The scope of climate finance demand can vary dramatically under different policy environment. After an initial research on climate finance demand in 2012 China Climate Financing Report, the Research Center for Climate and Energy Finance (RCCEF) cooperated with ERI to step into this issue by identifying the climate finance demand more clearly and developing the Climate Finance Demand Analysis Model (CFDAM) to explore the supply and demand structure of climate finance.
Structural imbalance led to huge funding gap
The analysis results of CFDAM indicate that the BAU CO2 emissions of China would reach peak at 12,936million ton-CO2 in 2040 whist the peak is 8,869 million ton-CO2 in 2020 under 2-degree scenario.
The demand of China climate finance would reach 2,750 billion Yuan in 2020 in which the demand from energy sectors is 1185.3 billion Yuan and the energy efficiency sector is 1,565 billion Yuan. The demand peaks at 3,043.1 billion Yuan in 2040 in which the energy sector contributes 1418 billion Yuan while the energy efficiency sector contributes 1625.1 billion Yuan. However, the average annual supply is only 525.6 billion Yuan according to our database which means the funding gap would be over 2000 billion Yuan in 2020 if this situation continued.
The huge funding gap is primarily caused by the internal structural imbalance. Climate finance is a fragmented market blocking large-scale investment due to its nature of technical and demand diversity, information asymmetry, policy and institution segmentation. Hence, the public funding plays a crucial role in improving climate finance institution, enlarging supply scale and leveraging private investment.
International Public Funding Mechanisms are Approaching Marketization
The public climate funding sources are mainly consist of fiscal appropriation, carbon market auction revenue and public financial funds. Limited by policies and macro-economic situation, although the fiscal appropriation is still the foundation of public funding, the focus of public finance is turning towards financial funds such as public revenue from carbon market as well as public financial funds.
The majority of international public climate funds in mitigation flow to developing countries via multilateral financial institution including the Clean Technology Fund (CTF) and the Global Environment Fund (GEF). There are three trends in 2013: Firstly, the funds received by India and China has decreased; secondly, supporting to rural areas has been strengthened; thirdly, funding to urban low carbon traffic projects has been enhanced.
In adaption, the funding approved by the developed countries has increased 34\% in 2013. Most of funding are employed by four channels: Least Developed Country Fund (LDCF), Pilot Programme for Climate Resilience (PPCR), Adaptation Fund (AF) and Special Climate Change Fund (SCCF).
The report investigates three new international public climate finance mechanisms: Green Climate Fund, Pilot Center to Facilitate Climate Technology Investments in Asia and the Pacific and First-Loss Protection Mechanisms (FPM).
n Green Climate Fund: GCF is expecting to be the most important international public climate funding mechanism within UNFCCC. China should engage in the operation of GCF actively by donating funds and linking with domestic finical entities such as China CDM fund, China Development Bank and local carbon funds.
n Pilot Center to Facilitate Climate Technology Investments in Asia and the Pacific: This project is aimed to assistant Asian-Pacific area to build a climate technical assistance mechanism. China should encourage domestic enterprises to apply funding from this project, and develop climate technology financing mechanisms such as climate technology fund to support the technology transfer, reduce investment risks and leverage private investment.
n First-Loss Protection Mechanisms: This mechanism can help investors to avoid financial losses by transferring partial potential risks and improving the credit. Typical FPMs include EC-EIB PBI and SDBAC. China can design FPMs to attract institutional investments based on the securitization of credit assets.
National Public Funding mechanisms are Distinctive
The functions of national public funds cover five aspects that are stimulating direct investment by hedging additional risks, leveraging indirect investment by equity financing, providing financial guarantee, improving pricing system and promoting capacity building.
The report analyzes six typical national climate public funding mechanisms:
n Green Investment Bank (GIB): GIB is owned by the UK government initially and will transfer to private sector finally. The success of GIB has inspired Japan and Australia to set up similar institutions. Among the investment of GIB, 25\% flows to waste management sector, 23\% flows to non-residential energy efficiency sector and 16\% flows to offshore wind power and biomass.
n Banque publique d'investissement (BPIFrance): As a state-owned financial institution, BPIFrance aims to help the development of SMEs by providing loans and guarantees. A key feature of BPIFrance is that it develop a broad local funds system including regional funds, Regional Innovation Funds and Regional Guarantee Funds to link with SMEs.
n US State Revolving Funds: US developed the Clean Water State Revolving Funds (CWSRF) to replace federal and state construction granting which are distributed as subsidies. The funds are composed by federal budget(83\%) and stat budget(17\%) to provide long-term low interest loans for the sewage treatment plants, sewage collection system and etc.
n Energy Conservation Promotion Fund (ENCON Fund): The ENCON Fund is aimed to assist the energy efficiency projects and activities with the use of three instruments: tax incentives, ESCO(the Energy Services Company) fund and EE revolving fund. The Fund has brought great flexibility for the government to support energy efficiency projects.
n The Indonesia Climate Change Trust Fund (ICCTF): The ICCTF is a national climate fund administered by Indonesia government. It is a typical case which combines international funds and domestic climate strategy together.
n Programme Solaire(Prosol) of Tunisia: Tunisia launched the Programme Solaire to stimulate the employment of solar water heaters by providing 20\% purchase subsidies and 18-month interest subsidies. During 2005 and 2010, the public funds within Prosol has attracted five times private capital.
Local Public Funds Focus on Flexibility
Due to distinguished political structure and economic features, the local public climate finance is much more complex in the sources and employment. The report summarizes 20 cases of developed countries on how the budgets balanced between central and local governments in low carbon economy investment and sort them into three categories that are local-driven, central-driven and hybrid model.
Generally, the obstacles in local climate finance can be settled by reforming fiscal system and innovate financial instruments. Typical financial instruments include:
n Public funds guidance tools: policy funds, local green funds, fiscal supported guarantee, local financing platforms, PPP and private donors.
n Carbon finance tools: CDM market, ETS, VER and carbon derived products.
n Conventional financial tools: green loans, corporate bonds, IPOs and risk management tools.
The report also analyzes a couple of cases in local public financing practices covering US, France, the Netherland, EU and London.
Policy Suggestions
The public funds will keep being the key driving power of future climate finance. To scale up climate financing and shorten the gap of more than 2000billion Yuan/year, it is necessary to reconstruct the supply and employment system by using public funds. The report suggests that:
n Enlarge public funds sources: bridge with international public funds by developing regional financing mechanisms and PPP tools; increase revenue by carbon permits auction; reform and activate the CDM fund; assist the pension fund and other institutional investors to identify opportunities and risks in climate financing.
n Build a public funding system bases on climate funds: accelerate the CDM fund transform into national climate fund by adjust its business model and governance structure; set up a revolving fund to provide interest-free loans to banks; set up a climate technology fund to promote pilot low carbon projects; set up a climate seed fund and link with local carbon funds to form a state-wide climate funding system; link ETSs with other market mechanisms like EMC, renewables subsidies, carbon offset, eco-compensation and etc.; establish a green investment section in the China Development Bank.
n Innovate climate financing instruments: encourage local governments and enterprises to develop new financing tools and apply international funds; design flexible PPP mechanisms; explore carbon financing business like carbon permits pledge and help the financial to develop carbon financing models.
n Improve capacity building: incorporate climate finance into the local fiscal and financial system reform; develop a state-local climate finance MRV system and database.