The December negotiations in Paris at which nations proposed targets for emission reductions are a key milestone in the fight against climate change, but to make a real impact we must get beyond goal-setting. The incentives for energy investment must change if we are to make reducing emissions commercially viable. Low-carbon energy will only spread at the scale the climate needs if investments are profitable and can be privately financed.
A Competitive Low-Carbon Challenge (CLCC) can help make that a reality. Under the CLCC, nations, energy developers, financial institutions, and development agencies would join together on a voluntary basis to drive energy investments toward energy-efficient and low-carbon solutions. For example, in nations with major geothermal resources, what changes in financing, tariffs, and land allocation would drive new investment to geothermal energy rather than coal? For island states heavily dependent on diesel imports, what shipping and technology improvements combined with financing terms would steer the economy toward natural gas? Solutions must be tailored to specific countries and address specific resource environments. The test in each case is straightforward: Will a financial institution or developer finance projects with lower-carbon solutions? Unless projects meet this test, no amount of target-setting will change the course of investment.
At the Paris climate negotiations, countries proposed actions to lower emissions within their respective economies using the laws, regulations, and financing tools available to them. These so-called Intended Nationally Determined Contributions (INDCs) will not replace the need for an ideal trajectory to arrest climate change, but they will get us started. That is where the CLCC kicks in—to put these “intended” paths on a real and achievable course of commercial investment. Each national set of INDCs needs a commercial strategy that will make lower-carbon solutions more profitable than business-as-usual investments. The strategies must be nationally driven because profitability depends on technical solutions that make money in a given country, with its distinct policies and resource environment.
Here’s how it would work: In 2011, the UN secretary-general and the president of the World Bank formally launched the Sustainable Energy for All Initiative (SE4All) to advance global access to clean energy. SE4All has created rosters of private companies interested in shaping a path toward clean energy investment. Now, as part of the low-carbon challenge, countries that commit to emission-reducing INDCs would be asked to submit proposals identifying the greatest opportunities for private investment toward those goals. In exchange, SE4All would commit to putting its roster of potential investors to work in particular countries by convening energy companies, financial institutions, development agencies, and technical specialists to produce tailored investment plans.
The CLCC would help turn good intention into action. The unglamorous but necessary work would be built around finding answers to some key questions: What electricity prices are needed to make low-carbon solutions cheaper than coal? What measures—for example, emissions targets or controls on particulate matter—would reflect the social or health costs of high pollution and make investments in clean energy more attractive? What interest rates and payback periods make zero-carbon solutions achieve competitive returns on investment with coal? Are there technical solutions that can be shared that make projects more attractive? The CLCC would help countries model these alternatives so that governments could make choices that show investors that clean energy can pay.
This is big business, not idealism. The International Energy Agency estimates that between 2014 and 2035, there will be $16.4 trillion in power-sector investments globally. The nature of these investments—whether for renewable energy, clean fuels, or coal—will determine whether all nations can succeed in combating climate change. Countries, energy developers, and the financial world must act quickly and radically. Two points are fundamental. First, when faced with trade-offs between power access and the environment, countries have tended to invest in the cheapest source of power. Second, energy developers and financial institutions invest in projects that deliver the best rate of return, and the trend in Asia and other emerging markets is still not favoring renewables. A straightforward answer would be to place a price on carbon to create the right incentives, but that has seen little support. In the United States, it’s a non-starter right now, and in the European Union, the carbon price is far below the cost of social damages from carbon emissions. Time will tell if China’s just-announced cap-and-trade program sends an appropriate price signal. Until these conditions change, we need other ways to intervene in the balance sheets of benefit-cost analyses of energy investments to alter the outcomes.
The CLCC is a way to integrate finance experts, energy developers, engineers, climate scientists, and foreign-policy specialists into the climate solution. No nation can, in 2016, seriously point to such an integrated approach to solving these issues. SE4All is a ready-made instrument that can launch the CLCC. Without it, the minds needed to address climate change cannot meet to create solutions that unite scientific imperative with economic and political realities.