team convened the Green Bank Design Summit in Paris, which brought together representatives from 23 interested countries, representing over 70 percent of global GDP and greenhouse gas emissions, with donors and green bank experts. “We saw a lot of nonprofits and others doing work in-country, but cross-collaboration wasn’t happening. We really wanted to bring the community together for the first time to learn from one another and to share ideas,” says Whitney. The summit has the global network off to a great start. Representatives of 13 donor institutions made commitments of support to green investment banks, and one-on-one clinics between experts and country representatives drew high praise, with one calling it the best hour he’d ever spent. Now a global network of national green banks is on its way to being built out.

“We need to generate a community of practice and scale it up and foster a real global discussion around the establishment of these national and subnational new public financial institutions that can deliver market catalysis for the low- carbon economy around the world,” says Granoff, who was one of the earliest supporters of green investment banks in emerging markets and the lead sponsor of the Green Bank Summit. “It is really transformative, and we needed an RMI to step in to do it,” he says.

A CLIMATE INVESTMENT BANKER IN EVERY PORT

Green investment banks may be a natural solution for larger and more advanced emerging economies, but the RMI team also saw that scores of smaller countries needed a different solution.

In 2016, developed countries offered $55.7 billion in climate-related finance to developing countries, and have pledged to mobilize $100 billion per year by 2020, but this Niagara Falls of money is actually a myriad of smaller streams channeling through about 500 funds and facilities. This poses a special challenge for low-income countries and island nations with limited capacity. “It’s a really daunting prospect,” says RMI’s Ott. “There are endless online portals and websites and databases, but many countries simply do not have someone whose job focuses on navigating the complex climate finance system.”

That’s why RMI is helping stand up the Climate Finance Access Service (CFAS), a network of trained, independent climate finance investment professionals who could substantially improve the capacity of low-income countries to unlock funding for green investment. For climate finance to be efficiently and impactfully invested in all the countries party to the Paris Agreement, says Ott, “there is a need for dedicated and unbiased finance professionals. We often refer to them as climate investment bankers.”

“CFAS has been developed based on input from those already working in this space,” says Ott, “and we’re building directly on existing initiatives.” One is the Climate Finance Access Hub (CFAH) of the Commonwealth of Nations, the 53-member group of developed and developing nations, including 31 small states. Their pilot program has run for two years in nine small-island developing states. CFAS is based on that example and a yearlong scoping effort in which RMI’s GCF team talked with more than 100 stakeholders in more than two-dozen developing countries, at climate funds and initiatives, and at related organizations.

“While inspired by the Commonwealth Finance Access Hub, CFAS is a truly innovative concept that has the distinct potential to dramatically scale up the benefits delivered to small states and other climatically vulnerable least-developed countries,” says Trivedi of the Commonwealth Secretariat. “We now have a strong partner in RMI that will significantly enhance the probability of meeting climate finance needs.”

In March 2019, RMI and the Commonwealth Secretariat convened a conference of the first Consortium Planning Meeting for CFAS, a two-day meeting of donors, international organizations, nonprofits, and developing country governments. CFAS is no longer a project of RMI. “This is very much a joint initiative that is being co-developed with a number of external partners,” says Ott. The consortium’s goal is to place the first cohort of intensively trained climate finance facilitators in 30 countries by 2020.

“CFAS goes beyond the traditional fly in–fly out consultant,” says Ott. “You have a real community in this group that will together enroll in training before working directly in-country. These climate investment bankers will really hustle to accelerate investment in low-income countries.”

RMI’s Global Climate Finance Program is really hustling, too. RMI is working with the World Bank to advance a radical innovation in climate finance — climate auctions — described in a recent joint publication, Climate Auctions: A Market-Based Approach to National Climate Action. The team was invited to author sections of the 2018 Biennial Assessment and Overview of Climate Finance Flows, the flagship climate finance report of the United Nations, and is also continuing to help f lesh out the implementation of the Paris Agreement’s finance mandates. Around the world, RMI’s GCF Program is taking action based on RMI’s whole-systems view that is revolutionizing the capacity of climate finance to actually f low to where it will do the most good, and helping finance realize its full potential as a critical enabler of the low-carbon transition.