Financing for Low-carbon Energy Transition

Significant contributions to global emissions by major Asian economies and their vulnerability to climate change impacts has contributed to a sense of urgency for leaders to implement policies and allocate investment into low-carbon energy systems. Current levels of investment are dominated by China and India, and while other Southeast Asian countries have lagged behind, along with India, their share is expected to increase. Energy efficiency investments are overshadowed by those into renewables, with wind, hydropower and solar representing the lion’s share of the mix. Looking ahead, while these technologies will continue to dominate, spending on solar and hydropower is expected to decline, and investment in energy efficiency is expected to increase faster than that in renewables. Future investments will have to increase 5% per year from 2015 to meet the required levels of annual spend in 2026–2030 predicted. This may prove challenging for smaller countries that do not have the same policy and technology capabilities. Individual countries vary in the technologies they plan to invest in throughout the 2017–2030 period. Solar and energy efficiency will be opportunities in most countries, as will biomass, with the exception of India. Wind will mainly be an opportunity in China, India and Vietnam. Hydropower opportunities will be focused in China, India, Indonesia and Vietnam and geothermal opportunities will almost exclusively exist in Indonesia and the Philippines.

Transition centred on innovation and application of low-carbon products to establish a sustainable environment requires financial support. However, as the core component of low-carbon energy system (LCES), renewable energy (RE) has been experiencing imbalanced in the overall transition process across countries and categories in private investment. Evidences in research provide rationality to assume balanced private investment on RE will apply a positive influence on environmental sustainability and global economy. Thus, in order to throw a light on policy perspective, this paper establish a stochastic frontier model to identify the determinants of private investment on RE based on profit theory of investment. By empirically estimating data of 18 developing countries, the estimation results show positive statistically significance on risk premium of country-specific low-carbon risks and the macroeconomic risk, political risk, trade openness, and business environment. The implication suggest feasible approaches to eliminate perceived risks associated with RE sector are essential. Government can play a role in adopting a more open trade policy, providing a more friendly business environment for investors, encouraging innovation by establishing green investment bank, reducing tax on low-carbon energy investment, and stimulating green investment in financial markets. In addition, regional and international cooperation is another solution to the transition to LCES by attracting financial and technology support.

The transformation of the energy sector poses huge challenges in terms of funding, especially for developing countries with high growth rates and increasing energy demand. Public sources alone will not be able to come up with the funds needed to finance this large-scale transformation. However, private finance faces a number of specific challenges and risks in the renewable energy (RE) sector. The chapter maps the public policy instruments which are relevant for unlocking private finance. Policy recommendations are related to the complex task of coordinating public and private actors in the early stages of market development in the RE sector. A major challenge for public policy is to create a certain degree of stability of expectations with regard to the policy framework for RE investments. This has to be complemented by public incentives to cover the remaining risks of RE investments, as long as markets are still in an infant stage.

The Paris Agreement adopted at COP21 states that it is necessary to reduce 55 GtCO₂-eq that is anticipated in 2030 to 40 GtCO₂-eq in order to keep the global average temperature rise within 2 °C based on before industrialization. Moreover, we should peak out GHG emissions worldwide as quickly as possible, and should aim to achieve a well-balanced artificial discharge and absorption in the second half of the century. Estimates under diverse assumptions suggest that the total global emissions should be 55 GtCO₂-eq in 2025 and 56.2 GtCO₂-eq in 2030. However, this is insufficient for achieving the second goal (56.2 GtCO₂-eq). Improvement pressure on high emission countries such as Japan tends to increase in the process where improvement of Nationally Determined Contribution (NDC) is required at the stocktaking meeting of United Nations Framework Convention on Climate Change (UNFCCC). In the future, important factors for promoting global warming countermeasures are investment not only from public sector but also private sector for emission reduction measures and cost burden method associated with carbon emissions. Although Carbon Capture and Storage (CCS) is attracting attention, as one of the technologies that can contribute to achieving the climate goal, the investment cost is high and its development is difficult. The major reasons for the difficulty of deployment are not only the cost but also the impacts derived from deployment of the CCS technologies (CCSTs). In order to develop and expand CCSTs as a promising solution towards low-carbon development, it is essential to improve the social and economic environment such as institutional and funding mechanisms that support development of CCS projects. Since CCS technologies are expensive, in addition to CCTs, it is desirable to develop financial support schemes.

