Thursday, 12 April 2012

It’s the financing, stupid

An often-overlooked aspect of the transformation towards a greener economy is the financial side of the story. New financial innovations could prove to become vital tools. 

by Peter Bjerregaard 

The main headlines in climate finance are usually cap-and-trade systems or programmes aimed at reducing deforestation, but a new trend is gaining traction: Climate bonds. Just like ordinary bonds, the idea is to raise capital from investors who benefit from guaranteed – though modest – rates of return. Meanwhile, companies or governments can invest in green infrastructure.

Similar to government bonds issued during the 20th century to fund World War II efforts, climate bonds fund the move towards more energy efficient technologies.

Presently, the major investors on the bond market, such as insurance, pension and superannuation funds, are heavily invested in the fossil fuel economy (oil wells, coal-fired power plants, pipelines etc.), but as growing uncertainty and rising carbon taxes make these investments increasingly riskier, the funds seek new investment opportunities.

Companies like Climate Change Capital and the Climate Bonds Initiative that have specialised in green investment and climate bonds, illustrate this trend. However, until the bond markets are heavily involved, at the scale of trillions of dollars, the transition cannot be said to be seriously under way.

Currently, one of the most significant, and perhaps also surprising, issues of the transition to a sustainable economy is the subsidies given to fossil fuels.

In 2008, governments subsidised fossil fuels with more than half a trillion dollars (equivalent to the total GDP of Sweden), which made them artificially inexpensive compared to renewable energy sources.

According to the International Energy Agency, 37 governments spent $409bn on lowering the costs of fossil fuels in 2010 – significantly more than the $66bn renewable energy sources received in subsidies. 

A new partnership model for financing

The new shift towards green investments has also given rise to new models of collaboration between private businesses and investment funds. A precedent for these kinds of partnerships can be found in Denmark, where the Danish energy company, Dong Energy, has started to engage with both private companies and investment funds in financing the construction of new offshore wind farms.

The model is based on the participation of investment funds, pension funds and private companies as co-investors. PensionDanmark, a Danish pension fund, recently decided to invest in two new offshore wind farms, which will supply 540,000 households with electricity in 2015 – and generate a stabile rate of return for their customers.

Previous offshore wind investments have experienced 3-6 % in rate of return but these investments are only the first of their kind. As CEO Søren Thorup Sørensen from the investment company Kirkbi (that also owns LEGO) said last month after having invested in an offshore wind farm in Germany: “This is the first time we invest in infrastructure, and it’s a big investment. And now we will see how it all goes”.

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