CETFI proposes a 3x3 matrix of transformative models to accelerate climate finance.
As the world grapples with the intensifying climate crisis, the need for innovative approaches to finance climate solutions has become more urgent than ever. The scale of transformation required is immense, and traditional financial structures are proving inadequate in meeting the challenge. To address this, a 3x3x3 matrix approach—focusing on technology, risks, and finance across various asset classes and structures—offers a comprehensive strategy for scaling climate finance to the level necessary for meaningful impact.
This article explores how we can achieve a threefold transformation in climate finance by targeting specific segments, asset classes, and financial structures. The 3x3x3 matrix provides a framework for understanding how technology, risk management, and finance can be leveraged across different stages of development, from First-of-a-Kind (FOAK) commercial demonstrations to global institutional capital access.
Illustration: 3x Transformation Model to deliver new approaches to climate finance
Segments: Technology, Risks, Finance
# 1. Technology: The Driving Force Behind Climate Solutions
Technology is at the heart of the climate fight, enabling the transition to a low-carbon economy. However, many climate technologies remain nascent, requiring substantial investment to scale. According to the International Energy Agency (IEA), investment in clean energy technologies needs to triple by 2030 to achieve net-zero emissions by 2050. This equates to an annual investment of $4 trillion, a significant increase from the current $1.3 trillion.
A critical challenge is supporting First-of-a-Kind (FOAK) commercial demonstrations, which are essential for proving the viability of emerging technologies. These projects are inherently risky, often requiring substantial capital and a tolerance for potential failure. For instance, the Global CCS Institute estimates that a single carbon capture and storage (CCS) project can cost between $500 million and $1 billion. Despite these costs, FOAK projects are crucial for unlocking new technological pathways that can dramatically reduce emissions.
# 2. Risks: Mitigating Uncertainties to Unlock Capital
Climate-related investments are fraught with risks, from technological uncertainties to policy shifts. Addressing these risks is crucial for mobilising private capital at scale. One way to mitigate these risks is through technology insurance. For example, the African Risk Capacity (ARC) offers insurance products that provide coverage against climate-related disasters, helping to de-risk investments in vulnerable regions.
Technology insurance can also play a pivotal role in scaling FOAK projects. By providing coverage against operational failures or underperformance, these insurance products can make investors more willing to finance early-stage technologies. According to Marsh & McLennan, the global climate risk insurance market could reach $1 trillion by 2030, driven by growing demand for products that protect against climate-related risks.
# 3. Finance: Mobilising Resources for Climate Action
Finance is the lifeblood of climate action, and mobilising it at scale requires innovative approaches that go beyond traditional mechanisms. Concessionary finance, which offers below-market rates to support high-impact projects, is one such tool. The Green Climate Fund (GCF), for example, has committed over $10 billion in concessional finance to climate projects since its inception, targeting areas where commercial finance is either unavailable or insufficient.
However, the challenge remains in scaling these efforts to meet the trillions of dollars needed annually. The IEA estimates that investments in energy efficiency, renewable energy, and other climate solutions must increase to $4.4 trillion annually by 2030 to stay on track for net-zero goals. This highlights the need for more aggressive mobilisation of both public and private finance.
Asset Classes: FOAK Commercial Demonstration, Technology Insurance, Concessionary Finance
# 1. FOAK Commercial Demonstration: Proving the Viability of New Technologies
FOAK commercial demonstration projects are a critical asset class for driving technological innovation in the climate space. These projects provide the necessary proof of concept for new technologies, making them more attractive to investors. However, they are also high-risk and capital-intensive, often requiring significant financial backing.
For example, the U.S. Department of Energy's Loan Programs Office has provided over $35 billion in loans and loan guarantees for innovative energy projects, including several FOAK demonstrations. These investments have helped bring technologies like utility-scale solar power and advanced nuclear reactors to commercial viability, demonstrating the critical role of public finance in de-risking early-stage innovations.
# 2. Technology Insurance: De-Risking Investments to Encourage Adoption
Technology insurance is emerging as a vital tool for de-risking investments in climate technologies. By covering potential losses due to technological failure or underperformance, these insurance products can make it easier for investors to commit capital to emerging technologies.
For instance, the European Investment Bank (EIB) has developed insurance products that cover the performance risks of energy efficiency projects, helping to scale investments in this critical area. By mitigating risks, technology insurance can lower the cost of capital, making it easier to finance projects that might otherwise struggle to attract investment.
# 3. Concessionary Finance: Catalysing High-Impact Climate Projects
Concessionary finance is crucial for financing projects that are essential for climate action but are not yet commercially viable. These funds often come from development banks, climate funds, or philanthropic sources and are used to bridge the gap between what is financially viable and what is necessary for achieving climate goals.
One notable example is the GCF, which provides concessional finance to projects that can deliver significant climate benefits but require financial support to become viable. For instance, the GCF has funded projects to develop renewable energy infrastructure in small island developing states (SIDS), where the high cost of capital and small market size make traditional financing difficult to secure.
Structures: Making Technologies Affordable, Market-Maker, Access to Global Institutional Capital
# 1. Making Technologies Affordable: Scaling Impact through Cost Reduction
One of the key challenges in climate finance is making new technologies affordable for widespread adoption. This requires not only reducing the cost of technology but also ensuring that the necessary infrastructure and support systems are in place.
The Solar Energy Corporation of India (SECI) has played a significant role in making solar power affordable through its reverse auction mechanisms, which have driven down the cost of solar energy to below $0.03 per kilowatt-hour. This approach has helped India become one of the world's largest markets for solar power, demonstrating how innovative financial structures can make technologies more accessible.
# 2. Market-Maker: Creating Demand for Climate Technologies
Market-makers play a crucial role in creating demand for new technologies, often by aggregating demand or providing long-term purchase agreements. Power purchase agreements (PPAs) are a prime example of this, where a buyer agrees to purchase electricity from a renewable energy producer at a fixed price over a long-term period, providing the financial certainty needed to attract investment.
The Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) in South Africa is an excellent example of a market-making initiative. By aggregating demand and providing long-term PPAs, the REIPPPP has attracted over $14 billion in private investment in renewable energy, making it one of the most successful renewable energy procurement programs in the world.
# 3. Access to Global Institutional Capital: Tapping into Large-Scale Funding Sources
To scale climate finance to the required levels, it is essential to tap into global institutional capital. This includes pension funds, sovereign wealth funds, and other large-scale investors that control trillions of dollars in assets.
Green bonds have emerged as a powerful tool for attracting institutional capital to climate projects. The global green bond market has grown rapidly, reaching over $1 trillion in cumulative issuance by 2020. Major institutions, such as the World Bank and the European Central Bank, have issued green bonds to fund projects ranging from renewable energy to sustainable infrastructure, providing a model for how global capital can be mobilised for climate action.
Conclusion: The Path Forward
The 3x3x3 matrix approach offers a comprehensive framework for scaling climate finance to the level necessary for addressing the climate crisis. By focusing on technology, risks, and finance across different asset classes and financial structures, we can unlock the potential for transformative change.
However, achieving this transformation requires coordinated action from governments, financial institutions, and the private sector. Policymakers must create the enabling environments that encourage innovation and investment, while financial institutions must develop the products and services that de-risk investments and make climate technologies affordable and accessible.
Ultimately, by leveraging the 3x3x3 matrix, we can create a financial ecosystem that supports the rapid deployment of climate solutions at scale, driving the global transition to a low-carbon economy and ensuring a sustainable future for all.