As the United Nations climate talks continue in Paris, identifying and developing financing resources to support the proposed efforts to mitigate climate change remains at the core of the process. By all calculations, reaching the internationally agreed target to limit global warming to 2 degrees Celsius this century will require a comprehensive set of solutions involving contributions from all sectors. According to the International Energy Agency (IEA), energy efficiency would contribute the largest slice of the pie, representing 38 percent of the needed reductions to achieve the 2 degree mark.
Despite its great and largely untapped potential, annual investments in energy efficiency, estimated at some US$335 billion from all sectors in 2012, remain far from where they need to be. Although this amount may seem large, upstream investments from oil and gas industries alone are double this figure.
Given the substantial savings that investors realize from most energy efficiency measures, this approach represents the lowest-lying fruit for reducing emissions. Moreover, energy savings have considerable knock-on benefits for countries’ power systems and foreign exchange reserves. Reducing the total energy demanded from a system avoids the needs for additional expansion and costly maintenance of power plants and lines. Similarly, with improved efficiency, countries that are reliant on imported fossil fuels would need to purchase less fuel for transportation and electricity, which can greatly reduce their foreign exchange expenditure, an impediment to domestic development.
The benefits of these measures are astounding. The IEA stated this week that spending $12 trillion on energy efficiency could lead to global lifetime savings of $18 trillion, all while tackling climate change.
Publicly funded energy efficiency projects can save individuals money as well. In 2007, the Ghana Energy Commission initiated a program giving out 6 million free compact fluorescent light bulbs (CFLs) in exchange for residents’ old incandescent bulbs. Heralded as a great success, Commissioner Kofi Agyarko cited at a Paris event that the program reduced peak demand by 124 megawatts and saved the average household recipient $36, all while increasing electricity access without the need for additional capacity.
Jumping the Financing Fence
The challenge for energy efficiency, however, is closing the financing gap. Despite generally being an economic win-win, providing returns from energy-saving programs to investors is tricky. It’s not easy to calculate how to properly remunerate a program that benefits numerous points along a variety of supply chains, corporate interests aside. Similarly, asking residential or commercial customers to return their savings to the government or to the utility program to pay for its investments is a tough sell.
This financing challenge is where international carbon markets come in (read more Worldwatch analysis on this here). Climate negotiators are busy this week hammering out a preliminary framework that will set the stage for how countries can engage in international emission reduction schemes. One popular approach is a cap-and-trade scheme, where, in the case of a global approach, countries could seek to reduce their emissions where it is most cost-effective. In many cases, financing less-industrialized countries to invest in energy efficiency could make the most economic and environmental sense. The flexibility offered in this approach is often well supported by lower-emitting and developing countries.
In the absence of a carbon market, energy efficiency projects often are limited either to those that are bankable—where investors expect to make a direct return on their investment—or to public financial programs that frequently are unable realize their returns. However, in less-industrialized countries, securing investment for such projects from mainstream investment institutions, or even from multi-lateral development banks, can be challenging because of poor perceptions of creditworthiness due to economic or political instability.
Establishing an effective carbon market is far from an easy task and requires a number of hard decisions, such as setting countries’ emissions caps, proving which projects qualify and have potential as “real reductions,” and accounting for and measuring reductions. These challenges, though, are solvable, and many carbon markets already have been shown to be possible.
Moving forward on laying this groundwork is key for success at the Paris climate talks and is a critical hurdle for unleashing the world’s largest “mitigation resource.”
Max Lander is a former research assistant with the Climate and Energy Program at the Worldwatch Institute and is currently a graduate student in International Energy at Sciences Po in Paris. Twitter: @maxclander