Potential shortfall of US$51billion in global climate change funding by 2016
- Government austerity measures in last 12 months increase “worst case” scenario funding gap, up from US$45b
- “Business as usual” model creates US$23.7b funding gap over next five years – up 5% on 2011
- Government support, in the form of guaranteeing risk, needed if private finance to close the gap
- COP18 summit must deliver solid 2020 roadmap to secure private sector support
Paris, 26 November 2012: The fallout from any Eurozone break-up could potentially create a US$51b gap in climate change funding by 2016 according to a study released today by EY. The Bridging the gap report, based on the analysis of environmental spending in relation to climate change across 10 major economies during 2011, extrapolates public sector spending levels to forecast the impact of current austerity measures over the next five years.
When compared to 2010, environmental spending in relation to climate change in 2011, as a percentage share of total government expenditure, was down in six countries (Germany, Spain, Italy, Japan, Australia and South Korea), virtually unchanged in France, and up in three countries (UK, US and South Africa). The changes were typically marginal, with the largest differences occurring in Germany (-0.19%) and Australia (-0.12%) cancelling out any increases in share of expenditure within larger economies, such as the US.
“Business as usual” scenario erodes funding levels
A “business as usual” scenario among the 10 economies in the study forecasts that under current austerity measures, a cumulative funding gap of US$23.7b could develop over the next five years – up from US$22.5b – predicted by EY in 2011. By tracking government spending according to historic rates (1990-2010), the indications are of a significant deficit emerging from constrained government spending, as the result of a need to reduce borrowing.
This climate change funding gap is set to be most pronounced in Spain, the UK and Italy. Spain is forecast to reduce its sustainability spending by US$4.1b (0.73%) by 2016, relative to an average historical rate, with the UK spending US$5.0b (0.41%) less, and Italy US$3.0b (0.31%) less. Germany may be the only country within the study to record faster growth in government spending through the use of fiscal policy in the medium term to re-inflate the economy.
Any Eurozone breakup doubles potential shortfall versus “business as usual” scenario
The study also calculated the funding gap under a “worst case” scenario in which multiple countries exit from the Eurozone and multiple sovereign defaults trigger a renewed credit crunch in Europe, with activity depressed around the world as a result of trade and financial linkages. Under this outcome, the cumulative funding gap widens to a total of US$51.0b in aggregate. In this scenario, the US would face the biggest climate change funding gap in absolute terms of US$9.9b; with Germany, France and the UK facing a gap of more than US$7.0b.
Juan Costa Climent, EY Global Climate Change and Sustainability Services Leader comments, “These figures suggest that continued austerity pressures globally have squeezed sustainability spending. The growing potential gap highlights the need for a mechanism that allows increased private finance to help address the issue.”
“If a Eurozone break-up materializes, the potential shortfall in funding will exceed US$50b for the first time and this figure should act as a warning. Governments must take action to safeguard against reaching the point of no return, where it is no longer possible to bridge the gap between the climate change funding available and the funding required.”
COP18 must deliver solid 2020 roadmap to secure private sector support
Juan Costa Climent continues, “The funding gap is becoming an additional challenge to the international negotiations for the forthcoming COP18 summit. As the political and business communities turn their attentions to Doha, a number of decisions will certainly be watched closely by the private sector; especially around the Clean Development Mechanism, the Green Climate Fund and the extension of the Kyoto Protocol. These potential funding gap figures reinforce the importance of decisive action now, if plans for a low carbon economy and achieving temperature rise targets are to become a reality.”
COP18 is not expected to provide a major breakthrough, but realistic negotiations on limited goals which are achievable can be hoped for. With a US$100b target agreed for climate change finance set for 2020, developing countries are concerned by the gap between the end of the fast-start finance commitment period in 2012 and the 2020 goal.
Juan Costa Climent summarizes, “Now is a critical time for the private sector to take a leading role in the foundation of a sustainable future. Governments can utilize businesses to harness their knowledge of risk analysis and mitigation, and their skills in leveraging and distributing finance, to help frame a more effective and wide-ranging global agreement going forward.
“With the potential gap in climate change funding showing no signs of slowing, the time for action to ensure we minimize the impact of a climate constrained world for future generations is now and COP18 can play a pivotal role.”
To download the Bridging the gap report, visit:
Notes to Editors
The study of governments’ spending on climate change was commissioned from Oxford Economics and included Germany, France, UK, Spain, Italy, Japan, US, Australia, South Africa and South Korea. These countries were chosen primarily based on the availability of comparable data. It calculates the level of climate change-related government spending across these 10 major economies and assesses the extent to which expected future austerity in the public sector could impact upon climate change investment. This includes all spending on pollution abatement and certain aspects of environmental protection, renewable energy, clean technology and environmental tax credits and subsidies.
About EY's Climate Change and Sustainability Services
EY helps clients navigate their climate change and sustainability journey — from understanding business and regulatory threats and opportunities, delivering strategy, exploring commercial transactions, monitoring performance and adding rigor to public disclosures on progress. EY has a global network of professionals who work in the area of climate change and sustainability issues, across assurance, tax, transactions and advisory. This team of professionals, with qualifications across accounting, law, science, social science, engineering and business, have provided climate change and sustainability services since the early nineties across industry, government and professional services sectors.