Download The role of financial institutions for sustainable economic

The role of financial institutions for sustainable economic growth
Takashi Hongo
Special Advisor
Japan Bank for International Cooperation
We are now facing two great threats in the global economy, namely the financial crisis
and climate change. Scientific review of climate change has been almost completed and
now we have to take actions. For combating climate change, financial institutions have
a large role to play and we should be aware of it and take actions with government and
industry.
1. What has happened?
I will show you two slides here as evidence of climate change.
Fluctuation of Rain Fall in Japan
Economic Damage by Weather Related Disaster
USD
Billion
180
Economic Damage
160
Insurance Payment
Average
Trend of damage
140
Annual actual
Trend
Trend of Payment
120
100
80
Rain
Fall
60
40
20
0
1950
1955
1960
1965
1970
1975
1980
© 2007 Munchen Re
1985
1990
1995
2000
1900
2005
1950
1990
3
Source: Japans government’ MLIT HP
5
Insurance companies are one of the parties seriously affected by climate change
because weather related disasters such as typhoons, heavy rains, storms and drought
inflict damage on our life and assets, and insurance payments are increasing. Munchen
Re-Insurance issued a report with historical data and their forecast of economic damage
and insurance payments by weather related disasters. It said that economic damage
and insurance payments by weather related disasters are increasing rapidly and it is
forecasted to reach USD 1 trillion in 2020. In general, insurance is not so common in
developing countries, so I am afraid that this seems to be under-estimated.
Another measurable evidence of climate change is rain fall. Historical rain fall data in
Japan shows the range of rain fall amount in the year between heavy rains and less rain
is expanding. It is said that rain fall is becoming unstable due to accelerating
evaporation, and agriculture which depends on water supplies will be seriously affected
by climate change.
2. Huge investment demand caused by climate change
We share views that we have to take measures not only for reducing greenhouse gas
emissions but also for weather change and disasters, that is to say climate change
mitigation and climate change adaptation. For climate change mitigation, we are
required to reduce greenhouse gas emissions by improving energy efficiency and switch
to renewable energy from fossil-based energy. For adapting to climate change, we need
to upgrade and increase agricultural and urban infrastructure.
Huge amounts of investment seem to be needed but there is no officially authorized
figure. I pick up figures from different sources to have an overview about the magnitude
of the ‘huge demand.’
For mitigating climate change, the International Energy Agency (IEA) said USD 430
billion investment is needed every year in 2020. This is the amount of additional
investment in the world. The World Bank disclosed USD 75 to 100 billion for additional
infrastructure investment in developing countries. By the turbulence of water recycling
flow and the growth of urban population, water infrastructure needs to be upgraded and
increased. Furthermore, it is expected that an enormous amount of funding will be
required for conservation of forests for biodiversity and stability of climate.
I am afraid that the total of these annual investment demands will reach USD 1
trillion, although it should be tested and reviewed.
3. Finance gap
We need to take actions for tackling the constraints of our planet as quickly as possible,
but a critical issue for these actions is funding, particularly for the projects in
developing countries. For mitigation, according to the IEA’s report, the necessary
investment to realize a low carbon society in developing countries is around USD 200
billion. Many developing countries ask for aid funding because it is least cost funding
but its average annual amount is around USD 100 billion. Also multilateral public
finance as a variation of Official Development Aid is around USD 30 billion as an
annual average. It is clear that bilateral aid and multilateral financial institutions
funding is not enough to fulfill the funding demand. This means that the financing gap
after this concession funding should be fulfilled by private financing and public
financing including public financing of developing countries. I understand the role of the
development bank is large for the financing of climate related projects.
The Kyoto Protocol includes international emissions trading. The Clean Development
Mechanism (CDM) provides Carbon Credits for projects for CO2 reduction and other
greenhouse gas emissions reduction projects by using a flexible mechanism. Now
international carbon trading is playing a significant role for financing in developing
countries. In 2008 over USD 6 billion was contracted. It is also a useful market based
incentive for energy efficiency and renewable energy projects.
However, the international framework for generating demand for carbon credits will
come to an end at the end of 2012. My thought is that a similar type of framework will
follow the current regime, that is to say Post Kyoto. Demand for credits will be much
higher because reduction targets by industrialized countries are very stringent and
excess emissions above their targets should be offset by carbon credits. It seems that the
market will become 5 times to 10 times bigger in 2020 although there are variations in
estimation.
