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The Power of Green Public Finance

In addition to visionary leadership and a mobilization of businesses, citizens, and civil-society groups, confronting climate change will require massive investments. We cannot count on governments alone to put up the money; rather, we must use public finance to leverage the power of private capital.

LUXEMBOURG – Policymakers and pundits have been wringing their hands over the crises afflicting the European Union, arguing that it is falling behind in confronting major threats to its long-term survival. Yet on the issue of climate change, nothing could be further from the truth. In mid-November, EU member states demonstrated that they can unite behind a shared vision of a low-carbon future. And European institutions are already leading the fight against climate change at the global level. Among these, the European Investment Bank will now be playing an even greater role as an instrument for decarbonizing the economy and limiting global warming to well below 2°C above pre-industrial levels.

Climate change is the top political issue of our time. Scientists estimate that if we remain on our current path, we will experience global warming of 3-4°C by the end of the century, at which point large portions of the planet will be uninhabitable. Coupled with demographic growth, the impact on human welfare and migration flows would be catastrophic. Carbon emissions reached a record high in 2018, indicating that we urgently need to step up our response.

The transition to a low-carbon economy will not be possible without massive investment. But scarce public resources will not be nearly enough to fund them. Instead, we need to leverage public money to mobilize private capital. The new European Commission under President Ursula von der Leyen understands this. In pursuing a European Green Deal, von der Leyen has asked the EIB to become the financial engine of the low-carbon transition.

To that end, the EIB will use its financing to mobilize more than $1 trillion for investments in climate action and environmental sustainability over the next decade, while increasing the share of climate investment in its overall financing portfolio to 50% by 2025. At the end of 2020, its entire financing will be aligned with the goals of the 2015 Paris climate accord, and one year later its financing for projects relying solely on fossil fuels will end. Going forward, the bank will be committed to the most ambitious climate investment strategy of any public financial institution in the world.

Rather than simply following the financial markets, public financial institutions must lead them, by creating investment channels into the green technologies of the future – from floating wind farms and new forms of tidal-energy production to better batteries and more efficient buildings. Public banks must go to where private capital is still reluctant to go, as the EIB has already demonstrated in the offshore-wind sector.

Besides, there is a clear business rationale for prioritizing green finance.Investors and rating agencies are increasingly scrutinizing investment portfolios for potential “stranded assets,” such as oil and gas projects that will become obsolete as more renewable-energy technologies become commercially viable. Many existing fossil-fuel projects already have shorter life spans than was previously expected, and financial portfolios that rely heavily on such assets will increasingly be at risk of devaluation.

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With some governments abandoning previous commitments to reduce emissions, one might think that the global effort to tackle climate change is losing steam. But we should not underestimate the power of financial pressure to effect change, nor can we ignore the determination of local governments and the private sector to act where national government have not.

Nonetheless, to get and keep all governments on board, the low-carbon transition must be inclusive. While countries with over 90% of the EIB’s capital voted in favor of the new energy lending policy, some countries did vote against it. They have legitimate concerns about the economic implications for their constituents. We cannot ignore the position of countries that depend on fossil fuels like coal, and that see increased natural-gas production as a transition fuel. Rather, we must help them accelerate that transition, by ensuring that the process is just and fair. The EIB, for example, has agreed to extend the deadline (until the end of 2021) for its support of gas projects already under appraisal.

As we have seen in recent years, climate policies can be perfectly designed, but if they leave communities behind, they will invite a backlash and likely fail. Right now, at least ten EU member states face specific energy-investment challenges that cannot be ignored.

To help them find a way forward, the EIB will be working closely with the European Commission and the new “Just Transition Fund,” including advisory support.

A properly managed green transition will offer more than enough economic opportunities for everyone in the energy sector – from generation to transmission and distribution as well as storage. In addition, the need for low-carbon technologies for the mobility and energy-intensive industrial sectors will create more opportunities for innovative businesses.

New participants are entering the market, consumers are becoming more active, and civil-society organizations are mobilizing. By shaping markets and guiding private investment toward the sectors that will ensure a just and fair transition for everyone, the EIB looks forward to demonstrating how much can be achieved through the leverage of public finance.