W. STERK, H.-J. LUHMANN, F. MERSMANN| HOW MUCH IS 100 BILLION US DOLLARS 3. Financing Needs in Developing Countries 3.1 Definition of Financing Needs International climate finance needs to be underpinned by an understanding of the financing requirements of developing countries in order to be able to assess whether international climate finance is commensurate to needs. In estimating finance needs it is necessary to be very clear what one is talking about. In particular, the question of gross and net flows is often confused in discussions. Representatives of industrialised countries frequently point to the finding of the UNFCCC’s report on investment and financial flows according to which 86 per cent of all global investments and financial flows come from private sources(UNFCCC 2007). On this ba­sis, industrialised countries argue that most of the finan­cing needs can be met from private sources. However, there are various layers of financing needs which should not be confused with each other(Melle et al. 2011): n Total investment refers to the totality of initial funding needed to invest in an asset, for example a power plant. Globally, even under»business as usual«, hun­dreds of billions of dollars will need to be invested an­nually in energy infrastructure, for example to satisfy the rising energy demand in developing countries and replace outdated plants in industrialised countries. In their World Energy Outlook 2010, the Organisation for Economic Cooperation and Development(OECD) and the International Energy Agency(IEA) project that, even without increased mitigation actions, cumulative ener­gy-related investment of 33 trillion US dollars will be needed over the period 2010-2035(OECD/IEA 2010). n By contrast, incremental investment is the difference between the initial investment needed for a low­carbon asset and the initial investment needed for a conventional one: for example, the incremental in­vestment needed for building renewable energy in­stallations instead of an equivalent coal power plant. Incremental investments are hence only a fraction of total investments. n A further layer is the incremental cost. The initial in­vestment needed for renewable energy installations is usually higher than for conventional energy installa­tions but operating costs are usually lower, as most renewable energy installations incur no fuel costs. Similarly, the initial investment for energy efficient as­sets is usually higher than the investment needed for less efficient ones, but the higher efficiency leads to lower operating costs. Incremental costs of an asset are hence calculated as the net present value of all related cash flows over its lifetime(including invest­ments, operating costs/gains and sometimes also ca­pital costs). Incremental costs are usually lower than incremental investments in low-carbon assets due to lower operating costs. For many mitigation actions in­cremental costs are even negative as lifetime savings are higher than the incremental investment, especially in the case of efficiency improvements. Discussions of international climate finance are clearly pre­dicated on incremental investment and incremental cost, not total investment. Naturally, it is typically not govern­ments but private actors who finance investments for in­sulating houses or building wind parks. But it cannot be expected that private businesses will reduce their profit margin and simply absorb the costs caused by choosing a less GHG-intensive investment. In addition, even where incremental costs are negative the higher initial capital expenditure required for many low-carbon technologies constitutes a formidable investment barrier, in particular in developing countries with limited access to capital. Experi­ence from industrialised countries shows that, even where investments are in principle profitable, implementation is often difficult nevertheless. Industrialised countries dis­pose of gigatonnes of no-regret or even win-win poten­tial that would generate a net economic benefit, and yet have so far not been very successful in actually achieving their pledged emission reductions. Typically, a whole range of formidable financial, institutional, technical, in­formation and capacity barriers prevent implementation, such as limited awareness of options, split incentives(such as landlords unwilling to pay for efficiency measures that lower tenants’ energy bills but without any benefit to themselves, while tenants are unwilling to invest in im­provements that revert to the landlord on lease expiry), limited access to capital or small project sizes coupled with high transaction costs. Just as industrialised countries will have to significantly scale up policies and measures, inclu­ding public financial support to market actors to tap their own emission reduction potential, developing countries will require significant capacity building and financial sup­port for policies and measures to mobilise their potential. 7