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How Can We Pay for Green Growth? New Report Provides Answers

In a little more than one generation—by the time your grade-schoolers will be seeing their own kids off to school—our planet will be home to 9 billion people. This will create an unprecedented demand for water, food, and energy--and stress the supporting infrastructure required for life in the 21st century. How are we to meet this demand while respecting planetary boundaries? And importantly, how will we pay for it?

A recent publication by the Green Growth Action Alliance (G2A2), aims to provide some answers. WRI and others provided guidance, case studies, research, and data to the publication, The Green Investment Report: The ways and means to unlock private finance for green growth. The findings were discussed widely at the recent World Economic Forum meeting in Davos.

Under current OECD growth projections, the world will need to invest $5 trillion annually until 2020 in the water, agriculture, telecommunications, power, transport, buildings, industrial, and forestry sectors. However, solely delivering this investment to maintain “business-as-usual” economic growth will not lead the world onto a sustainable growth path. We need to find ways to “green” our growth to cope with resource scarcity and alleviate risks from climate change and environmental degradation. Greening this investment will require a mix of appropriate policies and capital. The lion’s share will need to come from the private sector, given the scale required.

The “Green Investment Report” estimates that an additional $700 billion will be needed annually to green the business-as-usual investment in the global economy. This is a large sum, but relatively insignificant compared to the cost of inaction as negative environmental impacts increasingly take their economic toll.

The Right Policies Can Aid this Investment

Private sector investments are hugely important, but to a large extent, they rely on the reform of policies and incentives to provide the right signals to investors. For a start, fossil-fuel subsidies—which globally cost an estimated $775 billion in 2012 and dwarf subsidies to renewable energy—need to be phased out to level the energy playing field and drive innovation. Carbon pricing on a global scale would also go a long way in creating an investment environment that supports renewable energy development. Other policies to incentivize green investment include transparent and predictable pricing regimes for renewable energy, as well as policies that encourage energy efficiency in all sectors of the economy, from housing to commercial buildings to industry to transport. Finally, governments need to get smarter about how they use limited public resources to achieve their green investment objectives.

The public sector has the ability to attract private investment by improving the risk-reward profile of green investments. A variety of instruments is available to do this – the Green Investment Report discusses some, as does WRI’s working paper, Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Capital. Essentially, with the judicious use of financial and other support, the public sector could leverage a large amount of private finance—leverage ratios of five times or more are not uncommon. At Davos, Mexico’s former president, Felipe Calderon, said that by demonstrating the huge potential for leverage, the report gave a “can do” tone to what is often seen as a discouraging topic.

The report also contains a number of case studies demonstrating that innovative solutions are already at hand to move us to greener investment pathways. They also all point to the crucial role that governments and public policy must play to unlock commercial finance. Two important strategies already being employed include governments providing targeted support—particularly in the early stages of a new technology or business model—and establishing “investment-grade” policy frameworks to attract private investment.

The Costs of Inaction

We’re already getting a taste of what will happen if investments follow a business-as-usual path and climate change continues unabated. Last year was the hottest year on record in the United States; Australia suffered massive heat waves and wildfires; and China and India are facing extreme cold spells. Hurricane Sandy alone caused tens of billions of dollars worth of damages across the east coast of the United States. Events and figures like these demonstrate that while returns on green investments require upfront costs, efforts, and co-ordination, they are infinitely preferable to the bill that inaction would ring up.

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