This chapter aims to identify and map policies to unlock private financing potential for industrial energy efficiency investments in ASEAN + 6 countries. To map these policies energy saving potential in major industrial sectors is compiled from literature survey and own studies. Investment requirements were assessed considering payback periods of 3 years for retrofit and best practice energy savings methods and 10 years for BAT technologies. The need for private finance, public-private partnership mechanisms combined with market based instruments complimented with capacity building needs to attract private finance are discussed.

The ASEAN Economic Community (AEC) as an economic organization is to develop a single market and develop production to serve Asia-the fastest growing economy in the world. Supply and distribution are the major challenges of operations related to the limitations of logistics and transportation. While with 310 million ton of CO₂ emissions, transport in ASEAN is a significant contributor to global CO₂ emissions and the transport sector has the second highest share of total final energy consumption in the ASEAN region. This chapter has purpose to investigate how to unlock these two situations. Due to requiring high investment for economic and sustainable infrastructure development ASEAN country members should open and invite international financial sources and investors. They should also decline the obstacles. Therefore policy package of this study will focus on economic and management tools to support business and promoting sustainable energy source and technologies-related to transport.

The objective of this chapter is to study in ASEAN context about how to facilitate the financing of banks to the areas of sustainability and low-carbon transition. This chapter reviews the major issues related with low-carbon finance of banks. First, low-carbon finance products of banks are diverse and are categorized into two areas: the retail banking sector as well as corporate and investment banking sectors. Many innovative financial product provided by banks are to introduced in ASEAN context. Second, government can provide several incentives to the private financial sectors. An example of public-private partnership is green certification in Republic of Korea. The leading role of governments is critical. Third, the careful recognition of environment risk for the target projects, banks can provide capital and management incentive to projects with low environment risks effectively. Fourth, in October 2015, UNEP FI released the Positive Impact Menifesto, which calls for a new financing paradigm to bridge the funding gap for sustainable development. Fifth, financial technology or ‘fintech’ is emerging as a core disruptor of every aspect of today’s financial system. UN Environment commissioned an initial landscape review of the potential for fintech to advance sustainable development. Next, the situation of bank finance for low-carbon transition in Republic of Korea was studied in two ways: summarizing the situation of Korean banks during last three governments from 2008 to 2017 and interviewing a Korean expert in low-carbon finance. Based on the theoretical issues and case study of Republic of Korea, the policy recommendations were made for banks in ASEAN countries in four areas: recognition of ‘low-carbon’ as a new paradigm, leading role of the governments, global linkage of individual banks, and leapfrog by cutting-edge technology.

Properly functioned capital markets ensure the efficient operation of our businesses and economy in a globally competitive marketplace, and may in specific circumstances provide the appropriate reputational and financial incentives in low-carbon society. Renewable energy projects are especially in need of enhanced access to the public stock markets. Extension of Master Limited Partnerships (MLP) status to renewable energy technologies would allow the sector to access the public capital markets under favourable tax treatment. Through the sale of stock, Yieldcos offer the renewable energy industry a financing mechanism. Renewable energy securitization structures would offer investors an opportunity to participate. In addition to these equity investment vehicles, green bonds, debt raised through crowdsourcing and the lease of renewable energy equipment are emerging sources of capital for renewable energy and energy efficient building projects. Venture capital and private equity investments are becoming an important source of “clean tech” financing for innovative entrepreneurial firms. However, compared with self-financing and debt financing, the total volume of financing from capital market is still quite small. Core technical risk, regulatory Barriers, the lack of suitable investment vehicles in developing countries, the lack of right pricing signal and the lack of investor capability are the main barriers to increasing the financing through capital market. To encourage capital market to accelerate the transition to low-carbon energy system, the government need to play a positive and appropriate role, by providing technology developers and financiers with a stable platform for innovation, addressing early stage financing gaps, financing pre-commercial demonstrators for some technologies, leveraging public procurement, and improving reporting, enable better analysis and promote investor commitment to the cleantech space. For developing countries, it is necessary to enhance capital market infrastructure and capacity building to encourage green domestically listing IPOs by providing an incentive capital market environment. Furthermore, financial products and services innovations should be encouraged, i.e. local green or clean energy stock index, Debt-based instruments, structure finance, etc. It is also necessary to promote market transparency and strengthening formal requirements to provide information on investments with effective regulation authority cooperation and standardized and unified information disclosure environment, and set up “guarantee mechanism” to reduce risk by establishing standardised project documentation, tendering, contracting and due diligence processes, expanding the project pipeline and aggregate projects. International financial support and cooperation can play a critical role in financing renewable energy deployment in developing countries.

