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Wrangling over the costs of dealing with climate change remains a sore point at climate talks, but the private sector is more awake to low-carbon energy

As the UN Framework Convention on Climate Change released a weighty draft in Lima of what might evolve into a climate deal in Paris at the end of 2015, clear faultlines persist among the 192 participating countries.

Much of this divide stems from continuing disagreements about money. Poorer countries continue to accuse rich nations of failing to honour promises to help finance both adaptation and mitigation. Rich countries insist that all countries must share the effort, not just the better off.

For more than 20 years, delegates at UN climate talks have argued about who pays how much to cut greenhouse gas emissions and avoid catastrophic climate change.

The failure so far to agree on sharing the burden of transforming the way the world produces its energy means the protracted UN talks process remains far away from achieving the necessary cuts. We are now just one year away from the Paris climate summit, which the UN hopes will deliver a meaningful climate deal.

Sticking points

Both rich and poor nations are right. Major emerging economies such as India and China, mainly reliant on coal for energy, now have the ability to send the world’s climate over the brink, almost regardless of how much richer countries reduce emissions. But accusations from poorer countries that the developed world has not honoured its promises of technology transfer and funding are also well-founded.

In 2009, developed countries promised that climate funds would generate US$100 billion in funding for poorer countries by 2020 to help with adaptation to climate change and a low carbon development path.

But money has been slow to flow into the Green Climate Fund, the institution intended as the main conduit of finance to poorer countries. Firm pledges of around US$10 billion have only been made in the past few months.

So far, the arguments are following familiar outlines within the often acrimonious climate negotiations process.

But regardless of what emerges from Lima, there are fresher trends that suggest this stand-off may not be the fatal obstacle it has been in the past. On the margins of the Lima conference, and at other meetings this year, assumptions about the economics of decarbonising the global economy have begun to shift.

New determination

Low carbon development, once seen an expensive drag on economic growth and a threat to global prosperity, is increasingly understood as an essential risk-reduction strategy that can deliver long-term growth.

Many factors have contributed to the shift in thinking. Frustration with the pace of negotiations, coupled with increasingly scientific alarming warnings, have given rise to concerns among many business leaders and economists that doing nothing is the most costly option.

A series of recent reports, including a study by the New Climate Economy, have argued that there is no contradiction between prosperity and climate action. It is a conclusion strengthened by the mounting cost of adaptation to the temperature rises that current levels of emissions will inevitably produce.

For instance, a UNEP report last week estimated that adaptation costs in poor countries could be as high as US$500 billion a year, costs for which there is, as yet, no provision. On top of that, countries that are most affected by climate change and have contributed least to greenhouse gas emissions will increasingly ask the countries that have emitted most to pay compensation for the loss and damage caused by climate change.

On the positive side, China’s attempt to shift its maturing economy towards sustainable development represents a massive shift in priorities. Its effects are rippling around the world.

China’s attempts to make green growth mainstream have driven down the costs of wind and solar energy, transforming the balance of costs between fossil fuels and renewables.

Renewables increasingly commercial

This revolution offers poor countries a real alternative to carbon-intensive development. In the business sector, understanding of climate risk has also grown; many investors now realise that they must price in the costs of climate change and shift away from coal to protect their own long term interests. Investing in fossil energy – particularly coal and oil – has begun to seem unpromising.

Even if the current climate draft’s ambition of a global net zero world by 2050 is out of reach, prospects look brighter that the share of fossil fuels in the global energy mix will decline over the next three decades.

The Bank of England’s announcement last month that it would investigate the risk to the global economy of stranded carbon assets suggests that the highest levels of government and finance are responding to the prospect of an accelerating global shift away from fossil fuels.

Can the private sector bankroll green growth?

Although financing remains contentious within the UNFCCC process, developments outside the formal negotiations signal a growing awareness that investing in low carbon growth makes long term sense for governments, businesses and financial institutions.

The World Bank last month reiterated that it would no longer finance coal projects, except in cases of “extreme need,” focussing instead on renewable energy, while the European Investment Bank has made a similar commitment.

In New York in September more than 1,000 companies called for mechanisms to reflect the true costs of emissions. Financial institutions, including banks, insurance companies and pension funds, promised to mobilise more than US$200 billion in finance for low carbon energy and climate action by the end of 2014.

A major question will be whether the private sector decides to wait for a global deal to begin to reallocate investments towards cleaner energy. The potential for further shifts is huge, particularly if fossil fuels are truly in their end game.

Forecasters at the IEA say the death of fossil fuels is being exaggerated, cautioning that coal and gas are locked in for many decades to come.

Nonetheless, the discussion about the economic benefits of carbon cuts is gathering momentum.

New views

India continues to argue in Lima that it cannot cut emissions without damaging future economic growth, but a new report by the Overseas Development Institute argued the opposite. It says lifting the poorest permanently out of poverty can only be done through climate-friendly development that addresses inequalities, adopting and adapting China’s model of rapid growth.

Promoting renewable energy for India’s rural poor, for instance, would stimulate a more sustainable model of growth than continuing to subsidise fossil fuels, the ODI says.

Several speakers in Lima this week have identified potential for green bonds to finance climate friendly infrastructure. Sean Kidney, CEO and founder of the Green Bonds Initiative, told delegates that bonds could supply the US$53 trillion in capital required before 2050 for the long-term environmental infrastructure needed to build a low-carbon, climate-resilient economy.

Using bonds in this way, he said, would deliver savings of US$115 trillion in fossil fuel inputs and set the world on a low carbon pathway.

Inside the negotiations, poor countries continue to press rich nations to honour the promises of technology and finance that would help them to pursue low carbon development. To the complaint from rich countries that they cannot afford it, critics point out that G20 economies continue to subsidise fossil fuels.

Another recent ODI report estimated G20 countries’ total annual subsidies of fossil fuel exploration at $88 billion, a sum that would go a long way to meeting the $100 billion a year promised – but not yet delivered – to climate funds .

Signs of independent action

Finally there is the prospect that, with the long-term shift in global wealth towards Asia, other financial mechanisms will play an increasingly important role in determining where investment goes in the coming decades.

In Lima this week, China pledged to donate US$20 million annually to its new South-South Cooperation Fund, inviting others to join.

But even if that contribution is relatively small, China’s initiative follows on from its participation in the BRICS bank announced in July, and its new Asia Infrastructure Development Bank. These measures may signal that the future direction of global finance, and the degree to which it helps or hinders climate mitigation, will be decided as much in Asia as in New York or London.



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