Financing is a critical element for decarbonization efforts. In order to transform a large portion of economies, societies and infrastructure to their low carbon equivalents, enormous amounts of financial support will be required.
Such financing will belong to many categories - grants, loans, equity, with many variations within each. It is important to note that while developing low carbon technologies, we are trying to adopt technologies and solutions many of which may not be as efficient as conventional technologies, at least the way efficiency is measured right now. This is all the more reason why financial support is needed to bolster these low carbon and sustainable solutions until such a time they can sustain themselves in a competitive world.
A case in point is solar PV. Solar photovoltaic power plants of both types - utility scale and distributed solar PV - received financial significant support that allowed them to reach where they have today. While Germany and Japan heavily supported their rooftop solar systems through attractive feed-in-tariffs, large-scale solar panel production and utility solar power plants were provided significant financial support by the Chinese government. The result of such sustained financial support has resulted in solar PV becoming both technically and economically attractive by 2020. This should serve as an important lesson when the world considers how to transition to low carbon solutions that can become cost competitive in future.
A large and diverse set of actors populate the climate finance domain. Prominent among them are multilateral financing agencies, governments, large venture capital and private equity firms, large corporate groups and very high net worth individuals. Conventional financial institutions such as banks, mutual funds and pension funds are also increasing their focus towards climate finance.
During the 2020-2030 period, we can expect the current prominent stakeholder groups to increase their role in climate finance, with additional stakeholder groups (pension funds, regional banks etc.) joining these efforts.
Finance plays a critical role in accelerating decarbonization efforts.
While estimates vary, it is likely that the investments needed for climate change mitigation could be in the range $5-10 trillion a year for the 2020-2030 period, and could be even higher beyond 2030. A recent McKinsey study estimated that about $9 trillion would need to be spent on physical assets annually between 2020 and 2050 to bring the world back to a safe zone.
Investments in climate have however only been a fraction of this, about half a trillion dollars per year until 2020.
For decarbonization investments to increase dramatically, the finance sector needs to come up with intentions and instruments to provide the necessary support and sources.
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