Institute for Global
Environmental Strategies (IGES)
Non-Party Stakeholder Submission to the
Talanoa Dialogue of the UNFCCC

February 2018

1|PageForeword
The Institute for Global Environmental Strategies (IGES) is pleased to submit this document
as a third-party submission to the Talanoa Dialogue of the United Nations Framework
Convention on Climate Change (UNFCCC). This submission uses climate-related researchfindings from the Institute itself, as well as member organisations of the Low-Carbon Society
Research Network (LCS-RNet). The aim of this submission is to make a case for an accelerated
transition to a low-carbon society, backed by the latest research findings in climate policy andscience.
This paper follows the spirit of the Talanoa Dialogue, by asking three main questions: whereare we? Where do we want to go? And how do we get there? Studies show that the lowcarbon transition, enshrined in the Paris Agreement, is still not happening at the desired paceand scale, notably due to a lack of financing for green technologies and processes.
Nonetheless, there is reason for cautious optimism, as most scenario modelling researchseem to indicate that creating a decarbonised society remains technically feasible within therequired time frame. However, in order to achieve this, immediate and ambitious actions
should be taken. This submission concludes by emphasizing the importance of key policy
instruments that can facilitate this low-carbon transition.

2|PageContents
Foreword ................................................................................................................................ 2
1.

Where are we? A lack of climate finance to reach long-term decarbonisation targets . 4
1.1.

Current flows of climate-related finance .................................................................... 4

1.2.

The climate finance gap for NDCs’ targets implementation....................................... 5

2. Where do we want to go? The low-carbon transition is feasible but requires immediate
action ............................................................................................................................... 6
2.1.

The conditions for the feasibility of a global low-carbon transition ........................... 6

2.2. The case of Japan: decarbonisation is achievable but requires rapid emission
reductions............................................................................................................................... 8
2.3. The case of Germany: a GHG-neutral economy is foreseeable, but requires deep
production and consumption changes .................................................................................. 9
3. How do we get there? The need for transformative policies to mainstream green
growth and investments ................................................................................................. 11
3.1. Addressing the green investment gap by utilising public finance as a lever formobilising private finance .................................................................................................... 11
3.2.

The need for high-level carbon pricing instruments ................................................. 123.3. Alternative financial mechanisms could pave the way for a “new deal” for green
growth opportunities ........................................................................................................... 14
Conclusion ............................................................................................................................ 15
Authors of the Submission ................................................................................................... 16
About LCSR-Net .................................................................................................................... 16
References ............................................................................................................................ 17

3|Page1. Where are we? A lack of climate finance to reachlong-term decarbonisation targets
The question of where we are in the transition to a low-carbon society envisaged by almost
every country in the world through the Paris Agreement brings us to pressing issue offinance. As the mid and long-term targets for decarbonisation have set a commonly
accepted time frame for climate action, it is necessary to plan ahead the flow of climate
finance needed to fund the transition. Yet, studies show that while climate-related funding
is increasing (1.1), it is still not the level nor the pace required to keep the world on a twodegrees pathway (1.2).

1.1. Current flows of climate-related finance•

Bilateral climate-related development finance from DAC members amounted to $25 billion
on average in 2013-2014, or around 18% of total bilateral overseas development
assistance (ODA). This figure has been increasing steadily since 2002. The quality ofclimate-related development finance a, in terms of its impact in delivering mitigation andadaptation in partner countries, is as important as the magnitude of the finance mobilised.
However, this increase compared with previous periods still falls short of the climate
finance amount required to realize a low-carbon transition.
Figure 1: Bilateral ODA from DAC members and climate-related development
finance

Source: OECD-DAC, 2013-14 average, USD constant 2013 prices 1
a The Rio markers provide an indication of the degree of mainstreaming of environmental considerations

into development co-operation portfolios by requesting DAC members to indicate for each activity whether it targets theobjectives of the Conventions: 1. As a “principal” objective: the activity would not have been funded but for that objective;
2. As a “significant” objective: the activity has other prime objectives but has been formulated or adjusted to help meet therelevant environmental concerns.

