The world is getting noticeably warmer and there is a palpable change in world temperature. But, even after causing a once-in-a-century recession and unemployment for millions, finance is possibly the panacea for preventing an even worse catastrophe: climate change.
As the earth gets warmer, immediate action is urgently needed to contain global warming and prevent a disaster for humanity. But the global community is short of tools. There is not much support for the most desirable solutions advocated by economists, such as a global cap on greenhouse-gas emissions, or the enforcement of a worldwide carbon price by imposing a global tax on CO2 emissions.
Instead, negotiations for the UN Climate Change Conference in Paris in December are being planned on the basis of voluntary, unilateral pledges called Intended Nationally Determined Contributions. Although the inclusion of voluntary targets has the merit of creating global momentum, this approach is unlikely to result in commitments that are both binding and commensurate to the challenge.
That is why, climate advocates are increasingly looking for alternative means of initiating action. Finance is at the top of their list.
For starters, finance provides an accurate yardstick if deeds are consistent with words. A study in 2011 revealed that the proven fossil-fuel reserves owned by governments and private companies exceed by a factor of five times the quantity of carbon that can be burnt in the next 50 years, if global warming is to be kept below two degrees celsius.
Reserves held just by the 200 top publicly-listed fuel companies - excluding state-owned producers - exceed this carbon budget by one-third. And that means that these companies' stock-market valuation is inconsistent with containing global warning. This realisation prompted a campaign to convince investors to divest from carbon-rich assets. Individuals and institutions representing a US$2.6 trillion portfolio have already joined the divestment movement.
The amount of divestment may appear big, yet US$2.6 trillion amounts to less than 5.0 per cent of global private non-financial securities. The trend is real, but it is still too little to trigger significant changes in fossil-fuel companies' valuation and behaviour.
A second reason why finance matters is that the transition to a low-carbon economy requires huge investments. According to the International Energy Agency, global investment in energy supply currently amounts to $1.6 trillion per year, and 70 per cent of it is still based on oil, coal or gas. Green investment amounts to only 15 per cent of the total, and investment in energy efficiency - in buildings, transport, and industry - totals a meagre $130 billion. Containing the increase in average surface temperature to 2 degrees requires developing clean technologies, and more importantly, a four-fold increase in investment in energy efficiency over the next ten years.
Yet such investment will not be financed easily: its return depends on a still-elusive carbon price and will often materialise only in the long run, while improving energy efficiency implies replacing hundreds of millions of outdated vehicles and refitting hundreds of millions of energy-voracious buildings. Adequate financing instruments are required for the right purpose at the right place and at the right scale.
Development banks and green banks have a huge role to play. For example, dedicated long-term loans, coupled with a tax break or a subsidy, would help households decide to modernise their homes.
But the real hope among climate specialists is that innovative finance could help provide clarity in planning which is currently missing. To elicit the investments that are necessary to mitigate climate change and build green economy, the elimination of fossil-fuel subsidies and a credible, fast-rising path for the price of carbon are vital.
But, because high fuel prices are unpopular with consumers and raise competitiveness concerns among businesses, governments are reluctant to take action today - and many are retreating from their commitments and opting to act tomorrow.
To overcome such trepidation, advocates for climate action are turning to incentives. Some have recommended that governments issue CO2 performance bonds, whose yield would be reduced if companies exceed their carbon target.
Another idea, put forward recently, is to map out a path for an indicative price of carbon called its "social value" and provide green project developers a government-guaranteed carbon certificate representing the value of the corresponding reduction in carbon emissions. Central banks, they suggest, would then refinance loans to such developers, up to the value of the carbon certificate.
The idea is to force governments to have skin in the game, by balancing the risk of inaction on the carbon tax with the risk of insolvency or inflation. Action against global warming would take place without delay. But a decade or so later, governments - and societies more broadly - would need to choose between taxation, debt and inflation.
Undertaking massive investment now and deciding only later how to finance it, looks irresponsible. But not acting at all would be even more irresponsible.
East Asia and the Pacific remains potentially the largest victim of climate change. The area accounts for 31 per cent of the total or US$ 119 billion required to combat climate change, up by 22 per cent on 2013. China alone accounted for 22 per cent of total finance. With 24 per cent of the total or US$ 93 billion, Western Europe was the second major destination. Both the Middle East and North Africa and South Asia regions experienced large increases (114 per cent and 33 per cent respectively) from 2013.
Limiting climate change to 2°C requires a major shift in investment patterns towards low-carbon, climate resilient options. Achieving this goal will require policies that involve unprecedented economic, social and technological transformation, as economies shift towards low-carbon and climate-resilient (LCR) infrastructure investments. Choices made today about the types, features and location of long-lived infrastructure will determine the extent and impact of climate change and the vulnerability or resilience of societies to it. The challenge to shift and scale-up investment in LCR infrastructure requires policy makers to look across the breadth of the regulatory landscape to ensure that clear, consistent and coherent signals are being sent to investors, producers and consumers alike. OECD work on financing climate change action focuses on developing frameworks, tools and analysis to provide guidance to countries in this transition.
The global climate finance architecture is complex: finance is channelled through multilateral funds - such as the Global Environment Facility and the Climate Investment Funds - as well as increasingly through bilateral channels. In addition, a growing number of recipient countries have set up national climate change funds that receive funding from multiple developed countries in an effort to coordinate and align donor interests with national priorities.
Bangladesh Prime Minister Sheikh Hasina has also drawn the attention of developed nations towards the challenges of coordinating and accessing finance as proliferation of climate finance mechanisms increases.
