Bringing into focus the financing challenge of the low-carbon innovation

For some time in discussions about a global transition towards a low-carbon economy the unacknowledged elephant in the room was the financial sector. Various estimates from the International Energy Agency and others suggest that annual investment in a low-carbon energy system to mid-century will need to average USD2-3 trillion, with two thirds of that comprising a shift in investment from high-carbon to low-carbon infrastructure, and the other third being extra low-carbon investments. The 100 trillion dollar question about the elephant, which is now at least being increasingly acknowledged, is how such a dramatic shift in investment finance can be achieved.

Part of the problem for the investors who will need to make this shift is that it is not yet clear precisely which technologies should be the recipient of this investment. Innovation in new energy technologies, and corresponding changes in business models and consumer behaviour, are proceeding at a bewildering rate; however most projections indicate that current (financial) commitments fall short in achieving a 2° world. Trying to understand such innovation, and where it may lead, is at the heart of the INNOPATHS project, which was presented to a full house in Brussels on June 22 as part of Sustainable Energy Week.

An early output from INNOPATHS, the construction of which is being led by Aalto University in Finland, is a Technology Assessment Matrix, the purpose of which is to provide online insights into how technologies are developing, what their potential might be in terms of cost and scale of deployment, and how they might fit into the low-carbon energy system of the future.

Stimulating investment on the scale required to come anywhere near the 1.5-2oC temperature target of the 2015 Paris Agreement will require, in addition to technologies that offer large-scale energy efficiency savings or low-carbon energy supply, measures that will address institutional, regulatory, informational and business constraints on investment, as well as a supportive policy environment to pull through low-carbon investment that do not yet meet normal criteria of risk-adjusted rate of return.

These are among the topics addressed by the finance workstream of the INNOPATHS project, led by Utrecht University in the Netherlands, ETH in Switzerland and The Potsdam Institute for Climate Research in Germany, the first workshop of which will be held in Utrecht in September. Here, experts from the financial sector will meet and discuss the challenges ahead with energy company representatives and policy makers. These topics were also the subject of the recent meeting of the European Commission’s High-Level Panel of the European Decarbonisation Pathways Initiative, which will be producing a report in 2018 on research needs in Europe to ensure that the European Union can make the most of the many economic and other opportunities offered by deep decarbonisation of the energy system.

Another initiative that brought the financial sector into full focus was the workshop at UCL on July 5th, organised by the European Horizon 2020 Green-Win project, entitled ‘The Risk Transition: shifting investment to a low carbon economy’. The Keynote Speaker was Russell Picot, Special Adviser to the Financial Stability Board’s Climate-related Financial Disclosures Task Force, the final report and recommendations from which were published on June 29. Its areas of core recommendations were governance, strategy, risk management and metrics and targets. While the suggested measures were intended to be voluntary at present, it is clearly possible that they will become mandatory as experience with how best to disclose climate risk is acquired and the need for the great energy transition investment becomes appreciated as increasingly urgent.

INNOPATHS finance workstream colleagues also contribute to the New Pathways for Sustainable Finance process, led by the Brussels-based institution Finance Watch, the Global Alliance for Banking on Values, and Mission 2020, which over the next few will explore a financial market design conducive to a low-carbon transition and specific actionable areas to be addressed by 2020.

Such projects, initiatives, events and publications at least mean that the various parts of the elephant of transition finance for a low-carbon future are being recognised put together, so that the shape of the whole challenge ahead is becoming apparent. What is now required is determined action on the various insights that are being generated being the temperature targets of the Paris Agreement slip quite out of reach.

By Paul Ekins, Professor of Resources and Environment Policy and Director, UCL Institute for Sustainable Resources 

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