4|Page1.2. The climate finance gap for NDCs’ targets implementation•

Analysis of NDCs shows that cumulative financial needs expressed in NDCs from developing
countries amounts to approximately $ 5,700 billion, including specified needs of $ 2,700
billion for mitigation and $ 820 billion for adaptation (IGES, 2018). Financial demand in
NDCs comes mainly from developing countries in Asia (50%) and Sub-Sahara Africa (42%).

•

However, the amount of $100 billion per year pledged first in Copenhagen in 2009 andreiterated in the decision of the 21st Conference of Parties (COP21) from developed todeveloping countries is insufficient compared to overall investments needed for realising
the low-carbon transition. Besides, full implementation of the unconditional NDCs andcomparable action afterwards is consistent with a temperature increase of about 3.2°C by
2100 relative to pre-industrial levels, which means that ambitious action is required
beyond the expressed targets (UNEP, 2017 2).

•

Studies show that the world needs to double its annual investment over the next 15 years
in order to achieve the low-carbon transition—an increase of $2-3 trillion per year, a thirdof which needs to be directed towards sustainable infrastructure (Bhattarcharya et al,2015 3).
Figure 2: Total amounts of financial needs expressed in NDCs (in billion USD)

Source: IGES (2018) NDC Database, version 4.3 4

5|Page2. Where do we want to go? The low-carbon transition
is feasible but requires immediate action
The status of where we are, as seen in the previous section, should serve as a wake-up callto strengthen climate action. However, while more climate finance is required, scenario
modelling research shows that a decarbonisation of the society is nonetheless feasible in
the long-term. These findings can be cause for optimism regarding future prospects andhelp the global community plan ahead for the transition.
Studies notably show that at, a global scale, the world will reach a peak in GHG emissions,
before embarking on a more stringent emission reductions journey (2.1). This section also
explores the specific cases of two developed countries, Japan (2.2) and Germany (2.3), in
order to show sectoral evidence that in spite of local challenges regarding energy supply,a decarbonization of the society is possible. However, both at the global and country level,such pathway necessitates immediate action, depending in particular on the availability ofclimate finance.

2.1. The conditions for the feasibility of a global low-carbon transition•

IEA’s Clean Air Strategy scenario shows it is possible to cut air pollution and relatedpremature deaths by about half, while only requiring a 7% increase in investment. A welldesigned air quality strategy will also have major co-benefits such as improving energy
access, meeting the SDG targets of renewable energy and energy efficiency by 2030,
lowering the energy import bill, and leading to a peak in CO2 by 2020 (IEA, 2016 5). However,while the Clean Air Strategy will be able to reduce energy related CO2 emissions, more
efforts will be needed to achieve the 2 degrees target.
Figure 3: Climate benefits of the IEA Clean Air Strategy

Source: Presentation by Timur Gül (2016) 6, based on IEA’s Clean Air Strategy

6|Page•

Taking measures to drastically reduce GHG emissions needs considerable effort fromdifferent aspects. The AIM/Global [CGE] model uses different scenarios to assess a 1.5°C
pathway (Fujimori and Masui, 2015). In addition to the 1.5°C scenario, which encompasses
the Copenhagen emissions pledges in 2010 and mitigation policies to meet the 1.5°C target,
four other scenarios have been developed to analyse different energy mixes and economic
impacts. The Shared Socio-economic Scenario 2 (SSP2) is used as a reference scenario. The
SSPs are part of a new scenario framework established to facilitate the integrated analysis
of future climate impacts, vulnerabilities, adaptation and mitigation (Riahi et al., 2016) 7.
Figure 4: Global primary energy consumption under different scenarios

