Weather Means Investments

Extreme weather events will spur new investments globally.

By Pano Kroko, Green Capital LLC

Climate change is likely to cause more storms, floods, droughts, heat-waves and other extreme weather events, according to the most authoritative review yet of the effects of global warming, according to the IPCC, the Intergovernmental ational Panel on Climate Change.

Jake Schmidt of the US-based Natural Resources Defense Council said:

“This report should be a wake-up call to those that believe that climate change is some distant issue that might impact someone else. The report documents that extreme weather is happening now and that global warming will bring very dangerous events in the future. This is a window into the future if our political response doesn’t change quickly.”

The Red Cross warned that disaster agencies were already dealing with the effects of climate change in vulnerable countries across the world.

“The findings of this report certainly tally with what the Red Cross is seeing, which is a rise in the number of weather-related emergencies around the world,” said Maarten van Aalst, director of the Red Cross / Red Crescent Climate Centre and coordinating lead author of the IPCC report.

“We are committed to responding to disasters whenever and wherever they happen, but we have to recognize that if the number of disasters continues to increase, the current model we have for responding to them is simply impossible to sustain.

”Insurers are also worried. Mark Wey, of the insurance giant Swiss Re, said that the massive increase in insurance claims is causing serious concern.

Between 1970 and 1990, the insurance industry globally had paid out an average of $5 billion a year in weather-related claims, but that this had increased to $27 billion a year. He said insurers wanted governments to get to grips with the effects of climate change in order to prepare for likely extreme damages from extreme weather and frequent storms and tackle the root causes of global warming.

“Rapid urbanization and the growth of mega-cities, especially in the developing countries, have led to the emergence of highly vulnerable urban communities, particularly through informal settlements [slums] and inadequate land management,” the report said.

[A]mid the wreckage of the 2009 Copenhagen climate summit, an agreement that rich countries would, by 2020, furnish the developing world with $100 billion a year to help mitigate and adapt to global warming. But with almost no hope of a big new pact, many expect progress on the formation of a global Green Climate Fund to be one of its few successes. Yet there is huge uncertainty about how developed countries will deliver on their promise,

Yet there are some good news too.

And the good news is that there is already a surprisingly large flow of climate finance investment into renewable energy around the world. Because renewable energy replaces CO2 emissions act as a warming abatement and resilience measure indirectly. The greening of the industrialized economies also helps, but with the vast majority of new emissions loads coming from the developing world, and it’s need for electrification and economic growth, we need to focus there for deploying renewable energy technology and infrastructure.

According to the first big study of the issue, by Climate Policy Initiative Think tank (CPI), at least $97 billion a year is going to developing countries, mostly from private lenders in rich countries. They contributed around $55 billion, with another $39 billion drawn from public budgets and capital markets by multilateral and bilateral development banks. Western taxpayers provided at least $21 billion of the latter amount. Less than $3 billion flowed from carbon markets and western philanthropy.

A more coherent view is [that money] should be used to cover the “incremental costs” of low-carbon developments. This is a term in the growing lexicon of climate finance that refers to the additional cost of low-carbon investments – building a wind or solar farm, – as compared with seemingly lower-cost alternatives such as coal-fired power stations. 

Last year about $200 billion was invested in renewable energy, low-carbon transport and energy efficiency in developing countries—more than a third of the global total. The magnitude of the private sector’s contribution to climate finance suggests an obvious lesson for the Green Fund. It needs to be designed in such a way as to encourage much more of the same. And with the global investment industry sitting on over $100 trillion of assets, this would be true even if Western governments had $100 billion to spare from their budgets, which they do not.

According to the World Bank, loans issued at market rates by multilateral lenders are typically leveraged with private capital by a factor of three to six, and soft loans and grants by a factor of eight to ten.

This suggests the promised $100 billion a year could, if loosely defined, be raised with a relatively small contribution from Western taxpayers. According to a proposal by Green Capital New Energy Investment and Development Bank – the Environmental Parliament’s Finance Initiative for Renewable Energy Finance – a fund could be easily raised and it might consist of just a mosaic of $30 billion of basic equity and the rest can be leveraged from existing trillions of assets sitting presently on the sidelines.

Naturally the $50 billion of this would still come from private lenders. Having thus brought down the cost of capital, the “incremental costs” of renewable-energy projects over the standard sort would be relatively low. These could be covered by between $5 billion and $10 billion a year from public budgets, philanthropy and new sources of cash, such as taxes on bunker fuels or carbon markets. That way we can achieve grid parity with coal in the developing world and scale up renewable energy to the much needed level of reducing emissions.

About Green Capital LLC

Established in 2005, Green Capital is a private investment company focused exclusively in the energy sector and with a specific interest in renewable and green energy investment. Headquartered in Boston, with offices in New York and Houston, Green Capital’s principals have a recognized energy sector track record comprising 65+ years of combined energy industry experience, $5 billion in acquisitions and project development investments in over 20 countries.