The International Energy Agency states that additional incremental annual investments of USD 1,100 billion will be needed for the period 2010 through to 2050 to mitigate climate change. Who will move first to capitalize this opportunity?
President Obama has just announced that his government will commit between USD 400-500 billion in an economic stimulus package where clean energy infrastructure will be a centre point. This is additional to the USD 4 billion invested in the sector in 2007 in the US. In the UK the figure for private equity and venture capital investment in the sector totalled almost USD 1.5 billion, while in the rest of Europe totalled USD 1.9 billion.
Australia’s investment commitment pales by comparison. We are nowhere near reaching our potential in terms of matching our engineering and financial capabilities necessary to carry out this task.
The grand vision of the Asia-Pacific Partnership on Clean Development and Climate has lost momentum since the changes of government both here and in the US. The recent attempt to connect SMEs with clean energy opportunities through the recently established Clean Energy innovation Centre remains grossly under-funded (AUD 20 million over 4 years) and lacks a coherent approach to fostering new market opportunities. Even the Future Fund, the much talked of public investment fund to finance Australia’s future, is silent on the issue of clean energy investment.
How serious is the Government really about building jobs and spurring investment in Australia’s promised green energy future?
The introduction of a carbon trading market will give companies an economic reason to invest in clean energy technology in order to reduce the carbon cost base of their production processes.
But carbon markets alone are not enough. Just look at Europe which has had a carbon market trading since 2005. Notwithstanding the shortcomings of the first phase of the EU ETS, the problem of clean energy investment has not disappeared with the introduction of carbon markets. If anything, the need for investment has come into sharper focus as it has become clear that carbon markets alone are not enough.
The recent report by the OECD What Role for Public Finance in International Climate Change Mitigation is that carbon markets lure private sector investment towards technologies which are already proven and have achieved economies of scale. But they provide insufficient incentive to finance and develop technologies which have already received government R&D funding but are still at the proof of concept and early commercialisation stage.
The ‘valley of death financing gap’ is a serious concern for policy makers in Europe, the UK, and even the USA but remains under-considered in Australia. The valley of death gap arises because venture capital firms are unwilling to take on the commercial risks of financing newly developed clean energy technologies. This problem doesn’t occur in other sectors such as biotechnology and ICT because venture capitalists there is usually sufficient product diversification here to enable technology spin offs to be sold to market. In the energy sector, however, all early stage clean energy technologies must compete against the low cost base of coal-fired electricity. As a result of this market barrier, there is a strong need for public money to enter the market and cover the commercial risks.
The need for innovative financing mechanisms from government is reiterated by world business leaders in the World Business Council’s recent Power to Change report where they argue that enough low-carbon technologies exist to help the world avert climate change. What is needed in targeted economic policy to bring these technologies to market.
One innovative solution has been the UK’s Carbon Trust which has developed blended public-private financing models to tackle the valley of death financing gap in clean energy technology. Managed by private sector leaders but mainly financed by public money, the Carbon Trust has identified a portfolio of promising and commercially unviable technologies in a number of emerging environmental market sectors and accelerated their development.
The idea is to shadow a technology’s development through to the revenue generating stage which usually takes 3 years after which time the company is able to scale up the technology by itself. This is the true win-win model: scientists and entrepreneurs bring technologies to market which would otherwise be left behind, governments generate jobs and world-leading businesses, and the community enjoys the benefits of mitigated climate change.
Politicians and activists need to look beyond the trench warfare of targets, tactics, and other policy vagaries over the coming months. We have to realise that the real battle is to be won in the market place by making Australia a technology innovator and business leader. This is where the economic fight to revive the economy amidst the current doom and gloom may be won or lost. If we don’t do it, our European and North-American friends certainly will.
Eric Knight is reading for a DPhil in environmental economics at the University of Oxford as a Rhodes Scholar and is co-author of the OECD report.