Interview with the author (Jean-Charles Hourcade)

Financial policy promoting low-carbon investment is key

Jean-Charles Hourcade, Lead Author of Chapter 4, IPCC Special Report on 1.5℃

Interview Date: 18 October 2018/ Location: Etudes (14 Rue d’Assas) (Paris, France)

Kainuma: First of all, please tell us what you think are the key messages of the SR1.5.

Hourcade: I think the SR1.5 has two messages. The first message is that the 0.5℃-difference matters.

The second message is that, according to my interpretation, the SR1.5 will force us to change the way we discuss present policies. Considering the current speed of change, it is almost impossible to make decarbonised societies a reality.

So the question is not whether it is possible to limit global warming to 1.5℃ or not, but about the enabling conditions to limit warming and how to implement all these enabling conditions. The key issue is how we can trigger transformation without knowing in advance whether or not these conditions are possible.

Redirecting investment is key for transformation. The question of what stance we should have on carbon pricing and overall regulatory measures remains. We have a mix of technological uncertainty, economic uncertainty, and other uncertainties. All come through whole markets.

There are also issues with carbon pricing. If you look at the discussion on carbon pricing now, people expect that if carbon pricing is introduced, then everything will go well. But this is not the case. It might encourage investment in low-carbon technologies. However, if we introduce only carbon pricing, it may cause the price of energy to increase and could have unintended effects on societies. Therefore, it would be prudent to combine carbon pricing with other policies.

Yet, if you push for regulations, people may try to stop their enactment by lobbying, so you may not succeed. Thus, both carbon pricing and regulations are necessary. Still, you can’t be sure that such policy approaches will be fruitful, because people care deeply about affordability and worry about political uncertainty. This is where finance comes into the picture.

The first step of finance is to start with the fact that you are taking less risk by investing in low-carbon assets.

Kainuma: Please tell us what you want to emphasise about investments in low-carbon technologies. How much does it cost?

Hourcade: Estimates suggest that, in addition to climate-friendly allocation of public investments, a potential reallocation of 5% to 10% of the annual capital revenues is necessary.

The mean incremental share of annual mitigation investments to stay well below 2°C is 0.36% (between 0.2–5 1%) of the global gross domestic product (GDP) over the 2015–2035 period. Since the gross fixed capital formation (GFCF) is about 24% of the global GDP, the estimated incremental energy investments between the baseline and a 1.5°C transition would be approximately 1.5% (between 0.8–4.2%) of projected total global investments.

A massive mobilisation of low-emission investments would require significant efforts, but may be complementary to sustainable development investments.

Kainuma: How can we lower this risk?

Hourcade: Historically, the only tool to reduce risk has been public guarantees. Public guarantees are very simple. People need guarantees to avoid risks.

If you have public guarantees, investments become much more secured. Then, instead of charging 9%, let’s say, the charge can be 5%. Thanks to such guarantees, even charging 5%, you can have gains every year.

By setting long-term targets by the government and introducing public guarantees, investments could be redirected to low-carbon technologies. Since some countries have huge debts, it may sometimes be difficult. However, I think it is possible to push investment forward, using bonds, savings in banks, institutional investments, pension funds, and some other measures.

What is important is how to lower risks of investing in low-carbon technologies by utilising public guarantees and how to mobilise—albeit small—private funds.

Kainuma: How about investments in developing countries?

Hourcade: The key for developing countries is how to lower risks of investment and to lower the rate of investment. It also could be done via public guarantees from the developed countries.

But we do not have to have full guarantees. Some projects might fail, but there may still be a gain overall. And, as a whole, technologies could charge towards “low-carbon.” However, higher guarantee amounts could lower the risks of deficits.

Kainuma: Please tell us about the possibility of low-carbon investments and their challenges and opportunities.

Hourcade: At present, most rents come from real estate, which is significant from the viewpoint of low-carbon development. There is value in investigating low-carbon assets. The idea is that investment in low-carbon assets is beneficial in the long run and has reputational effects. It also helps to redirect capital away from potentially stranded assets.

To limit global warming to 1.5℃, we need policy packages. They can help to mobilise incremental resources and provide flexible mechanisms that promote reductions in social and economic costs. This could trigger transitions towards low-carbon societies.

Kainuma: Thank you very much.