Source: Fujimori and Masui (2015) 8• This research shows that the world could move towards using an increased share of
renewables under a 1.5°C scenario. The availability of renewables in 2030 would be limited,the amount of primary energy consumption would decrease after 2030 and reach 65% ofthat in the reference scenario in 2100, due to energy efficiency improvements and theavailability of renewables. However, the deployment of renewable and energy efficiency
technologies depend largely on the level of public support that will be put in place during
the same time frame.
• This brings the question of the financial cost of the low-carbon transition. The AIM model
scenarios show that, although the 1.5°C scenario may cause a decrease in GDP comparedto the reference scenario, absolute GDP will increase in the long run. Global GDP in 2100
in all scenarios are higher than in 2010. Some scenarios show a lower global GDP than in
the reference scenario, however, this is mainly because the GDP estimate does not takethe economic impacts of climate change into account. Therefore, this likely increase inglobal GDP due to the low-carbon transition can serve as a basis for increasing the level of
7|Pageclimate finance to its required level, in order to create a virtuous loop of investment andclimate impacts.
Figure 5: Global GDP change compared to reference case, from AIM model

Source: Fujimori and Masui (2015)

2.2. The case of Japan: decarbonisation is achievable but requires rapid
emission reductions•

Global and Japanese scenarios assessed by the AIM modelling team of Japan indicate thatfor Japan achieving approbatively 25% emission reduction in 2030 and 80% in 2050
(compared to 2005) is technically feasible even without nuclear power.

•

Besides energy efficiency and renewable energies, innovative technologies such as CCS will
be important options. End-use will be significantly electrified after 2030 and electricity willbe almost fully decarbonised by 2050. While NDCs are meaningful, much more effort will
be needed after 2030.

•

Key challenges to implement these options for 80% reduction by 2050 are: (i) Integrationof variable renewable energy after 2030, (ii) Technologies such as back-up energy systems,
efficient, high capacity batteries, and reliable grids, (iii) Policies such as carbon pricing,feed-in tariff, emissions trading, regulations linked to best available technologies, andpolicies to increase employment with low carbon systems, and (iv) increasing publicawareness through dialogue among stakeholders and international collaboration. As seen
above, most of those options required to implement the low-carbon transition as seen inthis research requires a sharp increase in the level of climate finance in the short run.

8|PageFigure 6: Electricity generation in 2010, 2030 and 2050 in Japan

Source: Oshiro (2016) 9

2.3. The case of Germany: a GHG-neutral economy is foreseeable, but requires
deep production and consumption changes• Germany’s goals of 40% GHG reduction in 2020 and 80–95% reduction in 2050 imply a
GHG-neutral German economy in 2050 with 80–100% share of renewable energy inelectricity, halving of final energy use by 2050, resource-efficient economy, and 1 tonne
CO2 emission per capita.
• Some major characteristics of this GHG neutral pathway are: 100% renewable energy inpower, heat, transport and industry; Intensive deployment of technological measures for
GHG reduction in all sectors; Ecological and sustainable agriculture and change in lifestyleand food habits, especially meat consumption; High recycling rate and use of secondary
materials, and major reductions along entire value chains.
• Similarly with Japan, the lifestyle and economic changes required for Germany to follow
the low-carbon scenario shown in this research tend to imply a steep increase in the levelof funding available for implementing climate actions and facilitating the adoption of lowcarbon processes.

9|PageFigure 7: UBA-Study: GHG-neutral Germany in 2050

Source: Presentation by Harry Lehmann, Synthesis Report of the Eight Annual Meeting of theInternational Research Network for Low Carbon Societies (LCS-RNet), September 201610 | P a g e

