The World Is Looking for a Financial Model to Solve Climate Change. It Doesn’t Have to Look Too Far.

By Yusuf Khan | Nov. 15, 2024 12:04 pm ET  | |WSJ Pro

Current global climate financing mostly occurs through bilateral agreements. igor kovalenko/Shutterstock

Delegates at COP29 see the private sector as key to finding $2.4 trillion worth of green finance, in a framework that has similarities to President Biden’s Inflation Reduction Act.

BAKU, Azerbaijan—At this year’s U.N. climate summit, known as COP29, negotiators are trying to determine how to pay for the steep cost of staving off climate change—a more than $6 trillion annual ask.

The solution proposed by the Independent High-Level Expert Group on Climate Finance depends on the private sector, calling on banks, insurers and all those in between to invest in climate capital. It is a framework that has been likened to President Biden’s flagship economic policy, the Inflation Reduction Act.

Roughly $2.4 trillion a year will need to be directed from richer countries to developing and emerging ones if the planet is going to limit global warming to 1.5 degrees Celsius, according to the group. Current global climate financing mostly occurs through bilateral agreements, with nearly a decade long squabble to get $100 billion worth of financing to developing nations from richer ones. 

“The single biggest mistake development finance has made over the past decade has been to focus on volume of finance rather than their catalytic impact,” said Nigel Topping, U.N. Climate Change High Level Champion for COP26 and the founder of Ambition Loop, a climate-focused NGO. High level champions are essentially advocates for businesses and other parties to work together on climate change. 

To get to $2.4 trillion, the new model calls for developing countries to pay $1.4 trillion to provide initial finance for projects such as new solar parks or wind turbines, through their own domestic policies and banks. The remaining $1 trillion will have to come from international or external sources: $300 billion is expected to come from the governments of richer countries in the form of grants or aid. 

That leaves around $700 billion, which is where private finance comes in. Under the plan, international investment banks, development banks, philanthropic organizations and other lenders help multiply the initial investments made by governments, calculating that projects that have already received some funding are less risky to back and that a potential profit is there to be made. 

This model is the one being proposed by wealthier nations such as the U.S. as a framework for the global climate finance target, dubbed the new collective quantified goal, or NCQG. 

“It used to be the job of the multilateral development banks that said, ‘Let me start and go in where it’s not commercial,’” said Marisa Drew, chief sustainability officer at Standard Chartered Bank. “The new way of thinking is, ‘How do we collaborate together and identify those areas where capital is not flowing, where risk is mispriced, where perhaps the rating agencies got it wrong?’”

Drew said combining different sources of funding can rapidly multiply the investment. For instance, an initial grant of public funds for a green energy project may then draw a bigger sum from a private institution like Standard Chartered. This week, the World Bank said financing for climate projects would reach $120 billion a year by 2030 from multilateral development banks, roughly double current levels.

“Those numbers sound really ambitious when you talk about trillions. But when we actually do that, the multiplier effect follows and it’s not that hard,” Drew said. 

White House Climate Adviser Ali Zaidi speaks during a session at the COP29 U.N. Climate Summit. Photo: Peter Dejong/Associated Press

For those in the U.S., the approach might sound familiar. President Biden’s Inflation Reduction Act has attracted more than $900 billion of clean-energy investments using a combination of policy changes, tax credits, grants and loans to attract private cash, according to the White House.

Ali Zaidi, national climate adviser for the Biden administration, said that in developing the IRA, the administration structured public incentives and investment as “booster packs to the rocket of private investment,” He said the same approach could be adopted “to achieve liftoff” for clean energy projects in developing countries.

“Once again, we will need to marshal private capital,” he said.

The process is more complicated on a global scale, with each country’s regulatory frameworks, policy landscapes and climate goals differing. 

“What’s different is that this is not one government,” said Rob Moore, associate director of public banks and development at climate think tank E3G. “This is many, many, many, many governments, and all will have slightly different policies and regulatory regimes. And so it depends on how the structural aspect interact with the injection of capital.”

Woochong Um, chief executive of Global Energy Alliance for People and Planet, a climate-focused philanthropic organization, said one of the first steps when looking at developing economies is a review of the regulatory framework for installing renewables.

“We look to see what kind of regulation they have in terms of investment flow,” Um said. “Let’s say when somebody from outside wants to invest in a solar plant project, what kind of certainty do they have through the regulatory improvements so that the money flows smoothly.” 

Developing nations at the COP meeting, including Saudi Arabia and South Korea, are eyeing more direct financing through bilateral agreements, arguing that richer nations have been the cause of historic climate change, and should be the ones to pay.

Negotiators remain confident that with just over a week to go in talks, a deal can be struck. “Money is money,” said United Nations Framework Convention on Climate Change Executive Secretary Simon Stiell. “Everything helps us get to our goal.”

Write to Yusuf Khan at yusuf.khan@wsj.com

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