Is there a finance gap for decarbonisation and how can we close it?

Closing the finance gap is not just a matter of finding more money, or of redirecting finance from ‘quick wins’ like renewable energy technology to sectors where decarbonisation has yet to get off the ground. It requires a shift in our collective mindsets about what makes an innovation or project investable and what kinds of returns we want on such investments for our future.

At first glance it seems obvious that there is a finance gap for decarbonisation. The figures suggested of the volumes of finance needed to decarbonise the economy – in the order of additional 800 billion USD per year – are eye-watering. But on closer inspection, we find that there is not one finance gap for decarbonisation but instead a number of different gaps between the availability, type and nature of finance on the one hand and the kinds of projects, innovations and processes that need investment on the other, which add up to make the question of how we finance decarbonisation one of the most challenging we face. 

To start with, there is a finance gap in terms of the sheer volume of investment available for decarbonisation. Public climate finance currently mobilises around 140 billion USD per year with private climate finance amounting to roughly double that amount. Despite there being 20 major multilateral funds dedicated to climate change action, these funds have had just under 50 billion USD pledged to them in total, far short of what is thought to be needed to reach the goals of the Paris Agreement. A shortage of public finance for decarbonisation is seen to be particularly important because private finance tends to focus on less risky and more profitable technologies and innovations.

This brings us to a second finance gap – the shortage of investment in decarbonisation beyond renewable energy technologies and energy efficiency measures. In 2016, 93% of climate finance targeted mitigation activities and of those investments, 74% were in renewable energy generation. High-cost carbon abatement sectors have not yet been brought within the remit of climate finance, a crucial gap as a decarbonised economy requires that all sectors shift away from fossil fuels, not only the energy, building, and transport sectors [see Financing Net-Zero Report].

The limited amount of finance being directed towards decarbonisation in high-energy and material-intensive economies, is at least in part driven by a third finance gap – the difference between the action that needs to be taken and what is considered to be an ‘investable project’. Given that innovation in these sectors, especially in the Global North, is likely to be driven by private rather than public investment, how they come to be seen as ‘investable’ – capable of being counted as saving carbon and as generating a return – matters a great deal. New approaches will be needed within the private finance sector in terms of how being ‘investable’ is calculated and recognised if this gap is to be closed.