Simon Zadek, currently Visiting Scholar at Tsinghua School of Economics and Management, is Senior Fellow of the Global Green Growth Institute and the International Institute for Sustainable Development.
Financing the Green Economy
21 January 2013
BEIJING – According to new estimates that will be presented at this year’s World Economic Forum meeting in Davos, $100 trillion is needed by 2030 to finance infrastructure needs worldwide. This investment needs to be greened – its design and use must rely on less carbon and fewer natural resources – if we are to avoid an unsustainable increase in global temperatures of four degrees Celsius or more in the coming decades.
At least in the short term, green investment costs more than business-as-usual investment – about $700 million a year worldwide, according to the G-20-inspired Green Growth Action Alliance, chaired by former Mexican President Felipe Calderón. Additional outlays of $140 billion annually are required just to green the estimated $15 trillion investment in energy generation needed by 2020.
These incremental costs are insignificant compared to the economic and other damage – including, for example, rising and volatile commodity and food prices – implied by unrestrained climate change. But someone still needs to put up the extra money.
Investment in clean energy has increased, with global spending on renewable energy rising six-fold since 2004. But the total remains far too small. While active government support remains crucial to advancing green investment at scale, widespread fiscal weakness is pulling in the opposite direction. Germany, the United Kingdom, and Spain, for example, have reduced their rates for solar photovoltaic feed-in tariffs, while the expiration of the United States’ federal production tax credit for renewable energy has undermined investment in wind installations there. The slowdown in long-term infrastructure investment is also an unintended consequence of tough new banking regulations adopted in the wake of the recent global financial crisis.
The good news is that there is growing experience in leveraging private investment with relatively small amounts of public finance. Equity and debt financing by public institutions, especially development banks, have been crucial catalysts of private investment, as have feed-in tariffs, green bonds, and publicly sponsored insurance schemes that cover political and currency risk.
Indeed, rough estimates suggest that each tax dollar can be leveraged with such instruments to yield 3-8 dollars in private investment. On that basis, the Green Growth Action Alliance calculates that public investment of $130 billion a year – again, an almost trivial sum, given low financing costs and the disastrous implications of inaction – would deliver enough private investment to close the incremental costs of going green.
More good news is that developing economies are a rapidly growing source of finance for green investment. Total clean-tech investment originating from non-OECD countries for both domestic and cross-border uses grew from $4.5 billion in 2004 to $68 billion in 2011. Based on recent growth rates in investment originating in non-OECD countries, such clean-energy financial flows may have surpassed those originating in the OECD in 2012.
Two things must change to translate this good news into the level of investment that we need. First, today’s trade rules and international development-finance institutions must stop blocking potential industrial and economic gains from green investment supported by tax revenues. This is a crucial issue for all countries – not only major potential exporters such as China, but also smaller countries in Africa and elsewhere that are seeking to benefit from their willingness to go green. A free-for-all in subsidizing exports must be avoided, but there is an urgent need to reform international trade and financing rules to validate and encourage green-growth transitions.
Second, financial markets need to take a longer view. As Nicholas Stern has pointed out, by not pricing in climate risk, investors are effectively betting on – indeed, encouraging – an unsustainable increase in global temperatures. Much can be done on this front, from including environmental risks in credit ratings to fuller disclosure of how investors price carbon and natural resources. But advanced countries’ financial sectors remain largely resistant to reform.
Developing countries with maturing capital markets thus have a chance to jump ahead by shaping those markets in a way that encourages greater investment in tomorrow’s low-carbon and resource-efficient global economy. Moves by Brazil and South Africa in this direction are promising, while China is on the verge of rapid financial-market development, which could make the difference.
Failure to green infrastructure investment will reduce economic growth, increase systemic risk, deepen inequality, and fuel social unrest. Today’s winning investors will eventually lose, but too late to change the course of history. Private investors need incentives to green their portfolios – and penalties for failing to do so.