Development of 2°C compatible investment criteria

Development of 2°C compatible investment criteria

Niklas Höhne, [email protected]

21 October 2015, Bonn

Authors: Niklas Höhne, Frauke Röser, Markus Hagemann, Lutz Weischer, Alexander El Alaoui, Christoph Bals, David Eckstein, Sönke Kreft, Jakob Thoma, Morten Rosse

Key messages

2°C investment criteria are necessaryFinancial institutions use climate criteria but rarely linked to 2°C2°C investment criteria for individual projects …

Can be developed from scenarios Have to be sector specificNeed to strike a balance between complexity and manageability

Use of 2°C investment criteria can be integrated in the decision making processes of international financial institutionsCriteria are also needed to reduce the risks to investments from and increase the resilience of communities to climate change impacts A coalition of “early adopters” could be formed

Key messages




2°C requires step change in investments towards zero emissions

0

10

20

30

40

50

2000 2005 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Glob

al G

HG e

miss

ions

in G

tCO

2e

CO2 from fossil fuels and industry

CO2 from forestry

Non-CO2

Source: Illustrative 2°C scenario, based on marker scenario RCP 2.6 of the IPCC, from RCP scenario database http://tntcat.iiasa.ac.at:8787/RcpDb/dsd?Action=htmlpage&page=download

• Annual investments in clean energy need to quadruple to 1 trillion US$ per year until 2030

• Misguided investments will lock in greenhouse gas emissions for decades

Business as usual

http://tntcat.iiasa.ac.at:8787/RcpDb/dsd?Action=htmlpage&page=download



Key messages




Criteria in use

Some banks already use climate-related indicators to guide investments, but direct link to 2°C is limited. Examples from development banks:

Positive lists Qualitative conditions Quantitative conditions

Negative lists

• Funding for renewable energy

• Best available technology

• CCS readiness• National climate

strategy• Country groups

(e.g. LDCs)• Others

(development, energy access, system reliability, etc.)

• Efficiency-floor values in x (net) %

• Carbon-ceiling values in x gCO2 per (net) kWh

• Shadow economic prices of carbon in $ x per t/CO2

• Others (incremental costs of alternatives, etc.)

• No funding for greenfield coal fired power plants

Key messages




Categories of investment areas

2°C compatible Conditional Ambiguous MisalignedFully aligned with 2°C consistently across all scenarios

2°C aligned only under certain conditions in all scenarios

2°C aligned in some scenarios, but not in others

Consistently misaligned with 2°C in all scenarios

• Due to the fact that multiple pathways can lead to 2°C (e.g. more renewables and less efficiency or the other way around)

• Due to different assumptions on technological development

• Due to considerations of other sustainability factors

• Renewable energy

• Energy storage• Low carbon

transport fuel infrastructure

• Low carbon vehicles

• Gas fired power plants• Energy transmission and

distribution infrastructure• Energy efficiency in heating

and cooling of buildings• Efficiency in industry• Transport infrastructure• Transport efficiency• Agriculture and forestry• Building appliances

• Biofuels• Fossil fuel production• Large hydropower• Bio energy carbon

capture and storage• Nuclear

• New coal fired power plants with unabated emissions over their lifetime

Based on a comprehensive review of 2°C compatible model scenarios, including scenarios from Integrated Assessment Models (e.g. as in IPCC report), energy sector models (e.g. IEA), renewables and efficiency scenarios and sector specific scenarios.

Key messages




Guidance for individual project

types

Country frameworks

Integrating criteria on decision maling processes

Preliminary screening

Economic evaluation

ESG evaluation

Development evaluation

• Within the bank’s priority sectors ?

• …

• Is the project viable?

• Not crowding out private finance?

• …

• Are any environmental, social or governance issues associated with the project?

• Does project promote development, in line with country strategy/needs?

Sector policies

Overall Bank strategies

• For development banks: on negative list?• For dedicated climate funds: on positive

list?

• Project viable with shadow carbon price?

