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By Kim Da-ye
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| Dominic Waughray, head of environmental initiatives at World Economic Forum |
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| Michael Liebreich, chief executive officer of Bloomberg New Energy Finance |
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| Mark Halle, vice president of International Institute for Sustainable Development |
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| Vikram Widge, head of climate finance at International Finance Corporation |
Amid severe shortages of electricity and doubts over nuclear power, the need for energy efficiency and renewable energy is likely to emerge as a subject of public interest once again.
The Global Green Growth Institute (GGGI), an international organization promoting sustainable economic development, held a summit in Songdo, Incheon, in early June. The summit focused on the practical side of green growth including policy, innovations and finance.
In many countries, renewable energy sources are cheaper solutions than fossil fuel options, but investment from both the public and private sectors is far from adequate.
The Korea Times' Business Focus interviewed the world's leading experts about the financial barriers facing green industries in an attempt to draw more investments, especially from the private sector. The interviewees are: Bloomberg New Energy Finance Chief Executive Officer Michael Liebreich; Dominic Waughray, head of environmental initiatives at World Economic Forum; Vikram Widge, head of climate finance and policy at International Finance Corporation and Mark Halle, vice president of the International Institute for Sustainable Development.
The experts suggested that public money should be used as leverage to make investments less risky for the private sector and attract more private money. Furthermore, subsidies for fossil fuel should be removed so that renewables can compete in the same market..
The interviews were conducted individually and compiled. The questions and answers were edited.
Q: How would you assess the current state of financing for green growth?
A Dominic Waughray: The current state of financing for green growth is actually reasonably vibrant over the last decade. Over $210 billion was invested into clean energy from private sources last year. Although this is 11 percent down from 2011, it's still a huge increase over the last decade.
Interestingly, if you look at the flow of financing from South to South in green investment, it increased quite dramatically — it's up 47 percent every year over the last decade. Last year was the first time when more financing in green investment flew from South to South than from North to South. In the U.S., less investments may have to do with shale gas, while in Europe, the financial crisis led to removing subsidies for renewable energy. But in countries like China, South Korea, Brazil, Mexico or many other emerging countries, there is a much more vibrant sector. This might be where the growth would be in the longer run.
Michael Liebreich: First of all, it's a difficult question because there is no accepted definition of green growth. We have very specific datasets we gather in renewable energy and energy efficiency, and there is no controversy. You also have to bear in mind that public transportation or high-rise buildings are also more efficient than private vehicles and lot of small buildings. Is that green growth?
But to answer your question, no, it's not sufficient. It is a dangerous time, in a sense, because investment flow into clean energy had been growing but dropped last year. The debate in many countries is quite controversial, particularly around climate change.
Vikram Widge: I think we are doing a lot, but it's not enough. Even our institution, which deals with investment in the private sector, has increased our climate-related financing by 25 percent from 2012 to this year, but we still have more to do to meet our our own targets for the coming years. The world at large has a long way to go.
Q: Investment into clean energy has traditionally flown from developed countries to developing countries? Are developing countries doing enough?
A Liebreich: The North-to-South flow in clean energy we tracked last year and in 2011 has changed a little bit, but is broadly $10 billion a year. In China, $65 billion was invested in clean energy, and most of it was Chinese money. Out of $8 billion invested in South Africa, probably more than half of that was South African money.
In terms of mitigating emissions, big industrialized or industrializing countries including Indonesia, Malaysia, Iran and Saudi Arabia have a huge population and are very dependent on petrochemical for everything, leaving huge footprints. They clearly need to do much more.
There is still the view that the developing world wants to do what the rich world has done. We will be in trouble if that's the direction of development. There is an opportunity to leapfrog to much better housing solutions, city design, use of public transport and energy technology. And that's green growth.
Mark Halle: There is an enormous investment in green growth projects in the developing world. Opportunities are there because they are not overly invested in the wrong kind of energy. They have opportunities to, in a sense, leapfrog from the situation where there isn't much energy available straight to clean energy, without passing through the phase of conventional energy. But to do that, they need to be assisted.
The real problem is within least developed countries. In those countries, we have to recognize the number one priority is providing energy access.
For any countries looking to provide its population with access to modern energy, you need to understand that the strategy should be a mix of renewable solutions and conventional ones. For example, an African country that produces oil could use the gas produced along with oil and together with renewable energy at an optimal ratio that gives the country energy access as quickly as possible.
Q: What do you think are the barriers for green growth financing, especially in the private sector?
