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France has made ambitious commitments in connection with the reduction of greenhouse gas emissions. The French finance ministry predicts short-term investment needs till the year 2020 of between 40 to 60 billion euros annually. However, in its present form, the climate finance regulation in France depicts rather a brake for investments on account of the regulatory rules provided. The determination of a significant CO2-price could accelerate the redirection of private finance in the direction of low CO2 investments.

The General Electric offshore wind turbine plant in Montoir-de-Bretagne, near Saint-Nazaire, in western France.© Stephane Mahe, Reuters

The role of private financing for climate protection

In the 2015 “Energy transition for green growth” Act, there is a provision for reducing the emission of greenhouse gases in France by 75 percent (default value from 1990). During the COP 22 in Marrakesh the French President tightened this ambitious goal further, as he announced the same time-frame of emission neutrality for France. The challenge is enormous and requires a massive redirection of investment and of the corresponding finances towards solutions without carbon in order to produce energy, ensure traffic mobility and provide accommodation and nourishment.

The French finance ministry predicts short-term investment needs till the year 2020 of between 40 to 60 billion euros annually. This funding framework corresponds to between 10 and 15% of total investment in France. In its 2015 panorama of climate financing, the Think Tank 14CE (Caisse des Depots and AFD) mentions an estimated annual volume of 32 billion euros for France; 12.8 billion for energy efficiency, 6.5 billion for renewable energies (EE), 10.6 billion for the construction and modernization of sustainable transport and network infrastructure as well as 2.1 billion for the rehabilitation of nuclear power plants (KKW) and the war against other greenhouse gases (THG). 40% of this finance is provided by the state, the business enterprises and households bear another 30% each.

If France wants to fulfill the assumed commitments, it would have to invest around 15 billion euros more annually till 2020 (around 10 billion alone would be for the energy efficient rehabilitation of buildings). The additional need for finance is however quite modest and above all it involves redirecting private investments: less for fossil fuel energy sources and energy production capacities and more for renewable energies and energy efficiency. Also if private finances do not flow in spontaneously, then it is of course to be positively noted that private finances today are available to excess. For each publicly invested euro it can be reckoned with there is a maximum leverage for private financing. A challenge exists for the public sector to create the conditions for finance intermediation to redirect private investments by guaranteeing an adequate return.

The financial sector, so far rather indifferent to climate issues, has approached the topic step by step with an increasing attention span starting from risk perspectives. Of the three risks, which Mark Carney differentiates (physical risk, transition risk, legal risk), the risk of the transition from the carbon world to a carbon-free world and the consequent world of stranded assets, is probably the main flash point of interest for the finance community about climate change.

The transition risk is especially critical for the enterprises which produce fossil fuel sources, as in case of the 2°C scenario 80% of the coal, crude oil and natural gas reserves have to remain under the earth, their share market value however is partly determined by the size of the confirmed reserves. On account of the influence of coal and crude oil companies on the financial parameters, the argument of “carbon bubble” wins credibility with long-term investors and regulatory bodies.

Banks, insurance companies and investors have assumed considerable obligations in 2015 and 2016 within the scope of the Montreal Carbon Pledge, to reduce their CO2 footprint by disinvestment in the coal sector. Recently 500 enterprises, which in total manage over 3000 trillion US dollars, have taken a similar decision. Thereby the climate financing has found a permanent place on the agenda of international economic and financing governance.

Transparency and Regulation of the Finance System

In France investors must consider environmental aspects in their investment policy according to Article 173 of the statute about energy transition for green growth and especially the issues connected with climate risks and be accountable for it. Although the relevant risk assessment methods have not yet been stipulated, the protagonists of the private sector have shown themselves to be extremely innovative considering the publication of this new type of strategic data. At end of October 2016, the Department of the Environment has offered a prize “for the best reporting”. This French standard should serve as guideline for international rules and standards.

Apart from the risk transparency, the handling of the institutional investors with the finances, the usage of benchmark indices as well as the institutional and regulatory environment of the financial system have to be aligned with the time horizon of climate challenge. However, in its present form, this financial regulation depicts rather a brake for investments on account of the regulatory rules provided. Therefore some protagonists plead for it to include the environmental risk in the upcoming discussions about the future regulatory standards.

Green Bonds

The green financing business of banks remains marginal, green bonds provide 1% of the total bond market. Analogous to it, only 1% of the assets of institutional investors are invested in green and sustainable infrastructures. What makes the situation more difficult is the definition problem of the selection criteria for projects, to have entitlement to green bond financing: nuclear energy projects, natural gas installations, coal power plants’ rehabilitation? The definition of the criteria was till now left to the private sector, on whose initiative the “green bonds principles” (2016) are based. The strong impulse triggered by the issue of the first green state bonds by France in January 2017 (amounting to 7 billion euros) will make a contribution to structure this market.

In order to accelerate the growth of the green finance sector, the German journal “Stern” – (Stiglitz Report (2017), defining a corridor of benchmarks for climate measures - recommends to integrate such marks into the financing instruments. If the value of the CO2 emissions that were avoided with the help of green-financed investments is offset and guaranteed by the state sector, the risk of these investments is reduced and through it the financing costs will be more favorable.


The determination of a significant CO2-price could accelerate the redirection of private finance in the direction of low CO2 investments. France pleaded in 2016 in the EU for a vigorous reform of the emission business. With the help of a price corridor the market price signal should be adequately strengthened in order to trigger low CO2 investments in the industry.

At the national level in the energy transition law of 2015, France has established an ambitious development of CO2-tax, which shall increase from € 30.5/t in 2017 to € 56/t in 2020 and to € 100/t in 2030. The CO2 tax mainly concerns diffuse C02-emissions in the private transport and residential sector. This long-term development must now be set on a credible basis, so that households and business enterprises can invest with corresponding confidence in the stability of the price development.

Give Long-term investments a social value

Transparency of environmental risks, reporting of the 2° portfolios, new approaches to the finance regulation, clear definition of the green investments, CO2 pricing and the finance-engineering are necessary elements in order to align the financial system in a novel manner. All these elements are necessary in order to divert long-term investments for a battle against climate change. Thereby they shall obtain social benefits. This means that private finances are to be steered in harmony with the big public investment projects more or less directly in the direction of carbon-free projects. Without involvement of the public force during the clarification of the course direction and the values to be achieved, any further investments from on behalf of the central banks or new investment incentives will not have long-term growth supporting impact.

About the author: Baptiste Perrissin Fabert is a specialist in climate finance at France Stratégie.

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