• Does project meet qual/quant benchmarks?• Does project fulfil existing standards deemed

to be 2°C compatible?• Is project consistent with national 2°C

strategy• …

Regular project evaluation

Additional questions on 2°C compatibility

2°C criteria for the power sector

2°C compatible

Conditional / ambiguous Misaligned

Preliminary screening:Energy source:WindPVSmall hydro

Economic evaluation:

Energy source:e.g. natural gas Shadow economic price of carbon

ESG evaluation:

Energy source:e.g. natural gas Decarbonisation based approach. Simple: Prove that project fits into a path towards 0 gCO2/kWh in 2050 Advanced: Prove that the project fits into a national sector-based decarbonisation strategy including lifetime, operation mode and capacity requirements

Preliminary screening:Energy source:New coal fired power plants with unabated emissions over their lifetime

Decarbonization approach – Electricity sector

CO2/kWh

Year

Grid emission factor

2015 (Today) 2050

Aim: Decarbonization by 2050

2030

Project needs to contribute to reducing the grid emission factor to this level over its lifetime

Gas power plants- Power plant has to be able to

support a system change towards decaronization

- Practice has shown that this requires high flexibility in conventional power plants

- This needs to be taken into account when developing the project (i.e. through lower FLH in the future)

20652045

Bottom up considerations - buildings

Positive investment

Conditional investment No investment

Fully aligned with 2°C consistently over all scenarios

2°C aligned only under certain conditions in all scenarios Consistently misaligned with 2°C in all scenarios

e.g. 20 kWh/m2 e.g. 200 kWh/m2

Q: What do you support as a bank? (examples)

BAT globally

BAT in country

Current average in

country

Pot. Future average after development

A: (bank with climate as co-mandate): advance BAT in country.

A: (bank with clear climate mandate): implement global BAT in country.

2°C criteria for the building sector

2°C compatiblePositive list

ConditionalQuantitative / qualitative conditions

MisalignedNegative list

Preliminary screening(Near) zero emission buildings (new and renovation) below 10 kWh/ m2

ESG evaluationQuantitative benchmark (simple)- Specific energy use between 10 and 150 kWh/ m2

- Gradual phase in and increased stringency based on BAT or country average

Sector based decarbonisation (advanced)Fit into a decarbonisation of the building stock during the course of the century Benchmark of energy use per floor space (x kWh/m2) determined at a country level, considering Market maturity Current energy use and local BAT levels Annual growth and lifetime of buildings, renovation rates and

levels, demolition rates Climatic zones

Preliminary screeningSpecific building energy use above 150kWh/ m2

2°C criteria for the transport sector

Sub-sector 2°C compatible(positive list)

Conditional Misaligned(negative list)Qualitative

conditions (example)

Quantitative conditions

Air, Water, Rail Inland waterways

Rail network and assets (passenger and freight)

Mass rapid transit/ Light Rail Transit (LRT)

Airports with transport interconnectivity plan/ bio-fuelling stations

Quantitative criteria for transport infrastructure are difficult to set given the indirect link of infrastructure to GHG emissions. Quantitative criteria may be set for vehicles (e.g. fuel efficiency, penetration of electric/ hybrid vehicles) and linked as sub condition to infrastructure investments.

Dedicated fossil fuel rail network

New airports in developed regions

Road Non-motorised infrastructure

High quality Bus Rapid Transit (BRT)

Road renewal to include strategic plan

Electric vehicle charging infrastructure linked to RE plan

New road network in developed regions*

Key messages




Criteria for climate resilience

Enhancing the resilience of communitiesPositive investment Likely positive

investmentNeutral No investment

Projects that explicitly increase resilience (project by project assessment)

• Projects that give priority to vulnerable countries/ communities

• Projects in certain priority sectors

Projects that cause no harm for future climate vulnerability

Projects that worsen the (future) climate vulnerability of the country/community

'No harm' principleall projects should at least not worsen the (future) climate vulnerability of the country/community (red category)

Climate funds should only fund projects in "positive investment" (dark green)All development banks should have portfolio targets for "positive" (dark

green) and "likely positive" (light green) projects

Key messages




Next steps

Financial institutions may choose to respond in different ways to the fact that for some individual projects there is a higher certainty that they are 2°C compatible than for othersA coalition of “early adopters” could be formed bringing together interested bilateral development banks and governments:

Support and accelerate the development of criteria in sectors Road test the proposed criteria

Future research: other sectors, private banks, investments in financial assets, portfolios

Key messages




Development of 2°C compatible investment criteria

Environment