This chapter provides a discussion on costs and benefits of market-based instruments (MBIs) in accelerating low-carbon energy transitions. MBIs are contrasted with discretionary government policies such as mandated energy efficiency standards and subsidy support for renewable energy. After providing a brief survey of existing carbon pricing schemes and trends, the chapter discusses the literature on costs and benefits of carbon pricing with a focus on Asia.

Public sector will need to leverage private capital for meeting the financing needs of low-carbon energy transformation under the Paris Agreement. This chapter examines the approaches and financial instruments that Asian Development Bank (ADB) applies to leverage private finance for clean energy investment. This chapter analyzes the effectiveness of each approaches/financial instruments. The chapter highlights some initial experience and draws recommendations for public sector to better mobilize private capital.

An active participation of the private sector is necessary along with the public sector to successfully finance the low-carbon economic development to address the global climate change problem. However, the private sector perceives a higher risk in this endeavour because financing low-carbon economic development involves investing on new and emerging technologies with high market uncertainties and risks. The international financial institutions (IFIs) could play a major role in leveraging the private finance for low-carbon technologies by offsetting or sharing the risks. They have already launched various initiatives in this direction. During the 2011–2016, IFIs allocated US$23.01–US$28.35 billion, accounting for more than 20% of their annual portfolios, for climate change mitigation and adaptation related activities through various instruments including grants, soft loans and guarantees or insurances. IFIs efforts to leverage private finance for low-carbon economic development are expected to increase further in the coming years.

The main obstacle to the development of Renewable Energy (RE) projects is lack of access to finance. Electricity tariff is often regulated by the government, hence, to increase the investment incentives the spill over effects originally created by energy supplies need to be used. Tax revenues are refunded to the investors in energy projects and such fiscal policy reform will increase the rate of return of energy projects. For smaller-size energy projects, this chapter provides a theoretical model for combining utilisation of carbon tax and a new way of financing risky capital, i.e., Hometown Investment Trust Funds (HITs). Because of the Basel capital requirement, and because most RE projects from the point of view of financers are considered to be risky projects, and thus many financers are reluctant to lend to them or they lend at high interest rates. This chapter theoretically shows that by taxing carbon dioxide (CO₂), sulphur dioxide (SO₂), and nitrogen oxides (NO_x) and allocating those tax revenues to HITs, RE projects will become more feasible and more interesting for hometown investors, hence the supply of investment money to these funds will increase.

Transformation of infrastructure, such as energy and transport infrastructure, is crucial for the transition to low-carbon economy. Quality Infrastructure proposed by Japan will be effective but its eligibility criteria should be adjusted to accommodate ASEAN economy. Monitoring, Reporting and Verification (MRV) is a useful instrument for distinguishing Quality Infrastructure and providing financial support effectively. Carbon market is an option for the use of MRV and will support Quality Infrastructure. In Asia, a new carbon market is emerging and Carbon Club will push its development by stabilizing carbon market and mitigating political risk. Voluntary action, such as carbon disclosure and shadow carbon piece, is expected to push the transition but its technical barrier is having a reliable MRV in place. Alliance for MRV and Carbon Club is recommended as a part of ASEAN Economic integration.

Placing the ASEAN and East Asian economies onto a low-carbon development pathway requires an unprecedented shift in investments. The private sector will have to play a central role in financing this transformation and achieve the Paris Agreement targets. This chapter reviews the state of low-carbon investment in the region and provides a critical analyses of private-public financial initiatives and the mechanisms, being practiced across the developing Asia. In practice, private financing of low-carbon energy projects is not easy due to various risks, projections of revenues as well as evolving regulatory changes under the ambit of economic integration process. Four interrelated regional solutions: a low-carbon transition fund, financial performance warranty program, regional best regulations and high quality infrastructure program are proposed as means to accelerate low-carbon finance. This chapter also discusses in detail the implementation outlook and challenges in achieving the objectives of the transition fund and other associated solutions. It recommends close coordination across the economic, energy and environment ministries that involve promoting sound investment policy principles, including non-discrimination, investor protection, contract enforcements and transparency for the activation of the fund.