Investments in ‘clean’ technologies are still grossly insufficient to curb the effects of climate change, and the energy mix in fast-growing East Asia is not getting cleaner, says Aldo Baietti, World Bank Lead Infrastructure Specialist and main author of a new report “A Public-Private Partnership Approach to Climate Finance.”
He proposes a simple approach that will help re-think how green projects are funded – bringing climate finance closer to a framework more typical for infrastructure projects – to make them viable and more attractive compared to ‘dirty’ alternatives.
Why aren’t more investments going into clean technologies?
Clean projects are still often more expensive and riskier than polluting projects. As a result, they have special financing needs, particularly to manage upfront costs and the high risks associated with these technologies. The second part of the problem is that because they are more expensive, a government that wants to promote green energy would see a trend of rising energy costs.
This goes against a country’s basic interest to stay competitive, because energy costs affect everything. In the East Asia and Pacific region, most economies are geared towards promoting exports, and some countries actually subsidize fossil fuels to stay competitive. This is a fundamental conflict, and a big reason why green investments don’t go forward. In East Asia, we’ve seen many policies put in place to promote green investments, but this has not resulted in a cleaner energy mix for many countries.
What about improving energy efficiency? Isn’t this a priority for many developing countries?
Improving energy efficiency helps industries by making them more productive, so this is in line with the industry strategy of export competitiveness. Adding capacity in renewable energy is not.
Ultimately, new investments need to flow to low-emission projects rather than polluting alternatives to reduce the effects of climate change. That’s why it’s so important that clean technology projects are brought in at a much lower cost, to move more investments in this direction. Many developing countries don’t have large systems. If they don’t start doing more clean energy from the beginning, they haven’t solved anything.
How will your approach help promote more investments in clean technology projects?
These projects would never stand alone on private financing, and need some sort of public support. We began by re-evaluating how clean technology projects can be assessed, structured and financed to make investments viable and more attractive.
We take a clean technology project, such as wind or solar, and compare its financials to a low-cost, polluting alternative – typically, a coal project – and determine what we call the financial viability gap. This may include the added cost of capital, additional risk factors, etc. We say, simply, if we can get public, particularly international support to close that gap, the disincentive to move the renewable project forward would be eliminated.
The gap should be funded by different public sources. Governments must first rebalance any distortions that they may have created by subsidizing fossil fuels and should pay for that component of the gap. These subsidies disadvantage clean project even more. The rest can come from monetizable environmental benefits offered by the project. From a climate change perspective, the first are GHG global benefits, which industrialized and high emitting countries would need to pay but not necessarily under the auspices of a Kyoto Protocol-like structure. The second are local pollution benefits, which host governments would finance in filling the gap for their own projects.
By developing this sharing concept, we’ve created a rational, equitable, politically acceptable structure which lends itself to a hybrid public-private partnership (PPP) – with different components coming from both public and private funding sources in a complementary manner, and which allocate funding responsibilities and costs to those that actually receive the benefits.
We also call for a green investment climate assessment which goes beyond looking at green policies and incentives. This is very important. Our approach examines the existing PPP framework, the general business environment, and the natural resources that the country has both in fossil fuels and renewable energy, and its overall competitiveness strategy – which provides clues that explain why that country is doing certain things.
Finally, our approach looks to link itself to a robust regulatory framework of legal and enforceable contracts, procurement rules, and sanctions for non-performance in the given country, so that the financing for the environmental benefits can be made up front, when it’s needed.
How is this different from efforts in the past, such as the Clean Development Mechanism (CDM) created by the Kyoto Protocol?
From a climate change perspective, this is a very different approach. We are explicitly pricing and monitoring environmental benefits as a service obligation. Approaches such as CDM have provided this kind of public finance support, but have funded projects on an output performance basis, utilizing strictly carbon markets which have shown to be volatile. That approach doesn’t address how to get these projects financed in the first place nor make use of many other sources of public financial support, including the responsibility of governments.
Also, in terms of the regulatory framework, CDM operates under an international framework, and parties would have to rely on commercial contracts to resolve disputes, which can be expensive. Under our approach, the regulatory framework is country-based, and the onus is on the government to monitor these contracts like they do in PPPs. The idea of having a regulator that can ensure that the benefits are generated to those paying makes a big difference, because the money can also come up front.
What’s clever about this approach is that it has a way of breaking down the responsibilities in a rational and economically fair way. We’ve have had blended financing before, but it wasn’t necessarily done this way. Perhaps that’s why, governments sometimes don’t know how much to subsidize, or that they’ll subsidize projects that aren’t worthwhile. Not all green projects should be justified, as some are way too costly -- this approach gives you a quick way to tell you when green benefits are not sufficient or a project is not justified from a climate change perspective.
What needs to happen to move this forward?
We have profiled seven countries in East Asia, and identified actions that can be taken by each. We hope to implement a prototype fund in East Asia. This will give us more information on whether this approach is creating the incentives that we think it will, and accelerate investment in clean technologies.