An overheating planet requires extreme climate solutions

Rapidly closing the finance gap

Doing more means spending more. The race against heat is measured in finance.

The sums needed to virtually eliminate global emissions by mid-century, which would give the world a chance of staying within 1.5 deg C of warming, are head-spinning: US$196 trillion (S$260 trillion) in total spending, according to BloombergNEF, or almost double the size of the global economy in 2022.

Last year was the first time ever that industrial and consumer investment in the energy transition equalled fossil-fuel investment, according to BloombergNEF. Reaching net-zero by 2050 would mean that ratio needs to be 4-to-1 by this year, BloombergNEF’s modelling shows, before rising to 6-to-1 in the next decade and 10-to-1 in the 2040s.

Achieving that acceleration will require every financial trick available. And there are lots of approaches being tested. A prime example is “blended finance”, or the bundling of investments by different kinds of institutions to support hard-to-finance projects. Governments, development banks and philanthropies can take on some of the risk so private investors are more willing to get involved. There might be debt issued at friendlier-than-market rates. Or else a mix of grants, loan guarantees and equity-ownership arrangements.

Another problem for many green projects, especially in the developing world, is that they are too small to interest deep-pocketed investors. One attempt to remedy that was launched at the 2021 UN climate talks in Glasgow. Called the One Planet initiative, the group assembles a portfolio of smaller clean-energy and sustainability projects, which increases their scale enough to attract large institutions with bigger potential profits.

The key, says Ms Cozzi from the IEA, is lowering what’s known as the weighted average cost of capital – which raises expected returns for investors. There also has to be serious reform at multilateral lenders such as the International Monetary Fund to unlock more money from companies and investors. “Without the private sector, you don’t do the clean energy transition,” she says.

Markets made to support speed

Greening the global economy will require creating new markets and reshaping existing ones.

Companies developing cutting-edge climate solutions need to raise money, but investors can be wary of technologies they’ve never heard of. One way to allay that fear is to show there’s demand for their products. That’s why Mr John Kerry, the US climate envoy, launched a pact for big companies such as shipping behemoth A.P. Moller-Maersk and construction giant Holcim to buy tonnes of green fuel and emissions-free cement before a drop is produced. Breakthrough Energy leads a similar effort.

The global carbon offsets market – where companies currently spend billions on credits they use to cancel out their emissions – will also need to be reformed and better regulated to channel money into a greater swathe of CO2-saving initiatives, says Breakthrough’s Mettler. While projects focused on planting trees and protecting forests are vital, those funds could also be used to support emerging technologies such as carbon capture, she says. Countries could also explore other market solutions, such as a system being trialled in Germany which rewards companies for emitting less using more expensive solutions.

“Right now those that invest in clean technologies have all the risk, and that’s not working,” says Ms Mettler. “There are policy levers that we can pull that would reduce the cost of the energy transition.”

Carbon markets backed by government mandates will also play a key role. By making it increasingly expensive to emit CO2, companies are incentivised to drive investments into low-emissions alternatives. While around 40 per cent of global emissions are covered by carbon markets, according to the OECD, the price varies from close to €100 (S$147) per ton in Europe to less than US$9 in China.