Wanted: $1 trillion a year to decarbonise by 2020

The world will need to come up with more than $US1 trillion a year to fund the decarbonisation of the global energy system by 2020, according to a new report by HSBC.

The report – Counting the Climate Cash, released on Tuesday – warns that the flow of finance to climate solutions needs to be scaled up significantly if the world is to decarbonise and have any hope of meeting globally accepted climate goals.

The most capital-intensive of these solutions would be funding the transformation of the world’s energy systems from high-carbon, fossil fuel-based networks, to low-carbon and renewable energy networks. It says yet more capital will be required for sectors like industry, agriculture and forestry, and to insure against climate shocks.

But HSBC says progress on this effort is being hampered by what it describes as “a series of bottlenecks”, the most troublesome being a lack of clarity over what ‘climate finance’ actually covers.

The report points to the latest conclusions from the Climate Policy Initiative, suggesting there was $US364 billion in financing for the climate economy in 2010/11, with the private sector contributing the bulk of this (see chart below).

Public sector intermediaries, notably national and international development banks, are playing a particularly important leveraging role.

HSBC says current climate policies have focused on how the industrialised world can honour its commitment to deliver $US100 billion a year in climate funding to developing countries by 2020.

But the report notes that there is almost no agreement on the finer details of how this will be done: how the funds will be allocated between countries or shared between the public and private sectors.

Instead, it says, visibility on climate investment flows has declined since the close of the ‘fast start finance’ phase, where industrialised countries pledged $30 billion to the developing world between 2010 and 2012.

HSBC says that the development of smart policy frameworks, which reward capital markets for financing climate solutions, as well as mechanisms to deliver long-term financial flows, will be a key part of the next UN-led global climate conference in Warsaw this November.

The report recommends various policy frameworks, including the development of ‘investment grade’ climate policies in the real economy – a promising example of which is the move to replace consumption subsidies (for diesel and kerosene for power and light, for example) with capital support for decentralised renewable energy.

HSBC also recommends the development of common definitions of what ‘climate finance’ includes, as well as greater transparency on allocations to climate solutions; the integration of climate into frameworks for the financial economy; the use of public finance mechanisms to reduce investment risks; and the mainstreaming of climate into familiar channels for deploying finance at scale.