Infrastructure investments closely linked to climate change

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By Éloïse Dulac – Consultant

The New Silk Roads project led by China—known as the “Belt and Road Initiative” in English—is raising numerous concerns about its environmental impact [1]. In September, a report titled “Decarbonizing the Belt and Road” was published by three organizations on this topic: the Center for Finance and Development at Tsinghua University, Vivid Economics, and the ClimateWorks Foundation [2]. The report’s objective is to link the project's investments to the emissions trajectories of member countries that could result from them.

To do so, the study’s authors used estimates of planned investments in 17 member countries of the initiative to model the spillover effect of these investments on the countries’ GDP trajectories through 2050. Based on this GDP trajectory, various scenarios for energy demand and emissions are derived. The results show that For eight countries where investment is significant and emissions are high, the project could have a significant impact on the country’s emissions trajectory. In a second step, various measures are analyzed to reduce emissions in each country.

This report provides an opportunity to to highlight just how critical infrastructure investments are in the context of climate change. Because of their long operational lifespan, infrastructure is closely linked to climate change in two ways:

• The Phenomenon of Onboard Emissions, or “locked-in emissions”: a piece of infrastructure generates greenhouse gas emissions over a long period of time as a result of its operation;
• The infrastructure will be increasingly exposed to the consequences—sometimes extreme—of climate change : For example, a road built today along the coast could be at risk from rising sea levels.

Aware of these issues and with expertise in this area, Carbone 4 has published a study [3] outlining the challenges related to infrastructure and has created theInitiative 2: Infra Challenge with a twofold objective for infrastructure managers:

• Measure the alignment of their asset portfolio with a 2°C pathway;
• Measure their exposure to physical and transition risks related to climate change.

This initiative, developed in partnership with sponsors—including major corporations and financial institutions—has a scientific advisory board to ensure the robustness and rigor of its work. To measure alignment with a 2°C pathway, the 2 Infra Challenge initiative offers two methods: a financial approach based on order of magnitude, and a more precise physical approach that takes into account the asset’s specific operational data. For a given investment portfolio, the carbon performance of each infrastructure asset is assessed and compared to a 2°C scenario. By aggregating all these performance comparisons, the portfolio’s alignment is determined. The 2 Infra Challenge initiative thus makes it possible to determine the appropriate allocation of infrastructure types to be financed, in order to ensure alignment. Transportation infrastructure is among the most affected: roads, rail lines, ports, and airports… all of which generate emissions from their operations for decades (unless their emissions eventually become unbearable, which could lead to restrictions on their use and thus their value) and all of them will be exposed to the physical risks of climate change. Some infrastructure can claim to contribute to reducing emissions, while other infrastructure will inevitably have to evolve to be compatible with an energy transition that breaks with the past. How can we make the right investment and design choices today to reduce, from an investor’s perspective, exposure to both transition risks and physical risks? That is the exciting challenge at the heart of the 2 Infra Challenge initiative.

Article written by Éloïse Dulac – Consultant

Sources: [1] Novethic [2] Decarbonizing the Belt and Road Initiative: A Green Finance Roadmap [3] Carbon 4