Building greening economies

The global community was spooked by the election of Donald Trump. The new president of the USA has earned the sobriquet of a “climate denier” and has promised to always put America first. However, there is cautious optimism that his presidency will not overturn the global agenda in this regard. But thus far, within his first 100 days in office, he is following through on his electoral campaign promises by officially promoting coal digging, among others. Still, it is too early to assess if investors would spend money on new mining operations and create new jobs in this industry.

Observers hope that some of Trump’s cabinet members will work to positively influence his views on the UN Framework Convention on Climate Change – and multilateral agreements in general. US policy may actually align with reality over time. International policymakers know that global agreements cannot be reversed easily.

Global agenda

In the meantime, stakeholders around the world are pressing ahead, drafting strategies for climate-change mitigation and adaptation. Action is similarly needed to achieve the Sustainable Development Goals (SDGs). International cooperation is becoming ever more important, as the world population is growing and efforts must be made to ensure that everyone can live a life in dignity without global development exceeding planetary boundaries.

Limiting global warming is the most important issue. Should it exceed two degrees on average, the impacts will spin out of control and will undo whatever progress being made in other fields. It was promising that many countries ratified the Paris Agreement so fast that it took force not even a year after being agreed in December 2015.

Global action against global warming has thus shifted to strategic programming. Some of the plans are already gaining traction. Global investments in renewable energy totalled $ 286 billion in 2015. This sum was three percent larger than the previous global investment record of 2011 (Frankfurt School, UNEP and Bloomberg, 2016). In 2016, moreover, investments in coal and gas-fired electricity generation accounted for only half of the money invested in renewable power generation around the world.

The force of the trend towards renewable energy differs from country to country. China alone accounted for 55 % of the total respective investment last year, while Africa’s share was less than five percent.

The plain truth is that low-income countries cannot keep pace without international assistance. Unfortunately, the advanced countries appear to be reneging on their pledges to help finance both mitigation of – and adaptation to – climate change in the developing world, including Africa. There is ample reason to doubt that the developed countries will actually make the annual $ 100 billion available for these purposes by 2020 as promised:

• Virtually all advanced countries have been bedeviled by weak economic growth since the global financial crisis of 2007/2008.
• The economic malaise is driving populist nationalistic sentiments in Europe and the USA.
• The developing world has ceased to be monolithic. A few countries have been making significant economic and financial progress, so people in donor countries feel that official develop assistance (ODA) is no longer warranted. However, the less fortunate countries continue to depend on ODA.

Change driven by business decisions

Africa must not be left behind in the transition to the green economy. Otherwise it will be even worse off than it is today. At the same time, it is in the enlightened self-interest of Africa’s private sector to mobilise investment capital for climate action. For obvious reasons, greening the economy depends on business decisions.

In Africa, power generation and agriculture matter in particular. These sectors are less developed than urban service sectors. Promisingly, several countries, including Nigeria, have recently enacted reforms. They have relaxed statist control and are geared to mobilising private-sector capital. It is worth noting that private investments in agriculture and the power sector will drive progress towards achieving various SDGs, in particular the eradication of poverty.

Private-sector companies can benefit from reforms that have relaxed the centralisation of the power grid, driving innovation and financing off-grid electricity solutions, for example. Moreover, opportunities arise for public private partnerships. Africa has ample wind and sunshine, so renewables technology is an attractive option in the electricity sector. To achieve up-to-date energy supply for everyone (SDG 7) it must be applied large scale.

Reforms in the agriculture sector have similarly created opportunities. At the same time, farms must be made climate-resilient. Otherwise, hunger will get worse and not be eradicated as promised in SDG 1. Private investments across the agriculture value chain are needed. There are significant knowledge gaps in African agriculture which smallholder farmers and even the national governments cannot be expected to fill. Well-informed investors can make the difference.

Africa needs more than token action towards building green economies. Without adequate climate action, African farmers may lose 40 % to 80 % of their croplands for growing grains. Preventing the loss of biodiversity (SDG 9) and ecosystem degradation will safeguard urban people’s food supply too. 

The big question is: how will private sector resources be mobilised? No doubt, African financial institutions have significant capacities to support investors. However, they have a history of risk aversion and lack sufficient market instruments to facilitate risk-sharing. Therefore investments in agribusiness has stayed below what is needed. A further drag is the macroeconomic situation. Interest rates are rising and are increasingly beyond what smallholder farmers and small and mid-sized enterprises can afford.

To unlock private-sector funding, therefore, the credit market’s demand and supply sides must be unblocked. More­over, there has to be a framework for sharing expertise on the continent. The good news is that we already have networks that pool resources, help to mitigate risk and share knowledge. They need better coordination however.

In this contest, the African Risk Capacity (ARC) is a very promising initiative at the supra-national level. Founded in 2012, it is a donor-supported agency of the African Union. It basically runs an insurance scheme to finance disaster response and promote climate resilience (see article in D+C/E+Z ­e-paper 2016/12).

In line with its mandate, the ARC is planning to create an Extreme Climate Facility (XCF), which will issue bonds. The idea is to raise funds on global capital markets, attracting investors from beyond Africa. A market-driven insurance facility that is backed by governments and multilateral institutions is a clever way to spread risks widely. One hopes that the XCF will soon become a reality, and the rigorous risk modelling it plans to have in place will serve other market initiatives.

Necessary as it is for Africa to take responsibility for its resilience to climate change and to develop its adaptation mechanisms, the continent should not be denied climate justice. The heavily-industrialised countries account for overwhelming shares of the emissions that are heating the planet and are intensifying climate risks for vulnerable people in less-privileged countries.

The advanced nations must compensate the victims of global warming. This is an issue of justice, not charitable aid. It is worrisome, moreover, that South Africa, which has a big economy but a comparatively small population, is the only G20 member from the continent. The G20 is an important forum of global policymaking. It should focus on promoting market-driven frameworks that promote sustainability in all its dimensions – in Africa and around the world.

Chinedu Moghalu is Head of Corporate Communication at the Nigerian Export-Import Bank.
moghaluigwe@gmail.com

Reference
Frankfurt School of Finance, UNEP, Bloomberg, 2016: Global trends in renewable energy investment 2016.