Climate Investment Fund should be scaled up without Ministry of Finance as brake

On June 10 of this year, it adopted a broad political majority that the government should step up funding to Climate Investment Fund, a government investment fund for renewable energy in developing countries, managed by Norfund. Its purpose is to reduce or cut emissions.

Broad political agreement on climate action is unusual these days, but this proposal received the support of all parties except the Progress Party. Now the government must come back to Parliament with a plan for escalation in 2026-2030.

Unfortunately, this can also go wrong. As is often the case, “the devil is in the details.” If an increased investment in the Climate Investment Fund should have net positive effect, and to reach a level of investment that really hardens, an important obstacle must first be overcome: the Ministry of Finance's resistance to change.

Profitable climate investments

In many developing countries, a lack of capital stands in the way of investment in renewable energy and other socially beneficial projects. By providing venture capital, Norway can help trigger such investments — and at the same time make money. This is Norfund's model.

In 2021, the Solberg government proposed to give Norfund a separate mission to reduce and avoid emissions, through what became a Climate Investment Fund. The Støre government chose to support this.

In just three years after its launch in 2022, Norfund reports that the Climate Investment Fund's investments contribute annually to 17.6 million tonnes of CO2 in avoided emissions. This corresponds to 40 percent of all of Norway's annual emissions. At the same time, the fund has had an average return (internal rate) of 19 percent in Norwegian kroner. It shows that investments in climate cuts in the south can both be profitable and have a big effect.

But who pays?

The problem is who is footing the bill for this today. In practice, it is the world's poorest who finance the Climate Investment Fund's investments, although the results are in the interest of the whole world. 100 percent of all government transfers to Norfund, including the Climate Investment Fund, exceed the aid budget. In total, Norfund has received around NOK 32 billion since 1997, which could alternatively go to more targeted measures for the world's poor.

Today's practice is both unpatriotic and unreasonable, for the state's capital contribution into Norfund is neither expenditure nor aid, as we normally understand it. Even the conservative Ministry of Finance counts only 25 percent of transfers to Norfund as a expense on the state budget. The rest they lead as one capital placement, so-called transfers “below the line” (money they expect not to be lost, but which, on the contrary, should yield marketable returns).

To count investments with market-rate returns as aid is absurd. Moreover, for the Climate Investment Fund specifically, its purpose is a common good that benefits everyone in the world, without particularly high relevance for developing countries. Then there is reason to ask: Why should the poorest in the world pay anyway?

Three measures to get climate finance right

Scarce aid funds should go to poverty-directed aid and those in the world who have least, not to profitable investments in emissions cuts in India -- the world's fifth-largest economy. Current practices also stand in the way of the increase in funding that we believe the Climate Investment Fund deserves — from the current two billion a year to 10-15 billion or more.

In a Long-Term Note on Norfund we describe how the Storting's decision on the Climate Investment Fund should be followed up. Here are a minimum of three moves that the government should take in the state budget this autumn:

1. Stop running your investments as an expense. The Climate Investment Fund invests on market terms, together with private investors, with an expected return commensurate with the risk. Therefore, 100 percent of government transfers should have been “below the line”, not just 75 percent as at present.
2. Stop counting capital investments as aid. Only expenses should be counted as aid. This is also what the Solberg government proposed for the Climate Investment Fund in 2021, before the Støre government very surprisingly changed it. Now they should turn again.
3. Allow Norfund to use retained profits as risk capital. To date, Norfund has received NOK 32 billion from the state budget, of which 8 billion has been set aside to cover losses. But the truth is that Norfund has not lost money - on the contrary, it has had an accumulated surplus of 19 billion until now. Overall, that means a risk capital today equivalent to 115 percent of the state's basic fund capital -- the money the state expects to be able to recoup. That's more than enough. There should therefore be no need for new loss provisions every year.

Norfund itself believes that the Climate Investment Fund can be scaled up significantly and quickly if politicians wish, but currently only NOK 2 billion is provided per year.

What stands in the way of an upscaling that monner, and done right? Yes, a Ministry of Finance that insists that all climate action is expenditure, even when in reality they are profitable investments. Their risk aversion is here a direct impediment to the success of the green shift. That is a risk in itself, and something no one is profited from.

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