20.9 Vinod Thomas 20 Sep - Financial and Market-Based Interventions Post-Glasgow

Financial and Market-Based
Interventions Post-Glasgow
Vinod Thomas
Former senior vice president, World Bank
September 20, 2023
Topics
1.Risk Finance
2.Carbon Pricing
3.Climate Finance
Risk Finance
Global Risk
Inter-
Connections
Disaster Phases and Resource Needs
The picture can't be displayed.

Disaster Risk Financing
• The volume of financing available is key to disaster risk reduction.

• As important as the volume is the efficiency of the use of the money.
• Yet, additional investment is all too often understood as additional cost.
• However, the bulk of this additional investment could generate attractive commercial
returns.
Examples
Energy efficiency investment leading to lower energy bills and savings from less pollution.
Investment in flood resistant rice varieties, leading to stable rice production during floods.
Zoning and land use planning leading to lower death toll and damages during an earthquake.
6
Risk Transfer
https://www.casact.org/sites/default/files/presentation/reinsure_2015_presentations_c-12.pd
Singapore’s Coastal
Risk
• Most of Singapore being within 15 m above sea-level
and around 30% less than 5 m above.
• The minimum land reclamation level was raised from
3-4 metres above sea-level.
• 70% of Singapore's coastline is protected from erosion
by concrete seawalls and stone revetments.
• The rest of the coast consists beaches and mangroves.
• Frontload the proposed $100 billion investment over
50-100 years to guard coastlines.
• Expand renewable energy, and phase out fossil fuels,
95% of energy needs.
Carbon Pricing
Emission
Pricing
• Climate Finance enables climate mitigation and

adaptation for which the private risk-reward calculus
may not be favorable.
• Emission Trading System (cap-and-trade system)
caps the GHG emissions and allows industries with
low emissions to sell extra allowances to larger emitters.
• A carbon tax directly sets a tax rate on GHG
emissions or the carbon content of fossil fuels.
Cap and Trade: case of EU
• A cap, that is reduced over time, is set on the total carbon that can be emitted.
• Regulated entities buy or receive emissions allowances, which they can trade.
• At the end of each year, regulated entities must surrender allowances to cover their
emissions.
• When allowances are auctioned, revenues are generated that can be ploughed back into
green investments.
• Some 40 countries, including China, Japan and South Korea, have such schemes, at
varying stages of implementation.
• Since 2005 in the EU, emissions were cut by 42.8% in power and heat generation and
energy-intensive industry.
Carbon Tax: case of British Columbia
• A carbon tax sets a price on carbon by defining a tax rate on GHG emissions, or
on the carbon content of fossil fuels.
• More than 40 countries, including Singapore, have adopted carbon taxes, but at
different stages and varying rates, from Japan’s S$3.50/ton to Sweden’s
S$184/ton.
• A carbon tax policy can raise sizable revenues, which can be used for green
investments.
• Since 2008 BC has applied a carbon tax on 70% of GHGs, which is estimated to
have “significantly reduced” the emissions.
Singapore’s Priority for a Carbon Tax
• Singapore faces constraints in switching to cleaner forms of energy, more reason

to scale up carbon taxes.
• Singapore accounts for 0.1% of the global carbon footprint, but it is the 27th
highest out of 142 countries (2018) in emissions per person.
• A solid case can be made for Singapore to sharply raise its carbon tax to S$50/ton
by the mid-2020s.
• A higher carbon tax would likely elicit most response in power generation,
accounting for nearly 40% of emissions.
https://www.channelnewsasia.com/commentary/carbon-tax-why-increase-singapore-budget-emissions-climate-change-
2499051
Likely Implications
• The power sector would be the most responsive to the tax in cutting emissions as it
is both lower cost and technologically possible to reduce emissions there.
• A $4 increase in monthly utility bills is indicated with a carbon tax of $25 per ton,
offset by U-Save vouchers.
• A carbon tax makes cap and trade, voluntary markets, and green investments easier,
but it does not substitute for them.
Climate Finance
PRINCIPLES OF CLIMATE INVESTMENTS
Creating attractive risk/reward profiles for green investment
The figure illustrates a shift from a

commercially unattractive
investment opportunity (right) to a
commercially attractive one (top).
This is achieved in two steps: first,
reducing the risk of the activity, for
example through a regulatory policy
such as guaranteed access to the
grid for independent power
producers (IPPs); and, second,
increasing the return on
investment, for example, by
creating financial incentives such as
a premium price for renewable
electricity through a feed-in tariff
(FiT).
16
Encouraging
Renewables Figure 8.3 Risk Reward Proﬁle for a Renewable Project
Guaranteeing the power Regulatory

