G20 Financing the transition – Glimpses of green

Investment Attractiveness

The transition from a brown to a green, low-carbon economy crucially depends on how attractive it is to invest. The investment attractiveness for renewable energy differs substantially between G20 countries.

Investment attractiveness is rated relatively high in China, France, Germany, India, the UK and the United States.

• China’s medium to high investment attractiveness is determined to a significant degree by the coherence and reliability of its green policy environment, as well as good domestic capacity and experience with technology and value chains.
• Despite France’s overall high investment attractiveness, policy commitment to a low-carbon energy transition that is not based on nuclear power is less certain, resulting in a lower uptake of solar and wind technology.
• Germany’s excellent performance so far could potentially be affected by uncertainty around the renewables law, with a newly proposed cap of 40%-45% power generation from renewables by 2025.
• India’s medium to high investment attractiveness is based on ambitious renewable energy targets and legislation, as well as multiple recent pledges by major domestic and international investors to develop large-scale renewable energy projects.
• The UK has a medium to high investment attractiveness giving its stable investment environment. The latest referendum and the uncertainty surrounding the upcoming negotiation process with the EU might negatively affect investment attractiveness in the future.
• Investment attractiveness in the United States is generally rated medium to high due to the overall size of the economy and commercial and regional importance of the country. However, differences in party positions pull down long term policy predictability, particularly concerning the National Climate Action Plan.

In contrast, Russia, Saudi Arabia and Turkey have low investment attractiveness for renewable energy. In Russia, a decree without any specific support measures is the only relevant form of support for renewables. Saudi Arabia also rates low due to its negligible support mechanisms for renewable energy, and its power system’s almost non-existent absorption capacity for renewable electricity. Turkey’s plans to extend coal-based power generation – and its barriers to the development of renewables – recently weakened its investment conditions: up to 2014, its investments in renewables had been comparatively high.

Investment Needs

“The G20 needs to explore ways to encourage greener financial institutions worldwide, and improve the capacity of capital markets in channeling resources to green industries.”– Message from President Xi Jinping on the 2016 G20 China Summit

Channelling resources to green infrastructure and industries is essential to address the climate change challenge. Between 2000 and 2013, G20 states have invested an average of USD 371 billion a year in the power sector. Investments in renewable energy (USD 117,78 billion/year) were, on average, higher than investments in fossil fuels and nuclear energy (USD 92,79 billion/year).

Argentina, Brazil, France, Germany, Italy, Turkey and the UK all had a very high share of renewable investments. In contrast, Russia and Saudi Arabia accounted for a very low share over the same period. Australia, Canada, China, India, Indonesia, Japan, Mexico, South Africa, South Korea and the United States have a relatively even share of investments between renewable energy, fossil fuels and nuclear energy.

To be in line with a 2°C-compatible trajectory by 2035, G20 countries face an enormous investment gap of almost 340 billion USD/year in the power sector. This means doubling the annual investments in the power sector for most developing countries in the G20 and specifically for South Africa and India, more than tripling them. Not only do countries need to scale-up investments in the power sector, but they also need to shift from brown to green investments.

In a 2°C compatible pathway, investment needs in the power sectors of the G20 states vary between 73% and 21%. They are particularly high for India, Indonesia, Russia and South Africa – offering an opportunity to scale-up green investments that will foster economic growth and job creation.

ds were estimated based on the cumulative investments required between 2014-2035 to be in line with a 450 scenario from the World Energy Outlook developed by the International Energy Agency.

Fossil Fuel Subsidies

Back in 2009, G20 leaders pledged to phase-out ‘inefficient’ fossil fuel subsidies. However, their governments provided, on average, almost USD 70 billion in subsidies for fossil fuel production between 2013 and 2014. This does not include subsidies such as those for electricity and fuel use, nor other indirect support.

