Follow the Money: The Role of Innovation in Climate Finance

By Brad Townsend

As the 21st conference of parties (COP 21) began in Paris, a great deal of focus has been directed towards prospects for financing a global transition to a cleaner energy sector that can also provide affordable energy access to billions around the globe who currently lack it. How much money will be available, where it will come from, and what it should be used for have been sticking points in the global climate discourse since…well, the first negotiations in Brazil in 1992. A number of commitments have been made, and in light of major announcements during the COP’s opening day, it’s worth revisiting those commitments to see where we stand.

Two new research and development, innovation-centered initiatives were announced on the first day of the Paris talks, the Breakthrough Energy Coalition and Mission Innovation. The Breakthrough Energy Coalition (BEC), an investor coalition led by Bill Gates, includes 28 investors with a collective worth estimated to be around $350 billion. While the BEC hasn’t announced a specific dollar amount they plan to invest, they have made clear that they plan to provide billions in patient capital, which is particularly important given the characteristics of the energy sector; large capital investments with low margins and long-term returns. These investments will be critical to help projects bridge the so-called “valley of death” between technical discovery and commercial application and deployment, but they’ll also generate impacts by encouraging broader support for increased innovation investments as a mechanism to solve global climate, energy poverty, and security challenges. Importantly, the investments of the BEC will be focused in those countries who are participating in the Mission Innovation initiative.

Mission Innovation is a coalition of 20 countries, including the U.K., France, Brazil, China, India, and the U.S., that have committed to doubling their domestic energy research and development efforts over the next five years, and is expected to increase government investments in those 20 nations to $20 billion. President Obama has pledged to double federal funding for energy R&D from $5 billion annually to $10 billion annually. However, Congress must appropriate those funds, which would largely be distributed through the Department of Energy. Unlike some of the other financial commitments that have been made throughout the course of prior climate talks, the ability of investments in innovation to drive economic development at home makes innovation a rare opportunity for bipartisanship. The BEC investments will in part be focused on taking basic science and technical breakthroughs made by Mission Innovation funding and making investments aimed at product discovery, development, and eventual commercial application, highlighting the complementarity of the two efforts.

These initiatives nevertheless stand apart from the United Nations Framework Convention on Climate Change (UNFCC) international climate finance commitments. The UNFCCC efforts constitute the more contentious elements of the negotiations and are significantly more complicated. For the sake of clarity, it’s helpful to start with COP 15, which took place in Copenhagen, Denmark, in 2009.

Near the end of the Copenhagen summit, two separate climate finance commitments were made by developed nations, one short-term and one long-term. The fulfilled, short-term commitment—known as fast-start financing—was $30 billion by 2012. The more contentious, long-term commitment—known as long-term climate finance—was centered on the ability of developed nations to mobilize $100 billion per year by 2020, counting both public money and private funding “mobilized” by public investment. There are a number of different instruments, institutions and mechanisms for realizing that commitment, including the Green Climate Fund (GCF). According to the Organisation for Economic Co-operation and Development (OECD), $62 billion was mobilized in 2014, roughly $10 billion more than in 2013. These mobilizations do not, however, reflect the GCF as no funds had yet been allocated.

The GCF has received $10 billion in pledges, all public money from OECD governments, including the $3 billion commitment from the United States that has sparked congressional Republican admonishments that the United States will not be able to deliver. Becoming fully operational in 2014, although not yet funded, the GCF is a financial mechanism of the UNFCC and is considered as part of long-term finance commitments. The fund will offer grants and concessional loans, or those with better than market terms, with an objective of directing roughly 50 percent to both mitigation and adaptation activities.


View a larger version of the graphic


View a larger version of the graphic

So what’s the controversy?

Apart from the Obama administration’s maneuvering to meet its pledge to the GCF, which Secretary of State John Kerry recently noted he feels confident about, there are several contentious elements of climate finance worth parsing out.

First, there isn’t agreement about what even constitutes climate finance. While generally accepted that it must be a flow of money from developed to developing nations, the terms utilized in Copenhagen have generated some disagreement. Several questions continue to be negotiated in Paris, including whether public dollars alone should be counted towards commitments or whether private sector dollars should be considered to have been mobilized, although private money will likely remain included, in the end. Another major issue is whether those financial flows are in the form of grants or loans, which includes questions about the ratio of those two instruments as well as who is to administer them. Further, it’s not clear if these funds are new and additional, as there are concerns that dollars might be diverted from existing programs since no baseline year or dollar amount has been specified. It is also worth noting that the United States will direct its initial $3 billion pledge into the directly UN controlled Green Climate Fund, but China for example intends its $3.1 billion in funding to flow bilaterally, and counted toward the longer-term 2020 $100 billion annual fund.

Lastly, there is also disagreement about how much of those funds should be directed towards adaptation or mitigation, as well as what constitutes an acceptable project, viewed through a broader global development lens. For example, should highly efficient coal projects, involving Japanese firms, count towards their financial commitment? The OECD study released this fall finding $62 billion in funding flowing already in 2014 did not count so-called “ultra-critical coal” plant investments in that total. If the negotiations in Paris are to be successful, they will need to make progress in securing broad stakeholder agreement on these issues.

International climate financing has also been largely focused on deployment, which is critical in providing energy access, limiting pollution, and developing desperately needed project finance mechanisms for the poorest countries. Yet the complementary Breakthrough Energy Coalition and Mission Innovation initiatives will be essential to creating technology breakthroughs that can provide clean, affordable energy to the entire world while avoiding the unacceptable impacts of climate change. This mix of public and private capital internationally indeed in many ways mirrors highly successful U.S. innovation model. The Department of Energy currently administers about $5 billion in R&D funding annually, counting on the private sector to commercialize and deploy projects, some of which enjoy tax incentives for production or investment. There is strong reason to believe these additional innovation investments will enable the United States to continue to enjoy its historic competitive advantage in creating, developing and commercializing advanced energy technologies, providing a source of both domestic economic growth and export opportunities. It is these broader economic advantages that U.S. policymakers will attempt to maximize as they consider additional public investments in advanced energy R&D innovation while balancing federal budget constraints.

Brad Townsend is the associate director for energy innovation at the Bipartisan Policy Center