Aligning Investment with the 2°C Goal

The international community has committed to keeping the rise in global average temperature to below 2°C. Achieving this goal will require shifting capital from high-to low-carbon investments. However, global financial investments are often inconsistent with this objective and flow towards activities that will lead to greater emissions.

Within this context, the German government, through the Federal Environment Agency, has commissioned a study on “2°C Compatible Investment Criteria,” which investigates how public financial institutions can develop selection processes that evaluate whether project proposals are consistent with the 2°C goal.

I had the pleasure of participating on a high-level panel discussion, in Bonn, Germany during the UNFCCC climate negotiations, to discuss the release of this paper. CCAP has had a longstanding relationship with the German government as partners in promoting climate-friendly development, and I commend Germany for advancing this important discussion.

The panel recognized that development finance institutions can play a key role in aligning investments with the 2°C goal and that appropriate criteria can help them deliver finance with impact.

Beyond the technical understanding of which technologies are compatible with the goal from an emissions perspective, it is important to consider the local economic and political conditions and local development priorities of recipient countries before calling a project “2°C Compatible” or not. It is not just a top-down question.

It is vital that programs selected for support not only produce GHG benefits but also sustainable development, health, and other benefits that will ensure continued public support for similar investments after the initial internationally-supported investment is completed.

Deciding not to support coal-fired facilities because they are inconsistent with the 2°C pathway is straightforward. Deciding whether natural gas use as part of an expanded renewables effort is consistent with 2°C is more complex and needs to be analyzed in the broader context of host- country conditions, energy and political sustainability.

Emissions reductions are also not enough to determine whether a project is worth funding by a development bank. Ideally, all mitigation projects should not just reduce emissions, but also help to transform the economy. For instance, CCAP has been working in a number of countries to find options for developing Nationally Appropriate Mitigation Policies related to the waste sector. Tapping landfill gas to make energy is a quick way to reduce emissions. However, preventing waste from ending up in landfill in the first place through reducing packaging, recycling, composting, and using residual waste for energy through mechanical and biological treatment—while more complex and costly—is worth the investment. By addressing the waste system as a whole, and not just landfill emissions, the sector can be low-emissions and sustainable across other dimensions, such as improving health and quality of life at the local level and leading to a more efficient use of resources.

“2°C Compatible” projects supported by international public funds should also be underpinned by strong national plans like ambitious Intended Nationally Determined Contributions (INDCs) that include a clear sense of what a country can do autonomously. To help countries bring forward best-in-class investments to international funders, it is important to provide them with the support they need to convert their INDCs into enabling policies, specific measures, finance-ready investment plans and project pipelines. Doing so will help ensure that support flows to win-win investments that leverage private investment and wider social development in a manner that is truly “2°C Compatible” in the long run.

To learn more about this paper and to download the full report, please visit the NewClimate Institute’s page here.