Russia provided almost USD 23 billion, the United States more than USD 20 billion, Australia and Brazil USD 5 billion. China’s annual average subsidies in 2013 and 2014 were estimated at just over USD 3 billion, including tax breaks for oil, gas and coal producers. The UK is one of the few G20 countries increasing fossil fuel production subsidies, while reducing investments into renewable energy. It has increased its national subsidies to fossil fuel production to more than USD 1 billion a year between 2013 and 2014 to encourage offshore oil and gas in the North Sea.

Reducing fossil fuel subsidies could, in theory, create fiscal space for more international climate finance. In 2013 and 2014, fossil fuels subsidies were significantly higher than public climate finance in Australia (USD 5 billion vs. USD 0.15 billion), Canada (USD 2.7 billion vs. USD 0.14 billion), Italy (USD 1.2 billion vs. USD 0.06 billion) and the United States (USD 20 billion vs. USD 2.7 billion).

Carbon Pricing

In general, carbon pricing is expanding within the G20, with a whole range of different schemes being applied. However, they have only partially achieved their purpose: the price of carbon has been too low to steer economies towards lower carbon.

The European Union Emissions Trading System (EU ETS), covering 45% of the EU’s GHG emissions, remains the single largest international carbon pricing instrument. In China, carbon pricing instruments cover 1.3 GtCO2e, while in the United States they cover 0.5 GtCO2e. In 2013, China started seven pilot ETS’s at the sub-national level (Beijing, Guangdong, Hubei, Shanghai, Shenzhen, Tianjin, Chongqing). Two years later, China announced plans to introduce a national ETS in 2017 that will cover eight sectors, and is expected to form the largest national carbon pricing initiative in the world in terms of volume.

Several other countries have begun to implement pricing schemes during recent years:

• Australia introduced a national ETS in 2016. It has been criticised, however, for its baselines being so high that they will not require any emission cuts. Moreover, Australia repealed its comprehensive carbon price mechanism in 2014;
• Canada has had an ETS in Quebec since 2013 and in Manitoba and Ontario since 2015, and implemented a carbon tax in British Columbia in 2008;
• Japan introduced a national carbon tax in 201, the city of Tokyo introduced an ETS in 2010, and the Saitama region in 2011;
• Mexico implemented a carbon tax in 2014;
• South Korea launched its national ETS in 2015;
• South Africa has drafted a Carbon Tax Bill, with implementation expected in 2016;
• In 2010, India introduced a nationwide tax on coal of 400 rupees (USD 5.95) a tonne of both domestically-produced and imported coal;
• Brazil, Indonesia and Turkey are currently exploring possibilities to use carbon pricing schemes to meet their voluntary GHG reduction commitment more cost-effectively.

At a global level, the existing carbon prices vary significantly — from less than USD 1 per tCO2 e to USD 130 per tCO2e. The majority of emissions (85%) are priced at less than USD 10 per tCO2e. This is considerably lower than the prices needed to meet the 2°C. Similarly, every country defines the scope of their pricing mechanism and its emissions coverage. In many instances, the coverage is limited and therefore not in line with what would be required in 2° compatible scenarios.

Climate Finance

Developed countries have committed to mobilising USD 100 billion a year of climate finance to developing countries from public and private sources by 2020.

The eight G20 countries obliged to provide climate finance under the UNFCCC include some of the largest climate finance donors. Taking into account international climate finance provided through bilateral and multilateral channels, France, Germany, Japan, the UK and the US each provided between USD 1.2 billion and USD 8.4 billion a year in 2013 and 2014.

Australia, Canada and Italy provided far lower amounts of climate finance during this period. These contributions are modest in comparison to GDP. Ratios are highest in the case of Japan (0.18%) and France (0.12%) and lowest in the case of Canada (0.0008%), Australia (0.001%) and Italy (0.0003%).

The Green Climate Fund is a new institution with strong political significance as the primary channel for delivering climate finance under the UNFCCC to support the implementation of the Paris Agreement. Again, the US, Japan, the UK, France and Germany are the five largest contributors to the GCF, making pledges ranging from USD 1 billion to USD 3 billion. Three developing G20 countries without obligations to provide climate finance – Indonesia, Mexico and South Korea – have shown leadership by also pledging to the GCF.