- The OPEC Fund and Climate Action: An Ambitious, Yet Realistic Plan
The OPEC Fund and Climate Action: An Ambitious, Yet Realistic Plan
Active development work means finding a balance between seemingly conflicting needs. For this all hands on deck are needed
When OPEC Fund Director-General Dr. Abdulhamid Alkhalifa visited Madagascar last year, he woke up one morning in the capital Antananarivo and what he smelled was not the coffee. “From everywhere came the strong smell of burning wood and the whole city was covered in heavy fog. Only after a while I figured out that this was not a weather event, but in fact smoke rising from hundreds of thousands of households,” he recalls.
Cooking with wood, charcoal and other polluting biomass is still prevalent in large parts of the world. These fuels release plumes of smoke and soot with significant health impacts that contribute to millions of premature deaths each year. Burning these fuels during the cooking process emits carbon dioxide, methane and other pollutants. In addition, unsustainable harvesting of fuel drives forest degradation and prevents reforestation.
Despite these well-known and well-documented impacts, 2.4 billion people in Africa alone still rely on cooking with these traditional practices, says the UN-affiliated organization Sustainable Energy for All (SEforALL). The environmental think tank Project Drawdown estimates that around 40 percent of families in low- and middle-income countries globally are primarily using cookstoves fuelled by wood or coal.
Madagascar is a prime example of the hazards associated with these practices: Illness from household air pollution is the second leading cause of death in the country. Moreover, between 1953 and 2014, the country lost 44 percent of its natural forest cover. If deforestation continues at its current rate, all of Madagascar’s forests will be lost within 40 years, the World Wildlife Fund warns. Much of the island’s unique biodiversity, formed over 165 million years and including species found nowhere else on earth, is in acute danger of extinction.
The environmental damage also has a severe impact on socio-economic development. With many unspoiled beaches, untouched rainforests and average temperatures not exceeding 30°C during the hottest period of the year, the potential for tourism in Madagascar is huge. But in contrast to the neighboring Seychelles, which are only a two-hour flight away, Madagascar still only earns a fraction of its GDP from tourism.
It demonstrates how the responsible treatment of the environment and the careful use of resources have become an integral part of development. The Seychelles, one of the small island nations in existential danger because of rising sea levels, are taking decisive action to lessen their dependence on fossil fuels with massive investments to unlock their potential for solar power.
The OPEC Fund’s Climate Action Plan takes account of this duality. Energy is one of the most powerful drivers of development. Without energy, it is impossible to provide healthcare, education or clean water. It is impossible to strengthen food security and eliminate hunger. Ultimately, it is impossible to eradicate poverty without energy. The fight against energy poverty and climate action are not opposites, but two sides of the same coin called development.
These are the challenges we have to address: According to the World Bank, an estimated 750 million people around the world do not have access to electricity. At the same time, the world's population is expected to increase by about 2 billion in the next 30 years, from 8 billion today to 9.7 billion in 2050. Coincidentally, 2050 is also the year when the world must achieve net zero in greenhouse gas emissions to reach the 1.5°C target of the Paris Agreement.
This means: We are in a bind. More people = more energy = more emissions. This is a vicious circle that must be broken. For this, we need comprehensive answers and multidimensional approaches. The first one is energy efficiency, with measures from insulation to smart meters offering the potential of achieving more than 40 percent of energy-related emissions cuts, according to the International Energy Agency (IEA).
This still leaves us with almost 60 percent, and – due to a growing world population – rising demand for energy. Alternative sources exist and there is progress with their utilization, but it comes at a price: A recent IMF paper identifies financing needs between US$3 to $6 trillion per year until 2050 to reach the Paris goals. To put this into context: global climate finance currently amounts to about US$630 billion annually – “and very little goes to developing countries,” as the IMF notes.
The OPEC Fund’s Climate Action Plan aims to make a sizeable contribution from the Fund’s own resources and leverage its high mobilization rate. Roughly four out of five OPEC Fund projects are co-financed with partners. In the energy sector the OPEC Fund has committed nearly US$3.3 billion to date, with renewables by now accounting for nearly a third of public and private sector operations.