4. Carbon becomes cost – new business opportunity
The economic system is changing due to the capacity constraints of our planet, and
now ‘Carbon’ becomes a cost. However, another aspect of cost is business opportunity.
One success story is the Clean Development Mechanism, and financing for climate
mitigation projects is a business with great potential.
In addition to CDM, various new business opportunities are being developed now.
One is Carbon Capture and Storage (CCS). Global warming is caused by the increase
of CO2, which is contained in fossil fuels, which are emitted into the atmosphere. So the
aim of CCS is that CO2 from fossil fuels should be caught and put into the ground and
immobilized. This is called the ‘final solution’ for climate change mitigation.
Some experts say that the technology for CCS is not well developed. Generally
speaking this is true, but we need to know that CCS is already operated in some
instances. One of the successful examples is an Algerian gas development project. CO2
is separated at the refinery before being transmitted through a pipeline and injected
deep underground under very high pressure and stored. But CCS from coal fired power
stations or cement and other industrial uses have not been commercially operated
because technologies for them are under development and its operation costs are still
very high.
I also point out the potential of sustainable forest management and development. It is
analyzed that 15 to 20% of greenhouse gas emissions comes from deforestation and
degradation of forest. This is an enormous amount. Japan’s emissions account for 4 to
5% of global greenhouse gas emissions and Japan is making efforts to reduce by 6%
from 1990 emission levels. It is not an easy task. It is quite reasonable that such a big
space for reducing emission should be cultivated.
As a new funding for sustainable forest development and management, mechanism
for ‘forest credits’ are being considered. The concept is similar to carbon credits. Firstly,
evaluate the amount of carbon storage in wood and biomass, then evaluate the
additional storage amount by activities for sustainable development, and lastly provide
forest credits. Demand for forest credits has not been created because an international
framework like that for carbon credits is under consideration. When forest credits are
recognized as international offset credits, a large amount of funding for forests will be
possible. Currently demand for forest credits is for voluntary environment contribution
purposes and its price is low and its demand is limited.
The potential is large, so we at JBIC are considering forming an alliance with the
World Bank by participating in a Forest Carbon Partnership Facility.
5. Scaling up investment – commercially viable Best Available Technology
JBIC announced an environmental finance initiative called the Leading Investment to
Future Environment (LIFE) Initiative on March 2009 with USD 5 billion for 2 years.
The aims of LIFE are firstly scaling up funding for environmentally friendly
investments. USD 5 billion is not a small amount but it is not of great enough
magnitude to satisfy global funding demands, which are of the order of USD 200 billion
every year for climate change mitigation in developing countries. JBIC would like to
cooperate with private financial institutions and public financial institutions including
development banks and play a catalytic role to mobilize their financial resources.
The second aim is to provide a message to the market about specific areas of focus. We
specified 4 fields as prioritized areas, namely clean power generation, energy efficiency,
water infrastructure and urban transport. We publish our prioritized investment fields
explicitly to accelerate investment in these areas and also ask financial institutions to
form alliances with JBIC.
For alliances with financial institutions, we are preparing a technology handbook for
financial institutions. There are various handbooks for advanced technology called Best
Available Technology (BAT) or shopping lists which are prepared by seller parties. The
reason why we are preparing one by ourselves for financial institutions is that they are
not fit for financial institutions requirements because we financial institutions, in
principle, seek for proven advanced technologies with sufficient and stable economic
returns. We proposed ‘Commercially Viable Best Available Technology’ for financial
institutions.
Our preparation is underway but the lists for the steel and cement industries are
disclosed as an example. I would like to share our experience with all financial
institutions including developing banks and we would also appreciate comments and
opinions from developing countries too.
6. Public Private Financial Partnership
We face various constraints because our planet has capacity limits and is too small for
us when we would like to enjoy an affluent society. We need to change our lifestyle and
business model but we should avoid shrinking the economy. The only solution is
technology for realizing efficient use of our capacity, and investment is needed in
making use of these technologies. For sustainable growth financial institutions should
make contributions for pushing these investments.
The private sector is a driving force of economic growth because they have technologies
and are obliged to make investments to achieve sustainable growth. They should be
major actors. The role of government has changed under the trends of privatization and
liberalization of the economy. They need to improve the investment climate for the
private sector to scale up investments for the transition to a sustainable economy. Our
role as financial institutions is to push the last one mile for investment.
I proposed the Public Private Financial Partnership (PPFP) as a new business model.