A Widge: It's clear to me that clean energy is always an alternative to what you call dirty energy. People worry about the fact that you have to pay extra for clean energy. But fossil fuel subsidies artificially lower prices, but it has been accepted as normal over the decades while everyone gets concerned about the additional support that some times needs to be provided to clean anergy. And this is without considering the co-development benefits in terms of less local air pollution and enhanced energy access.
I say this not as a representative of a multilateral institution but as a global citizen. We are looking at unprecedented changes in our climate if we stay at the emission rate we are at now. I think we have probably five years to take significant action if we are going to start to reverse this thing.
Halle: The principle barrier, if you want to sum it up in one word, is risk. Private investors put money into what they believe is going to yield good return in a short period of time. A lot of investment into the green growth area is still uncertain and it is still in competition with conventional investments, some of which have the government's support. Green growth would be less risky if the environmental policies surrounding it were stable.
Liebreich: There are a lot of situations where clean energy or energy efficiency would be a much better economic solution but many investors are not familiar with funding these approaches.
The issue in the financial sector is that the regulation of the banks and pension funds, the roles of rating agencies and so on don't push innovation. They are conservative and slow down change.
Plus, there are a lot of different things taking place around the world. In Korea the push is green growth. The big issue in Europe is the fiscal crises, which overwhelm any discussion. It reduced Europe's ability to act on green growth, clean energy or almost any other issues.
It's a granular picture.
Business Focus: Could you elaborate on the obstacles in the financial industry?
Liebreich: The easiest example is that the scientists have established how much carbon is emitted into the atmosphere, but if you look at the balance sheet of the 100 largest coal and oil companies, the carbon they have on their balance sheet is three times as much. These are financial assets that are valued on their balance sheets.
Actually, you cannot use all of them because if you burn them all, it will cause a very unstable climate environment. So there is a mismatch between the financial system, which says these are all good assets and the physical system of our planet that says you cannot burn that. Why is it an asset when you cannot use it?
Waughray: The first point is to realize the scale of the challenge for greening our infrastructure including transportation, energy and water system. The cost of just providing finance for all of the basic infrastructure, we estimate at the World Economic Forum, is about a trillion dollars a year through to 2020. To provide an extra incentive for green infrastructure will be another 0.7 trillion dollars. It's money that cannot be found from public sources alone, and one has to figure out how to attract private investors into this space.
Now the challenge is it fills a new class of asset. It doesn't feel like a traditional road or rail project, so it's difficult for investors to know if they'll get a return on their investment. They may feel that it is a passing phase and in 10 years nobody will be building solar panels.
The trick is to use the limited public money to bring down the risks. It might be a guarantee that the government will purchase energy from new clean energy power stations. It might be a political guarantee that the policies won't change over 20 years. It might be a new kind of mechanism that blends public money with private money, like offering a reimbursement for the first loss.
Our estimation is that if you blend public and private investments and brought down some of these risks, you could possibly attract four to five times as much private money as the public money invested.
In developing countries, in particular, private money coming into the country for infrastructure will be a positive addition on the GDP and create growth and jobs, unlike aid money, which is always off the balance sheet and doesn't have positive impact on the GDP.
And, of course, private capital is not sentimental. New green projects have to be really bankable and pass all the tests that all the normal projects would have to pass. It's not a subsidy. This has to be market-credible.
Q: What would be the ultimate cause for private companies to invest more into green growth?
A Waughray: The leadership, I would say. All of this is like psychology. When one thing happens, the ecosystem starts to change.
Imagine if the CEOs of 20 large institutional investors, pension funds and sovereign wealth funds demanded they put 20 percent of their assets into long-term green investment. That would really shift the market because asset managers would try to create suiting funds, developers will see lots of money in the projects and politicians would try to attract the money into their country or province.
Some of those asset owners might feel it actually depends on political leadership, so it should be a combination of leadership from both institutional investors and politicians.
It might not be that you need everybody, like the United Nations, to do this. If you had a coalition of committed members like G20, it could be quite powerful.
Halle: Getting coherence into the set of policy signals given to investors. We all believe we all need to move toward clean energy. At the same time, we are using government money to subsidize fossil fuels in many countries. We are actually paying people to use more fossil fuel, therefore, making it hard for renewables to compete on the same playing field. One of the things we need to do most urgently is to start getting rid of what we call perverse incentives.
Business Focus: In the U.S, leaders were denying climate change. At this moment, are world leaders agreeing that climate change is happening and the need to come up with measures?
