In recent years, a broad range of financial developments have emerged that support the transition to a green economy. Despite the turbulence in world markets and the lack of an international regulatory framework to direct finance towards a green economy, capital markets have continued to evolve in ways that can help foster a green transition. Some examples include:
■ The arrival of cleaner energy technologies as new asset class and the four-fold increase in new investment in sustainable energy from US$ 46 billion in 2004 to US$ 162 billion annually by 2009 (UNEP SEFI 2010);
■ The creation of carbon markets where the value of annual trading volumes rose to US$ 122 billion by;
■ 2009. Studies estimate that emissions were reduced by around 120m to 300m tonnes in the first three years of the European Union Emissions Trading System (Pew Center on Global Climate Change 2008); and
■ The possibility of new markets associated with more effective management of natural resources, the provision of integrated urban environmental infrastructure and low carbon transport systems for cities, as well as low carbon industrial, commercial and residential property.
As indicated in the previous section, private capital sources are estimated to supply more than 80 per cent of the investment required for the transition to a low carbon economy. Access to capital and the magnitude of the necessary investment remains significant. The ability of public and private finance to interact within stable and resilient capital markets will be a key determinant if capital is to be provided at a sufficient scale to finance the transition to a green economy in a timely manner. Given the significant role that private capital sources are expected to play in the transition to a low-carbon economy, the smart deployment of public funds supported by a coherent policy framework will have a pivotal role in catalysing and leveraging greater private investment in a green economy. In the post-crisis government stimulus packages, some US$ 470 billion out of US$ 3 trillion-plus in public funds committed (HSBC 2009) to head off a severe global depression
was earmarked for low-carbon and environmental infrastructure investments.
Together with these recent developments, the role of multilateral financial institutions (MFIs), such as the World Bank, International Finance Corporation (IFC), and the thirty-plus regional MFIs, national development banks, as well as export credit and investment guarantee agencies, will be critical in fostering new and emerging niches in financial markets as private finance and investment adjust to and gain confidence in evolving green economy policy frameworks. Importantly, to archive best environmental and social outcomes, incentives should be designed and used in areas with the greatest potential for reducing GHG emissions along with job creation and other green economy objectives. .
3.2 New markets and instruments
Renewable energy The renewable energy sector is by far the largest destination for green investment in the GER scenarios. Financial
markets have already been mobilising
substantial amounts. A total of around US$ 557 billion of capital was deployed to the renewable energy market between 2007 and mid-2010 (UNEP SEFI 2010). This market has seen a four-fold increase in new investment from US$ 46 billion in 2004 to US$ 162 billion annually in 2009 (see Figure 1). The US$ 30 billion fast track financing pledged at the 2009 United Nations Climate Change Conference in Copenhagen (COP 15) has also focused greater business and investor interest in this market (see Box 1). Furthermore, analysts expect financial flows to this market to increase considerably in coming years. One recent study indicates that the low-carbon energy market size will reach US$ 2.2 trillion by 2020 (HSBC 2010).
Institutional investors, despite being considered risk averse and conservative, provided some 65 per cent of the finance for renewable energy in 2008 to 2009, contributing US$ 192 billion out of a total of US$ 294 billion. The remainder was spread among venture capital (VC)/private equity (PE), and research and development (R&D) sources, with some public stimulus money in 2009, offsetting a decline in VC/ PE funds (UNEP SEFI 2010). Notably, the Cleantech Group predicted that 2010