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2023 Mar/13
Challenges for Climate Finance towards Carbon Neutrality
Issue Papers 23-08
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- Research Topic Financial Services Industry
- Page 23
- Summary
- This report explores strategies for developing climate finance to achieve carbon neutrality. Even the most effective policies cannot inspire confidence and concrete actions without adequate financial support. Several international organizations estimate that the additional demand for climate finance will increase by $2 trillion to $5 trillion annually, potentially multiplying two to six times by 2050. Korea's projected demand for climate finance is expected to reach KRW 62 trillion annually and KRW 1,848 trillion cumulatively by 2050, potentially resulting in a significant shortage in this field.
International organizations predict that approximately 70% of total climate finance will come from the private sector. They also advocate for improvements in addressing certain structural factors contributing to market failures, including externalities in greenhouse gas emissions, maturity mismatches due to the long-term nature of climate investments, information asymmetry, and the resulting valuation challenges. To address these challenges, the most crucial step is the further development of blended finance. Blended finance entails the collaboration of the public and private sectors in sharing governance, returns, and investment risks, aiming to attract substantial liquidity from the private sector. This is suitable for climate finance that is characterized by externality, maturity mismatches, and information asymmetry. This is suitable for climate finance that is characterized by externality, maturity mismatches, and information asymmetry.
There is a need to reshape the current emissions trading market. The emissions trading market determines carbon prices, the core piece of information in assessing economic feasibility of climate investment. Balanced development between the carbon trading market and the voluntary carbon market (VCM) is essential, as it has the potential to enhance liquidity and improve price discovery efficiency. Lowering the emissions cap in line with nationally determined contributions (NDCs) appears necessary. The resulting market imbalance can be alleviated through measures such as redesigning market stabilization mechanisms, expanding participant diversity, and embracing carbon credit futures. Furthermore, increased transparency in the VCM could enhance the ecosystem within the emissions trading market.
Finally, it is advisable to mandate emissions disclosure to bridge the regulatory gap between Korea and developed countries. The mandated disclosure should encompass scope 3 emissions and expand the role of financial institutions responsible for managing emissions financed on the path to carbon neutrality.