Based on the OPEC Fund’s traditional engagement the Climate Action Plan sets ambitious, yet realistic goals. It will raise the share of climate finance to 25 percent of all new financing by 2025 and to 40 percent by 2030. Projects will include investments in climate adaptation (to reduce the risk posed by climate change and increase resilience) as well as climate mitigation (to reduce or limit greenhouse gas emissions). OPEC Fund climate financing will be available in the public and private sectors.
The Climate Action Plan will be complemented by a commitment to consider climate change throughout the project cycle. This ensures that by 2025 climate action will be mainstreamed across all projects the OPEC Fund is considering for approval.
In addition, the OPEC Fund will join international initiatives such as the climate finance working group of the multilateral development banks (MDBs). To facilitate cooperation, the OPEC Fund also commits from 2023 to measure climate finance and greenhouse gas emissions based on agreed methodologies and best practice. The recent US$24 billion climate package by the Arab Coordination Group launched at the UN climate change conference COP27 (pictured opposite) has demonstrated the OPEC Fund’s ability to leverage its own commitments by joining forces with other development partners.
The MDBs are leading the effort to provide climate financing. According to the latest joint report (see page 33), published in October 2022, international financial institutions provided US$51 billion in climate finance to low- and middle-income economies last year, while mobilizing US$40 billion private sector funding globally. This exceeded the 2025 climate finance goals.
However, compared with global needs this was merely the proverbial drop in the ocean. The IEA estimates that US$4.2 trillion are needed in global investment by 2030 to achieve the 1.5°C Paris climate target. No less than US$3 trillion would have to come from the private sector, “mobilized by public policies that create incentives, set appropriate regulatory frameworks and send market signals,” the IEA says.
So far, this is not sufficiently happening. This means that we have to revisit our approach. The successful proliferation of solar photovoltaic power can serve as an example: The combination of prudent regulatory reforms and technological advances turned solar into a highly competitive source of energy. The OPEC Fund supported, for example, the Kom Ombo solar plant in Egypt and the “Seven Sisters” project in Jordan.
Both projects demonstrate that if the right incentives are in place and provide investors with sufficient confidence that their investments will generate a satisfactory return, the private sector can be mobilized. Given the enormous needs, climate investments are a rapidly growing global market and a huge potential business opportunity, as OPEC Fund Assistant Director-General Financial Operations Tarek Sherlala says: “If we look into climate financing in 15 years and it becomes mainstream and profitable, the private sector will take it.”
The multilateral development banks can also deepen their impact by moving beyond debt financing. Private investors seek risk-sharing facilities, guarantees and blended finance. MDBs are key players in facilitating international trade in green technologies and services. The IMF, in a recent paper, also advocates the introduction of carbon pricing to ensure well-functioning markets and prices.
Transforming its climate ambitions into reality the OPEC Fund launched a Climate Finance and Energy Innovation Hub together with the United Nations Capital Development Fund and SEforALL at COP27 (pictured right). It will be a global platform to provide support on the delivery of Sustainable Development Goal 7, “clean and affordable energy”, in developing countries. The goal is to leverage each US$1 of sovereign finance to attract US$4 of green and sustainable capital from public and private sector investors for projects.
The OPEC Fund has earmarked US$100 million for concrete projects and a first clean cooking pilot is about to be launched in Madagascar. When the Director-General visits Antananarivo the next time, he should indeed be able to wake up to the smell of coffee.
International private investment in the SDGs
The United Nations Sustainable Development Group estimates an additional US$2.5 trillion per year will be needed for developing countries to achieve the SDGs. Though the COVID-19 pandemic had affected global levels of foreign direct investment, international investment in SDG-relevant sectors in developing countries increased substantially in 2021, by 70 percent, according to the United Nations Conference on Trade and Development World Investment Report 2022. Renewable energy accounted for much of that growth. Throughout this article we highlight the disparity between pre- and post-pandemic levels in international private investment across six SDG-relevant sectors.