Climate Finance Shaped by the People, for the People

Forty years after the abrupt decline of the coal mining industry in the United Kingdom, regions that were once economic powerhouses still bear the scars of the upheaval that comes with rapid and unplanned structural change. Unemployment, ill health, social disadvantage, and cultural dislocation persist in such areas that once supported over a million mining families. The former coal regions have only 55 employee jobs per 100 residents of working age, compared to a national average of 73 per 100.

While the United Kingdom’s coal decline was not linked to today’s global drive to reduce greenhouse gas emissions, it is illustrative of what could become of regions and communities that today face a rapid exit from carbon-intensive industries. Of major concern is the fossil fuel dependency across all facets of today’s globalized economy. This means that change will extend far beyond coal regions into almost every corner of the globe, as well as across sectors and supply chains from agriculture, transportation, construction, and heavy industry to tourism and many more.

Recognizing the potential scale and depth of disruption, many policymakers, regulators, companies, labor groups, and the financial sector are exploring what a just transition could look like where people are not left behind as a result of essential and urgent decarbonization. Key to these emerging conversations are some of the largest international public funders of climate initiatives, such as the Climate Investment Funds (CIF), for whom we work.

The CIF, and its partner Multilateral Development Banks, provide financing—mostly in the form of grants, loans, and equity—on concessional terms (long tenors, low interest rates) to governments and private companies to de-risk nascent technologies that have the most potential to reduce emissions and boost communities’ resilience to climate change as quickly as possible. CIF and its partners have channeled more than $70 billion towards some 300 projects that have helped open the door to new technologies and markets in developing countries. These projects include the world’s largest solar park, the first geothermal power plant in South America, and launching Mexico’s wind power industry virtually from scratch.  Globally, CIF has supported projects that are delivering 26 gigawatts in clean power capacity (more than the total energy output of Austria).

These breakthroughs, real wins for the low-carbon transition, are of course worth celebrating. At the same time, they have prompted new thinking about what the next wave of climate investments could and should look like. In short, the discussion is centered around how to best trigger an annual cut in global emissions of 7.6 percent through 2030 and reach net zero by 2050, while helping people navigate this rapid change.

In this context, we have been looking to the past to ensure that the decisions we make for the future are inclusive, safe, and just.

It is becoming clear from our ongoing review of the CIF project portfolio that certain investments can have myriad and highly complex implications for the fair allocation of the benefits and harms associated with low-carbon transitions taking place across value chains, sectors, geographies, and communities.

Take for example India. It is likely that the decarbonization of the country’s coal-intensive energy sector will have many knock-on effects across state and national value chains. Investments in large-scale rooftop solar and utility-scale photovoltaic could move economic prospects away from coal-dependent states that are home to hundreds of thousands of formal and informal mining jobs to western states, whose higher solar radiation places them at an advantage for producing solar energy. An unplanned transition in this direction can thus have dire consequences, especially for the already vulnerable informal labor that is reliant on the local coal economy. Even the country’s railways, often referred to as the “Lifeline of the Nation”, are exposed to the impact of the energy transition. Its dependence on high coal transport payments to cross-subsidize passenger fares makes the move away from coal unpopular with customers and thus politically sensitive. Moreover, Distribution companies could struggle to provide affordable electricity to poorer households as its high-paying customers escape the power grid in favor of distributed energy sources. There were 176 million Indians living in extreme poverty in 2015, and 5.8 million households have limited access to electricity.  In short, the ongoing transitions are as complex as they are urgent; and if they are to be palatable, inclusive, and equitable, unrivaled levels of planning, dialogues, and funding will be required.

For developing countries that do not have the luxury of Europe’s Just Transition Fund or Germany’s €40 billion coal phaseout allocation, sources of concessional finance may prove critical. Multilateral climate funds, with their range of tried and tested financial tools and technical partnerships, have the potential to pilot and scale up a new wave of climate investments that put people and the natural systems, upon which they rely, at the center of the transition to a net-zero economy.  

Reflecting on CIF’s 12 years in operation and our ongoing analysis of what a just transition might look like in different settings, there are two clear ways in which climate funds could support developing countries pursuing just transitions.

1. Offer grant funding to develop long-term and inclusive place-based planning: Climate funds, MDBs, and development agencies have dedicated pools of resources that governments could access when designing detailed just transition plans. CIF’s Technical Assistance Facility is one such example. These planning resources could be used to model national transition scenarios, establish sector roadmaps, and design place-based transition plans. The plans would need to outline opportunities, keystone projects, timelines, and budgets for the transition. Furthermore, the planning process would need to be co-led by key stakeholders of the transition across governments, labor groups, community groups, private companies, and academia (see guiding questions below).
   
   Without the upfront backing of follow-on investment finance, planning processes can suffer credibility crises or end up on a shelf gathering dust. This is why some of the most transformative climate funding twins its grant funding for planning with a follow-on tranche of large-scale investment finance for implementation.
   
2. Make available large-scale concessional investment finance to implement demonstrative just transition projects that can mobilize private sector funding: Investment finance could be made available to implement keystone projects identified in just transition plans (for example, repurposing coal mining sites) to demonstrate viability, build momentum, and cultivate overall confidence in the vision for a just transition. Although finite, concessional capital, when deployed strategically and flexibility, can be a transformative tool in bridging the gaps between various sources of funding, from the limited pools of philanthropic and public sector funding to the much larger private sector funding opportunities. Using the full range of tools available—from first-loss guarantees to low-interest loans to favorable term equity investments, climate funds have the potential to create the enabling conditions to pull in private finance that can help drive regional economic regeneration and diversification into new low-carbon industries by offering new skills and decent green jobs for communities in transition.

How and from where these financial tools and funding pools are tapped, in support of just transitions, will need to be determined by the contextualized needs of each country, region, and community in transition through the meaningful involvement and participation of affected people. Based on these considerations, we suggest some high-level questions that we think could help frame how concessional finance is made available and accessed for just transition planning and implementation:

Has the just transition plan and its component projects:

• Considered transition challenges in the short, medium, and long terms, in alignment with the countries’ national and international climate commitments?
• Identified the priority districts or regions that will be affected by a transition, up and down value chains?
• Addressed key just transition concerns that include: boosting economic diversification; helping vulnerable groups impacted by the transitions; supporting local economies through financial intermediaries or entrepreneurial support; developing skills to enhance employability in new economic sectors, etc.? 
• Been influenced by diverse and key stakeholders in priority regions and value hot spots as well as state- and national-level government?
• Included a strategy that outlines how the objectives and activities to implement the plan will be communicated to key impacted groups?
• Embedded rigorous monitoring, evaluation, and learning to allow for adaptive management and learning that could support replicable just transition plans elsewhere?

After 12 years in operation, we know that multilateral climate funds can drive emissions reductions and boost adaptive capacities in developing countries. The next frontier for climate finance as a force for positive change will be ensuring that it drives a “just transition” that is shaped by the people, for the people.