3. How do we get there? The need for transformative
policies to mainstream green growth and investments
Research have shown that the current flow of climate finance does not increase at a
sufficient pace to reach long-term decarbonisation targets (cf. section 1). In spite of this,
there is cause for optimism, as scenario modelling findings indicate that a low-carbon
society can still be materialised (cf. section 2).
However, the underlying implication of such scenarios remains that sharp action must be
taken in the short term, and such actions require an increase in climate finance. Therefore,
in order to facilitate the mainstreaming of climate change investments, transformative
policies should be adopted. Three policies in particular can be instrumental in this regards.
In a context of strained public finance and economic policies marked by austerity, utilisingpublic investments as a lever for mobilising private finance rather than an end to itself canprove effective in generating the required level of climate finance (3.1). A high level ofcarbon pricing must also become the cornerstone of the climate policy of any government
serious about addressing climate change, as it acts as a powerful price signal to incentivize
investors to shift their investments from carbon-intensive technologies and processes togreen ones (3.2). Finally, new financial mechanisms such as carbon certificates should becreated to serve as guarantees against the investment risks arising from low-carbon
investments, facilitating large-scale investments in climate-related initiatives, technologies
and processes (3.3).

3.1. Addressing the green investment gap by utilising public finance as a lever
for mobilising private finance•As many OECD countries are undergoing a period of austerity, reliance on public-sector
investment must be minimised, and more attention paid to attracting private finance.
Therefore, while public finance plays a critical role in catalysing, leveraging and guiding
climate-related investment; large-scale private sector engagement and investment will beneeded to enable this transition.

•

The World Economic Forum estimates that the green investment gap could be closed bymobilizing private investment through smart use of limited public finance. If public-sector
investment was increased to US$ 130 billion and more effectively targeted, it could
mobilize around US$ 570 billion in private capital (World Economic Forum, 2015) 10.

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Figure 8: Potential public-private finance mobilization to close the cost gap for climatespecific investment

Source: World Economic Forum (2015)

3.2. The need for high-level carbon pricing instruments•

As the world is moving towards implementing NDC targets, more countries are putting a
price on carbon, either through domestic, regional and international emissions trading
schemes (ETS) and carbon taxes. According to the World Bank and Ecofys’ Carbon Pricing
Watch (2017)11, in 2017 over 40 national and 25 sub-national jurisdictions were putting a
price on carbon, translating to a total coverage of about 8 giga tons of carbon dioxide
equivalent (GtCO2e) or about 15 percent of global GHG emissions.

•Three kinds of low carbon financial mechanisms are currently being implemented or
discussed: (1) “carbon markets”; (2) the “real pricing” of carbon for taxation purposes andsubsidy elimination; and (3) the “positive pricing” of carbon reduction (Sirkis et al. 2016) 12.
Carbon markets are recovering from recent blows and are developed on a national andsub-national scale. Nevertheless, these instruments are quite limited for achieving
stipulated efficiency targets by trading under the cap.

•

Carbon taxes and fossil fuel subsidy elimination hold an important potential forincorporating the climate change, environmental and health externalities’ prices into theeconomy and for helping to fund the transition. However, this approach faces fierce
political resistance, which must be tackled nation by nation, as taxation systems arenational policy instruments.
12 | P a g e•Future financial instruments could also be built on the ‘positive pricing’ of carbon reduction,
based on Paragraph 109 of the Paris COP Decision (decision 1/CP.21), which recognises“the social, economic and environmental value” of “mitigation actions”. This means thatcarbon reduction/removal has intrinsic value which could, in future, engender powerful
instruments for mobilising investment in mitigation. Positive pricing does not replace “real”
pricing for carbon taxation purposes.

•

Actions to mitigate climate change can simultaneously be tools for responding to today’s
economic and social challenges. However, high upfront costs of low-carbon projects might
impair their financial viability. Studies show that in the mechanism currently at play (seethe figure below), project A, capital-intensive, has a higher expected present value thanproject B, but it might not be selected because of its higher upfront costs. During the
incubation phase of the project, negative signals in terms of (indicated by the dashed lines)
might generate a deficit in the operating accounts beyond the “danger line” D, i.e. the levelof deficit the decision maker does not want to cross.