• Risk of Investment producer access to the Policy
energy grid
Providing a price premium

• Financial Return like feed-in tariﬀ for the Financial
electricity supply Incen�ve
Source: Glemarec, Rickerson, and Waissbein (2012)

Delivering Global Climate Finance 1/
Our starting point is the COP16 Accord: “developed country Parties commit to a goal of mobilizing jointly USD 100
billion per year by 2020 to address the needs of developing countries”.
The world needs to simultaneously tackle the COVID-19 and climate crises. The pandemic has highlighted that the old
normal was deeply fragile and dangerous.
The language of the climate accords starting with COP16 makes it clear that the $100 billion may include finance from
public and private sources.
Climate finance counting towards the $100 billion had been on an upward trajectory, but still falling short of the $100
billion per year ..the only realistic scenarios are those in which the $100 billion target is not reached in 2020.
Starting with the $100 billion per year by 2020, the whole climate finance system must scale up, urgently. A step change is
needed.
1/ Amar Bhattacharya et al report

https://www.un.org/sites/un2.un.org/files/100_billion_climate_finance_report.pdf 18
Financing a Low Carbon Global Economy1/
By one estimate, averted global indemnities could be $150 trillion to $792 trillion by 2100, or upwards
of four times the investment. Health benefits alone could exceed investment costs 1.5-2.5 times.
The International Energy Agency (IEA) estimated, a decade ago, that the capital required to meet
energy demand through 2030 in a non-carbon constrained world would amount to $1.1 trillion a
year. A more recent figure for needed capital investment for a low carbon economy would be $2.4
trillion a year through 2035.
1/ Araral and Thomas https://www.brookings.edu/blog/future-development/2020/06/24/climate-change-merits-a-

fiscal-response-like-covid-19s/) 19
• Business can finance climate investment projects by
using either on-balance sheet financing or borrowing
funds from a bank in the form of a loan, or through
equity capital from selling a stake in the business itself.
• Equity investors take equity positions in companies,

projects or a portfolio of projects, and expect a
Instruments greater return for the level of risk they take, to
account for the new ventures that can be expected to
of climate fail. Equity investment is usually in the form of funds
financing and involves many actors.
• Banks focus on getting that debt repaid, earning a

relatively small return on the transaction. Usually,
commercial debt is the cheapest source of finance 20
available to project proponents.

Temasek commits $500
million for a stake in LeapFrog
Investments
Private
Temasek and BlackRock form
Investments– US$600m decarbonization
the Case of investment partnership
Temasek
China Green Lights
Blackrock-Temasek-CCB
Wealth JV
Case Study #1: Can Climate Risks be lowered?
By 2050 Southeast Asia is projected to be severely inundated by a sea rise.
Extreme rains causing flash floods are already a reality. Most countries face
severe consequences of sea level rise, affecting tens and thousands of people.
• How does environmental degradation interact with climate

change to aggravate flooding in SEA?
• What are the effects of construction, watershed and aquatic
ecosystems, and what can be done to ameliorate the situation?
• What are the implications of climate change for cities and how
would you compare investments in coastal defenses versus
moving the capital cities?
Reference: IPCC reports, including latest https://www.ipcc.ch/assessment-report/ar6/
22
Case Study #2: Pandemics and Global Financing
Southeast Asia has seen how the needed resilience to pathogens varies widely in
resources, capacities, and strategies. Compare a SEA country with another country
faced with a new outbreak in 2025 on these questions.
• What is the best approach once a pandemic has started in coordination,
awareness, public health messaging, quarantine, reduction of transmission, and
care for the ill?
• What is the role of contingency planning and response, and surge capacity?
• Would you invite external financing and technology?
• Are there risk transfer mechanisms not considered thus far?

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Financial and Market-Based

The picture can't be displayed.

• The volume of financing available is key to disaster risk reduction.

• Climate Finance enables climate mitigation and

• Singapore faces constraints in switching to cleaner forms of energy, more reason

The figure illustrates a shift from a

Guaranteeing the power Regulatory

Providing a price premium

Source: Glemarec, Rickerson, and Waissbein (2012)

1/ Amar Bhattacharya et al report

1/ Araral and Thomas https://www.brookings.edu/blog/future-development/2020/06/24/climate-change-merits-a-

• Equity investors take equity positions in companies,

• Banks focus on getting that debt repaid, earning a

available to project proponents.

• How does environmental degradation interact with climate

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