With the climate clock ticking, green banks emerge as financial engines of country action.
197 nations pledged action to reduce their greenhouse gas emissions four years ago in Paris. Since then the alarm has grown louder about the slow pace of progress – and the consequences of failure.
While carbon emissions have started to decline in rich countries – albeit too slowly – the fate of the planet hinges on how quickly emerging markets can bend down their emissions curves while continuing to focus on economic development. Developing nations have consistently said that the answer depends on availability of green financing from developed countries. Accordingly, the last decade has seen a proliferation of 500 international public funds allocating more than $50 billion annually for developing country decarbonisation.
But solving the climate finance problem with international public funds could never work practically. The financial challenges and solutions of rewiring economies to support decarbonisation are profoundly local and the essence of the Paris Agreement is that each country sets its own goals and implementation plans. It can’t be done by the World Bank, the United Nations, or development aid.
The clearest sign that countries want to drive their own economic transition toward low-carbon sustainable development is through the creation of national green investment banks.
Green banks are public financial institutions with a mission to accelerate the low-carbon transition. Their job is to be the central catalyst for climate investment by assembling different capital sources, pioneering new financial structures, and by addressing market failures holding back deployment of renewable energy, energy efficiency, and other low-carbon technologies.
Commercial investors are cautious to invest in these markets for several reasons, including the small ticket size of many renewable energy projects and that payback periods are longer than what commercial lenders are used to.
Green banks can address these and other barriers by bundling projects and providing guarantees, mitigating some of the risk for investors. In many cases, doing so not only increases the number of climate-smart projects being built through the green bank, but also warms the entire market up to invest more in low carbon and climate resilient projects.
Green banks have a strong track record in developed nations including the United Kingdom and Australia, as well as US states like New York and Connecticut. The Green Bank Network, an association of green banks, estimates its members have deployed $11.3 billion in capital, which resulted in $41.1 billion worth of projects financed, resulting in 25 million tonnes of CO2 avoided. That's the equivalent to taking 11.6 million cars off the road.
Developing nations have taken notice and the scale of their interest was revealed at the first global conference dedicated to this topic last month in Paris. At the Green Bank Design Summit, 22 emerging markets convened to compare progress and seek partnerships with existing green banks, private banks, and multilateral funders as they work to set up variations on a national green bank.
They are a diverse group – including fast-growing Asian economies like China, Indonesia and India, sub-Saharan African countries like South Africa, Rwanda, and Nigeria, and Latin American nations including Peru, Chile, and Brazil – and they're working quickly. 11 countries are now planning to have a green bank operational within two years, each focusing on leveraging investment in areas including residential and commercial energy efficiency, residential and utility scale solar, forestry and land use, and transportation.
The countries present at the Summit communicated their need for technical assistance for green bank formation and more than a dozen multilateral institutions and private firms at the Summit then pledged support. This is a relatively sudden development from a globally significant set of carbon emitters. The countries attending the Summit represent almost three-quarters of developing country emissions and GDP.
Major emitters are now taking control of their own destinies and creating an appropriate financial architecture to execute the energy transition. While international funding from donor governments and multilateral development banks remains relevant, the locus of control is shifting to the national level – as it should. Whether emerging economies will succeed in driving investment fast enough in the race against climate change remains to be seen, but they are showing leadership by transcending the old argument that rich countries must solve the climate finance problem for them.
Nations are building a powerful financial engine of sustainable development tailored for their own needs and the whole world has an enormous stake in their success.
The Rocky Mountain Institute (RMI) is dedicated to transforming global energy use to create a clean, prosperous, and secure low-carbon future – they work across all energy sectors to accelerate the energy transition and reduce carbon emissions.