•

To explain the link between climate policies and the overall necessity of reducing the gap
between the propensity to save and the propensity to invest: the ‘danger line’ must be
moved (from D to D’) and the risks arising from overruns of upfront investment costs must
be decreased. To this effect, sufficiently high carbon prices could encourage decision
makers to take the risk, but the carbon prices would have to be very high because the costε(t) of approaching and crossing the danger line is highly non-linear and they would haveto cover the “noise” of other unfavourable signals (e.g. real estate prices, oil prices andexchange rates).
Figure 9: Investments risks, finance and carbon pricing

Source: Hourcade et al. (2014)13

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3.3. Alternative financial mechanisms could pave the way for a “new deal” forgreen growth opportunities•

Financial devices designed to “move the trillions” towards low carbon investments (Sirkis
et al. 2016) could contribute by making more long-term projects less risky and increasing
the propensity to invest. One potential option for triggering the low-carbon transition isfor governments to provide a public statutory guarantee for a new asset which allows thecentral bank to provide new credit lines refundable with certified reduction of CO2
emissions (carbon certificates).

•

These carbon certificates (CC), allocated to low carbon projects, would be priced at a Valueof Climate Remediation Assets (VCRA). The targeted credit facility would make possible
bigger loans to Low Carbon Investments (LCIs) by lowering the financial risk, and would
generate a new class of Climate Remediation Assets (CRAs) 14.

•

A CRA device would facilitate this strategic change if the CRAs were recognised in interbank
payments, reducing the need for countries to grow their exports in order to amass a war
chest of dollars. It would generate important north-south flows in support of the Nationally
Determined Contributions (NDCs) directed towards domestic markets and activities(Hourcade et al. 2015).

•

In addition to reducing the gap between the propensity to save and the propensity toinvest, this device would help to reduce one of the major ‘fault lines’ of the world economy:
an excessively export-led growth strategy in developing countries which places them underdisproportionate dependence on the ability of foreign consumers to pay (Rajan, 2010 15).

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Conclusion•

Research shows that the amount of climate-related development finance is increasing
compared to previous periods. However, this progress still falls short of theinvestment needs required to implement the mitigation targets of the Nationally
Determined Contributions (NDCs) and the target of the Paris Agreement of holding
the increase in the global average temperature to well below 2 °C and pursuing efforts
to limit the temperature increase to 1.5 °C above pre-industrial levels.

•

In spite of those findings, scenario modelling research shows that it is nonethelessfeasible to successfully achieve a low-carbon transition by 2050 at the global level.
However, such trajectory requires sharp actions in the short, and especially mid-termin order to radically transform global production and consumption patterns.

•

Several public policies have proven to be effective in redirecting investment flows togreen technologies and processes and mainstreaming sustainability concerns into dayto-day economic activities. While traditional public sector investments could be used
as a lever for increased private financing of climate initiatives, high level carbon pricing
instruments such as real pricing and positive pricing could pave the way for the lowcarbon transition. Finally, alternative financial mechanisms could be created in orderto generate large-scale green investments.

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Authors of the Submission
Alexis R. Rocamora, Analyst, Climate and Energy Area, IGES
Yuji Mizuno, Director of Climate and Energy Area, IGES
The authors would like to thank for their valuable comments on earlier versions of the draft:
Hideyuki Mori, Executive Director, IGES
Hironori Hamanaka, Special Research Advisor, IGES
Satoshi Tanaka, Principal Fellow, IGES
Mikiko Kainuma, Senior Research Advisor, IGES, and Secretary General of the LCSR-Net
Kentaro Tamura, Research Leader, Climate and Energy Area, IGES
Tomoko Ishikawa, Principal Coordinator, Strategic Management Office, IGES
IGES also would like to reserve special thanks for the contributions from the various expertsof the LCS-RNet.

About LCSR-Net

The International Research Network for Low Carbon Societies (LCS-RNet) is a network of
researchers and governments from the G7 tasked to provide contributions to national climate
policies. Its basic operational concept is to facilitate international dialogue between science,
policy and society on the profound, broad-based transition of social systems to reduce GHG
emissions and, by doing so, stabilise the climate.

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