Halle: I think many in leadership positions do and the question is, how you can make that a politically successful strategy? Most politicians that I know respond when there is a strong demand from electorates. If there are not, then they listen more carefully to organized interest groups. In the U.S., the fossil fuel industry is very well organized; they are successful in communicating with politicians. You have to counter that by gathering people with interest in the renewable industry.
You see it many times with consumer issues. There is no tolerance for unsafe products for heavy metal in food or for child labor. They to be very difficult to correct and all of a sudden they changed completely.
Liebriech: It's one of the responsibilities of the government to price externalities. The cheapest option may be building a coal-fired power plant outside Seoul, but we would use regulation or finance incentives to force cleaner or green growth solutions. Right now there are many things that make sense like geothermal energy, rooftop solar panels in any sunny country, good onshore wind farms and energy efficiency.
In Spain, Bulgaria and Greece, the regulators, which provide a source of funding so that investors commit capital, change the rules. One of the frustrations in this discussion is that these retroactive changes are entirely self-inflicted. These policy makers decided to encourage this development but they have not been able to make it stick politically or they make mistakes. It's simply political ineffectiveness, political inaptitude.
Business Focus: Under former President Lee Myung-bak, the economic policy focus was green growth. Under President Park Geun-hye, it is now a "creative economy."
Liebriech: There is a difference between shifting emphasis and retroactively changing terms of a particular project. Shifting emphasis is not great, to be honest, but it's not as bad as initially promising to pay 10 cents per kWh for wind power and now pay just 8 cents. That is really corrosive.
When I was here two years ago, it was impressive to see big Korean companies focusing and developing offshore wind technology and you've got some very substantial engineering companies. Let's hope that Korean companies remain focused. Hang on a second. Is this a creative economy because of Psy? Suddenly because Gangnam Style, you don't care about green growth? You can do green growth and Gangnam Style. There is enough capital to fund both.
Business Focus: In a creative economy, the government wants to merge information and communications technology and science to further develop value-added industries and create jobs.
Liebriech: You mean additive manufacturing. Then I am much more comfortable. If you combine material science, nanotechnology and bioscience, you have an opportunity to produce services and products with much less impact. With 3D printing, for example, you could potentially save an enormous amount of energy and footprint.
Q: What would be the most ideal form of green growth financing you envision at this moment?
A Widge: The perceived higher cost of green growth can be offset by the benefits you get both in terms of resilience and in terms of development impacts.
Let's take energy access as an example. There is a lot of cooking stove and water filtration projects in developing countries. In these cases, green substitutes are not only sustainable but also have improved health. As women have to collect less firewood, that improves the use of their time, which is a gender benefit. Furthermore, the cooking stove would emit less smoke and improve the health of women in the households who tend to inhale smoke.
If you start pricing these benefits correctly, you will find that the cost of the green substitutes isn't actually higher than that of the old ones. The problem is that we undervalue these benefits. There are both positive and negative externalities.
The government has to fix its policies. Gender and health benefits from the green stoves should be valued by the government, which should have the incentives for the private sector to deliver them. That's the public and private partnership.
Waughray: Right now we need to get more large-scale projects going, particularly in developing countries to show that there is a market and there is a return on the investment.
International Finance Corporation (IFC) has a model for what they call Climate Catalyst Fund, which blends government money and money in the form of equity from asset owners. You can pull this money together and chop it up into pieces and asset manager of that piece of equity to raise debt against, using the triple A rated balance sheet of IFC. Asset managers can likely get three to four times in debt compared to the equity slice they have. Then they have a fund that can deliver projects.
In addition to the combination of private and public expertise to manage this fund, you would link them to strengthen market trades between countries that benefit from the fund. That model is similar to how Marshall Plan that was constructed after World War II to rebuild Europe. It was not an aid transfer from the U.S. to Europe. It was a public-private construction of the infrastructure fund managed jointly by the public and private sectors.
Halle: The ideal form of financing is the market. We need to use every public policy instrument to make sure that the solution they choose for financial reasons is the same solution that's best for the future of our society. We need to ensure that green growth projects give investors the best rewards.
There are three specific suggestions to achieve this. The first one is to get rid of subsidies to fossil fuel because they are tilting the playing field. The second is to use the power of the government, particularly government procurement, to send the market signals to favor the green sector. The government should purchase 15 to 20 percent, sometimes more than that, of goods and services in the economy. If the government decides they will only purchase those products compatible with green growth, it will create the market, eliminating the tipping point and expanding market. The final thing is the government needs to look at the current distortion in the market. Many countries have monopolies in distribution of the energy. All of these things have falsified the market. It's not a question of allowing investors to make a maximum return on their money. It's the question of not driving them away and bringing them into the market.
