The world needs to spend a massive US$5 trillion a year on infrastructure to keep up with transport, energy and water needs, says a coalition of institutions including the OECD and World Bank.
That’s equivalent to the combined GDPs of the France and the UK, each and every year.
But finding the cash isn’t the only challenge, warn the authors of the report Green Investment, who are set to present their findings at the World Economic Forum meeting in Davos this week, the world`s largest annual jamboree for business and politicians.
If the world is to avoid a dangerous rise in temperatures of 4oC or more in coming decades, much of the investment must be low-carbon and resource-light, says the Green Growth Action Alliance, which also includes Bloomberg New Energy Finance, the Climate Policy Initiative and the World Economic Forum.
China and other developing nations need to be part of this shift from brown to green investment for the numbers to add up, explains the report, which was published today. The World Resources Institute estimates that China and India alone account for 76% of the 1,199 new coal-fired power plants currently proposed globally.
Green investment costs more, at least in the short term. The Alliance`s report puts the extra cost, globally, at US$700 billion a year, with almost half of that needed to cover the added costs of buildings and industrial efficiency measures, and another 20% to green the estimated US$15 trillion investment in energy generation needed by 2020.
These incremental costs are insignificant compared to the damage to economies, communities and nations of unrestrained climate change, or rising and volatile commodity prices, especially food. However, someone still needs to put up the extra money. So where will it come from?
Mobilising the private sector
Global investment in renewable energy has risen six-fold since 2004. But the numbers remain far too small. Moreover, future renewable investments are threatened by government cut-backs. Germany, the UK and Spain have reduced solar PV subsidies. Wind installations in the US are falling, in part due to the expiry of a key incentive scheme, the federal Production Tax Credit. And India and China are also phasing out tax incentives for wind power, though support for solar remains strong.
Active government support is crucial to scaling up green investment as long as the lack of a strong carbon price and fossil fuel subsidies continue to make green uneconomic for many private investors.
The good news is there is growing experience in mobilising private capital through the use of relatively small amounts of public finance. Equity and debt financing by public institutions, especially development banks, has been a crucial catalyst of private investment, as have feed-in tariffs – a guaranteed price for clean energy from small-scale producers – and other means of incentivising renewables investment and pollution clean-up.
Growing importance of developing countries in clean-tech
Major developing economies are a growing source of finance for green investment, despite, or perhaps because of, the failure to secure an adequate global deal on climate finance. Domestic clean energy financing within non-OECD (developing) countries has exceeded that of OECD (developed) countries each year since 2008, according to Bloomberg New Energy Finance. Total clean-tech investment originating from non-OECD countries for both domestic and international schemes grew from US$4.5 billion in 2004 to US$68 billion in 2011, according to the Climate Policy Initiative.
What’s more, judging by recent growth rates, the figure for 2012 may actually exceed the investment originating in developed countries that year.
However, that isn’t the end of the story. The Green Investment report highlights two further points worthy of attention. First, today`s trade rules and the basis on which international development institutions stump up cash are at best insensitive to, and more often actively block, potential economic development gains from green investment supported by tax dollars. This is a crucial issue for all developing countries, not only major potential exporters such as China, but smaller developing nations in Africa and elsewhere keen to secure economic benefits from their willingness to go green.
China`s attempt to gain from public financing of solar-panel manufacturing through lucrative exports, for example, has attracted accusations of unfair subsidies at the World Trade Organization. It’s not just China. South Africa`s attempts to link its willingness to pay more for renewable energy to local manufacturing conditions has met with resistance, often from the very international development banks mandated to support green economic transitions across the developing world.
While a free-for-all in subsidising exports clearly has to be avoided, there is now an urgent need to validate and encourage green-growth transitions through international trade rules and available development finance.
Second, while it’s reasonable to use public money to incentivise long-term private investors to go green, financial markets need to be more robustly diverted from their endemic short-termism. By not pricing in climate risk, British economist Nicholas Stern points out that investors are in effect betting on, indeed encouraging, an unsustainable increase in global temperatures.
Developing countries with maturing capital markets have a chance to leapfrog more advanced competitors by gearing their finance industries for more active investment in tomorrow`s carbon-light economy.
This is especially relevant to China, which is at a critical moment in the development of its financial services sector. Recent signals by the China Banking Regulatory Commission, which launched its
Green Credit Guidelines in 2012 are encouraging. But much more can and needs to be done to shape an appropriate regulatory environment and investment culture that ensures that domestic green investment advances more quickly, and that China becomes a major player in financing green investment internationally.
Simon Zadek is currently visiting scholar at Tsinghua School of Economics and Management, and contributed to the preparation of the Green Investment Report. He is also a Senior Fellow of the Global Green Growth Institute and the International Institute for Sustainable Development, and can be reached at [email protected] and followed at www.zadek.net. 
