Addressing the gap
Targeted public action can address the investment shortfall and promote green investment.
The need to scale up green investment is evidenced through the example of clean energy. As outlined above, total investment needs in the power sector in the IEA’s 2°C scenario are US$ 758 billion annually. Out of this total, 39% (US$ 294 billion) is required for renewable energy. Climate-change mitigation flows are estimated at US$ 350 billion per year by the Climate Policy Initiative (taking into account both public- and private-sector flows), of which an estimated US$ 189 billion was spent on renewable energy projects in 2011.61 This indicates a shortfall of about US$ 100 billion per year. While this may seem a relatively small amount, in reality the shortfall is larger because investment is biased towards wind and solar technologies in the OECD and emerging markets. Investment in other types of renewable-energy technologies need to be scaled up equitably across regions in order to meet the emission-reduction targets predicted by the IEA. Larger investment gaps in Africa and other non-OECD countries beyond the emerging markets will be challenging to close given the higher level of risk in these areas.
The Climate Policy Initiative estimated flows in energy efficiency investment at US$ 63 billion in 2011, with sustainable transport investment at US$ 35 billion.62 While there is a lack of comprehensive data on investment, these early estimates show that these sectors fall short of the required incremental investment (US$ 331 and US$ 187 respectively).
Bloomberg New Energy Finance estimates that annual flows in clean energy are increasing more rapidly than in conventional, fossil-fuel energy investment. Despite this, overall annual investment in fossil-fuel energy remains higher than clean-energy spending.63 While fossil fuels form part of the required energy mix in the future, investment needs to decrease over time, with a shift to greener technologies.
The public sector can address the green investment gap by unlocking private investment through targeted financial mechanisms that reduce risk and lower the cost of capital. At the same time, greener alternatives need to be promoted over conventional ones through better policy frameworks and a shift in incentives and behaviour. Strong carbon-pricing signals and removing fossil-fuel subsidies, in particular, play an important role in the transition. These actions, if successful, can promote long-term financing for green technologies and alleviate the barriers to investment. Part 2 of this report expands on these barriers and the potential instruments and actions that can help unlock the investment needed to support greener growth.