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November 8, 2022updated 09 Nov 2022 9:15am

AIIB pins hopes on PPPs and carbon tax to plug $26trn climate finance gap

There's limited support for emerging economies to transition. Two possible solutions, says the AIIB, are PPPs and a carbon tax.

By Adrian Murdoch

Jang Ping Thia, AIIB, PPP, carbon tax
AIIB lead economist Jang Ping Thia believes carbon pricing would go a long way to start closing the climate finance gap. (Photo courtesy of AIIB)
  • The 45 developing economies in the Asia and Pacific region need around $26trn of green investment from 2017 to 2030.
  • The share of PPP investments in Asia has grown quickly – from two-fifths in 2000 to nearly two-thirds in 2021.
  • Overall private sector investment in emerging markets increased from $300bn in 2010 to $375bn last year.

On the first night of the Cop27 climate talks in Sharm el-Sheikh, Egypt, Mia Mottley, prime minister of Barbados, criticised the lack of support for emerging markets to tackle transition financing.

“We were the ones whose blood, sweat and tears financed the industrial revolution,” she said. “Are we now to face double jeopardy by having to pay the cost as a result of those greenhouse gases from the industrial revolution? That is fundamentally unfair.”

This funding gap between developed economies and emerging markets is highlighted in the Asian Infrastructure Finance 2022 report, ‘Moonshots for the Emerging World‘ from Beijing-based multilateral development bank Asian Infrastructure Investment Bank (AIIB).

It argues that the 45 developing economies in the Asia and Pacific region need around $26trn of investments from 2017 to 2030, including climate mitigation and adaptation costs. Much of this has to be “front-loaded”.

An estimated $200bn a year of green investment will be needed in the Asean region until 2030 if the region is to have any chance of achieving the UN’s Sustainable Development Goals by 2030, it says.

But issuance is slowing down. The global volume of green, social and sustainability issuance in the third quarter declined to $215bn. That is 13% down on the same period last year and 10% lower than the previous quarter, according to ratings agency Moody’s.

Political capital

“The emerging and developing world is lagging in terms of both state and private sector engagement,” Erik Berglof, chief economist at the AIIB, tells Capital Monitor. There is, says Berglof, “a lot of vested interest” in emerging economies. Many of the institutions that are heavily invested in fossil fuels are also politically very powerful.

To put the size of the problem into perspective, last year, Asia-Pacific accounted for 52% of global carbon emissions, according to BP’s ‘Statistical Review of World Energy‘ last year, while coal accounted for 55% and 57% of the energy mix in China and India respectively, according to ourworldindata.org.

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The AIIB report characterises the net-zero transition as a “moonshot” – a once-in-a-lifetime opportunity. It calls for better deployment of existing state capacity, and the development of fresh capacity, to accelerate green innovation and adoption of new technologies.

“You need to have the right conditions,” says Berglof citing efficient regulations and transparent procurement as a perennial problem.

“You also need a strong stable sector, in terms of capacity to be able to empower and protect and enable the private sector and that’s what not working,” he says.

The report identifies public-private partnerships (PPP) as one tool for the development of green infrastructure and as a way to attract international investment.

These are long-term deals between governments and the private sector where the latter funds government work up front in return for collecting revenues for the duration of the PPP contract.

It argues that state-owned institutions must go from what it calls “laggards to leaders” in the net-zero transition and that governments must strengthen and enforce the net-zero mandates of these institutions.

The call to phase out fossil fuel assets and both to invest in and foster green innovation is admirable, but possibly idealistic at the moment.

PPP deals: On the back foot

At first glance, it looks good. The share of PPP investments in Asia appears to have grown quickly – from two-fifths of investments in 2000 to nearly two-thirds in 2021. But digging into those figures, they are less optimistic. China and India account for 50% of that investment in Asia.

Berglof admits that the take-up of PPP financing has been otherwise slow across the region. “[These types of deals] require a lot of state capacity to implement them,” he says.

More to the point, it can be what he calls “an imbalanced relationship”. Central governments are trying to structure complex deals that they have never done before with private operators that have done these hundreds of times around the world.

“Many governments feel that they are on the back foot from the beginning,” he says.

Then there is the elephant in the room of political stability. It is often a challenge for some emerging markets to promise the kind of stable conditions that private sector players demand.

His solution, perhaps unsurprisingly, is for multilateral development banks to act as “honest brokers”.  Interactions between the state and private sectors are not as developed in the developing world, he says, and the banks can balance that relationship.

Carbon tax could tip the balance

PPP projects might grab the headlines on the business pages, but they are not going to be enough to deliver the investment that is still needed.

Andrew Ness, portfolio manager at Templeton Emerging Markets Investment Trust in Edinburgh, points out that “in the months since Cop26 there has been little evidence of the funding levels increasing”.

London-based climate change policy specialists Carbon Brief this week estimated that developed countries are making smaller financial contributions to the internationally agreed target than their share of historical emissions.

The US gave $7.6bn (19% of its fair share) in 2020, the most recent year for which data is available. Canada, Australia and the UK gave 37%, 38% and 76% of their fair shares respectively.

AIIB lead economist Jang Ping Thia believes that carbon pricing would go a long way to start closing the gap.

Of course, he says that an “equalised price everywhere is the best”. But in the absence of global coordination “local pricing as long as it is realistic will still be very meaningful”.

A carbon price, he believes, will “accelerate innovation and adaptation”. It makes investors know that fossil fuels are going to have a lower return in the future.

Singapore, for example, which this year increased its carbon tax from S$5 ($3.56) a tonne to S$25 per tonne from 2024 has become an acknowledged regional leader in new technologies like carbon capture, utilisation and storage (CCUS) because it uses the taxes raised to develop these new technologies.

At the end of October, finance minister Lawrence Wong said that this money would be used to invest in technologies “to help decarbonise our economy”.

The AIIB report points out that overall private sector investment in emerging markets increased from $300bn in 2010 to $375bn last year. The 2% a year growth is not small beer, but the report emphasises that a greater proportion of that investment was in electricity generation, transport and oil and gas projects, than anything that might be deemed renewable, certainly compared to the rest of the world [see chart].

A carbon tax, explains Thia, would start to tip this balance. “Let’s innovate towards renewables. This would prevent a rush to fossil fuel especially when you face high oil prices.”

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