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Bridging the climate finance gap

by: Irene Fernando, Manila Bulletin Online

Globally, the clock is ticking as both private and public sectors try to find ways to fund investments on a low-carbon, clean energy future. Is the Philippines ready for the shift?

What we know is that the world has significantly changed in the last decade or two—politically, economically, socially, technologically, and most important of all, environmentally. Most countries have stepped up to address climate change-related issues, with leaders all around the world convening to tackle problems and draw up possible solutions to what has become a global phenomenon. Yet as we try to address climate change scenarios, the challenge remains the same: where do we look for financial support?

“The key challenge is the financing or the money needed in order to shift investments to a low-carbon, clean energy future,” says Manish Bapna, executive vice president and managing director of World Resources Institute (WRI). WRI is a think tank committed to putting ideas into action by working on the most urgent sustainability issues facing the planet. Bapna was recently in the country to speak about climate finance during the latest Asia Clean Energy Forum (ACEF).

“The World Economic Forum recently came out with a report that said that between now and 2030, about $5.7 trillion a year on average will be spent on infrastructure investments. About $5 trillion is what the ‘business as usual’ scenario suggests, and the challenge there is that we need to shift that money to more clean infrastructure investments,” he asserts. The problem is, an additional $700 billion a year will be needed on top of what is currently projected in order to ensure the shift to a low-carbon, clean energy future.

Tapping The Public Sector

Bapna says the public sector needs to help mobilize adequate private funding so that there will be enough money for investing in clean energy.

“They can remove subsidies for fuel, they can provide support for clean energy until it becomes more mature, and they can make a good policy environment,” he says. In addition, Bapna says the public sector can also introduce a de-risking mechanism.“One of the greatest challenges is

that the risk-reward tradeoff is insufficiently attractive for the private sector to invest in clean energy. So one of the things that public sector can do is to provide guarantees and insurance, to cover certain kinds of risks—in order to reduce the risks faced by the private sector, which would help enable them be more likely to invest in these areas,” he explains.

The public sector can also provide lending instruments like loan equity. One of the things that the ADB did about two years ago, according to Bapna, is set up a ventures capital fund. “They are now taking equity infusion in clean energy capital fund because a lot of times these are fairly high risk technologies or in high risk countries where getting equity is very difficult,” he shares.

The Opportunities

For the business sector, climate financing is going to be “the biggest market opportunity in the next 20 years,” according to Bapna.

“When you look at the transition that is taking place in the energy sector, in the transport sector, in the building sector, and in the agriculture sector, there is a tremendous business opportunity for companies to make money, because a lot of the opportunity is what we call ‘negative cost’,” he explains. These are investments that have great economic returns but are not really taken advantage of because of institutional policy barriers.

Add to this the scope of clean energy itself. “We’re seeing that a lot of clean energy—solar, wind, public transportation—that some of these new markets are also increasingly getting cost effective. In the next five years, I imagine we’ll be seeing solar or wind significantly getting more cost-competitive than coal or oil,” he says. And these opportunities are much more attractive to Asia and the Philippines because “these are resources that the Philippines and other Asian countries have domestically. They don’t need to import,” Bapna points out. If the Philippines doesn’t need to import, then it doesn’t need to spend its currency.

The Challenges

Bapna says there are barriers that continue to challenge effective climate financing: policy and legal, institutional, industry, and financial barriers.

“We need to get long, loud, and clear policies in place,” he says. “Long, meaning stable policy for 10 years. Loud, meaning it has to be sufficiently ambitious and clear. We need to send clear pricing that will promote clean energy as opposed to fossil energy, which is historically the case so far,” Bapna explains.There is also the call for more strong institutions that can help shift countries on to clean energy. “Oftentimes, it’s unclear where leadership for this will rest within government,” he says.

Government should also support the industry. “I think the governments can do a lot to help create some basic local public goods, doing a detailed resource assessment of what our potential is for solar or wind in a country,” he says. This can be incredibly valuable for companies that are looking to invest, he adds.

At the same time, what governments can do is to help create greater awareness among banks to lend to clean energy type of investments. “I think governments can provide some types of early instruments to help cover certain risks that banks may have initially,” Bapna says, adding that once these banks have more familiarity with regard to the risks, then they can do it on their own.

Is The Philippines Ready?

While the share of renewable energy has been increasing among Asian countries, it has declined in the Philippines the last few years.

Bapna attributes this trend to the country’s policy mechanism. “Part of it is the ongoing public debate right now about feed-in tariffs (FiTs),” he shares. There still remains to be a need to create a constructive, productive, public discussion about the shift to clean energy. “We need to have strong public support for bold policy on clean energy. Until you have that conversation and public support, you can never take the step toward the change we need to see,” he says.

What is interesting in the case of the Philippines, Bapna notes, is its archipelagic geography. “The fact that it is an archipelago, that clean energy decentralizes energy solutions, will oftentimes be more cost-competitive than conventional diesel-based energy,” he says. “I think we will see in the Philippines a lot of potential for clean energy growth. The economics of the Philippines will allow clean energy companies to thrive because of the cost of alternative energy. Those businesses that are first movers in space will have markets not just in the Philippines but will have a broader market in Asia and if not around the world,” he says. Still, this is the positive long-term range.

“In the short-term, we know that there are ups and downs. We need long, loud, clear policies to help create a stable, enabling environment to allow these companies to thrive,” Bapna says. “What businesses are looking for is stability. They’re okay paying or having clean energy subsidized to a certain extent. What they want back is stable policy because with stability, they can make investment cost-benefit decisions,” Bapna says.

In the end, it’s all just a matter of timing. “It’s not the question of whether we make the shift. It’s the question of when. Although it is, at the moment, still really a very small percent, I imagine in the next 20 to 40 years that is going to change quite radically. The question is how we can do that as quickly as possible,” he concludes.

Editor’s Note: This is a re-post of the article titled as “Bridging the climate finance gap” published by Manila Bulletin last August 19, 2013.

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