Study: Global Power Sector Investment Puts World On Pathway To Well Over 3.2°C Of Warming

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Five years ago, in Article 2.1c of the Paris Agreement, world leaders pledged to make “finance flows consistent with a pathway towards low greenhouse emissions,” meaning finance should catalyze climate action and enable a decarbonization pathway to keep global warming to well below 2°C.

In a series of three papers published today, Climate Policy Initiative provides a first-of-its-kind insight on the alignment of new power sector investment with Paris Agreement mitigation goals.

The research finds that while renewable energy investment continues to grow, global power sector investment is putting the world on a trajectory for more than double the 1.5°C target in the Paris Agreement, owing to a combination of continued new fossil-fuel investment and the existing locked-in, dirty fossil generation. CPI’s assessment also reveals that no major country or region is currently decarbonizing its power sector at the required pace to meet Paris goals.

CPI’s Global Managing Director, Dr. Barbara Buchner, said: “The past decade has brought significant growth in sustainable finance, much of which has been channeled toward an explosive growth in clean energy. However, the ratio of dirty to clean power in new investment remains far too high. If we plan to come even close to the goals of the Paris Agreement all new investment in power must fund zero-carbon development.”

Key research findings include:

  • Globally, 29% of new power investment in 2018, or approximately USD 129 billion, was invested in fossil fuel power, resulting in 109 GW of new fossil generating capacity and putting the world on a temperature trajectory of over 3.2°C.
  • Diffusion of fossil fuel finance across a wide range of markets suggests that no region can claim overall Paris alignment of power sector financing in 2018. No major country or region is currently decarbonizing its power sector at the required pace to meet Paris goals, and while renewable capacity is growing rapidly in almost all geographies, fossil fuel investment, that will remain operational for years to come, continues to hold back progress toward Paris-aligned pathways. Trends have been particularly worrying in Asia and South America: Brazil, China, India, and Japan, as despite their emissions-intensive existing assets, these major economies are still investing in high-emissions fossil fuel power locking in further emissions increases even as sharp decreases in power sector emissions are required to achieve Paris alignment.
  • Similar to the country level picture, no major investor category is fully aligned with CPI’s calculated Paris-aligned emissions intensity targets for power-sector finance. Institutional investors, with 43% of direct investments aligned with regional targets, and multilateral development banks, at 28%, are marginally more on track with their investment portfolios as compared with other investor types, none of which exceed 20% when assessing alignment of finance aggregated by region.
  • Investment flows from commercial finance institutions appear to be “Very misaligned,” as they lead investment in fossil fuels at USD 13 billion. Commercial banks, along with export credit agencies, and state-owned banks, invested heavily in fossil fuel power plants, at USD 13 billion, USD 9 billion, and USD 5 billion per year respectively in 2017/18. Overall, public, and private institutions provided similar shares of tracked project finance for fossil fuel power, the former contributing USD 22 billion and the latter USD 19 billion per year.

Valerio MicaleManager at CPI, said: “By focusing on new investments, the deployment of new high or low-carbon assets, and the role of locked-in emissions, this work is our initial effort to understand the extent of the challenges ahead and to ultimately improve the ongoing alignment efforts by financial institutions. Looking forward, higher transparency on firms’ financing commitments for high-emission intensive investments will be crucial to measure the real magnitude of their efforts.”

The primary challenge in attaining Paris alignment in the power sector is locked-in emissions from existing fossil fuel generation. The research recommends leaders take immediate action based on these findings by identifying solutions for the public sector, private sector, and others, falling into three broad categories:

  • Halt new carbon intensive investments
  • Accelerate retirement of fossil-fuel plants
  • Continue to scale up low-carbon investments including in renewable energy, energy efficiency, grid infrastructure, carbon capture and storage, as well carbon offsets

The research notes that the alignment metrics and outcomes presented in this work should be interpreted as the preliminary results of the first application of the proposed methodology, which will be strengthened over time. The complexity of the topic, the still-evolving nature of alignment methodologies within the financial industry, and caveats regarding data availability and underlying decarbonization scenarios all require more widespread discussion and testing.

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