A white paper on behalf of Thinking Ahead, the thought leadership platform of CPP Investments, a Canadian pension fund.
Challenge: Establish the case to identify, fund and support the decarbonization of essential businesses that have high emissions, but lack an affordable, near-term solution to do so.
Solution: A white paper making the case for why the successful decarbonization of strategic sectors — such as agriculture, cement, steel and others — is not only essential to meet wider net-zero ambitions, but also to sustain economic growth, stability and a responsible transition.
My roles: Research, SME interview and review, data composition, chart design/recommendation, writing and editing, design/visual editing.
A white paper on behalf of Thinking Ahead, the thought leadership platform of CPP Investments, a Canadian pension fund.
Challenge: Introduce experts to the fast evolving market trends around green bonds and related climate-focused financing mechanisms.
Solution: Contextualize and explain market growth, challenges and the outlook for green bonds as both a tool to raise climate-focused funds and as a investment opportunity.
My roles: Research, SME interview and review, data composition, chart design/recommendation, writing and editing, design/visual editing.
Dealing with climate change can seem impossibly costly. By all accounts, the toll will be many trillions of dollars annually for many years to come.
So far, efforts have been patchy and painful. Washington is momentarily engaged in a high-wire act to fund a multitrillion-dollar, climate-focused package that could make or break Uncle Sam’s decarbonization effort.
Even more modest sums are tough. To date, rich-world pledges to subsidize poor countries’ climate costs — to the tune of just $100 billion per year — remain unmet after a decade. Far tougher challenges and much higher costs lay ahead, so the prospects look grim.
What if there was a way we could fund the climate transition by creating a new global currency, off the books of national and corporate accounts?
The currency could be used to reward each ton of carbon abated, whether via cleaner energy, cleaner business or direct carbon removal and sequestration. Such a regime could not only turbocharge public and private climate investment. It could also pay to protect ecosystems, which today struggle to find funding. This regime would also be politically transformative. Corporate boards and policy makers could shift from fighting over funding to planning action.
What if there was a way to fund the climate transition by creating a new global currency, off the books of national and corporate accounts?
From today’s system based mostly on sticks — taxes and rules — a reward would incentivize decarbonization (carrots). Just like people, global economic systems change faster with a mix of carrots and sticks.
If any of this is sounding familiar, a similar system plays a central role in Kim Stanley Robinson’s latest work of climate fiction, The Ministry for the Future, a novel tipped as a top read by Barack Obama and Ezra Klein, among others.
In the story, as the climate crisis worsens, the world’s top central banks go from cautious recalcitrance to urgent collaboration to create a global “carbon coin” to fund decarbonization. Robinson name checks the inspiration for this financial solution as “the Chen paper.”
Carbon rewards
Turns out, Delton Chen is a real person, who co-authored the real academic paper that inspired Robinson and that informs an increasingly ambitious vision to overhaul the world’s economy: the Global Carbon Reward.
Chen’s academic roots start in Australia with a Ph.D. in engineering. Around 2013, he shifted his focus to explore the barriers to addressing climate change. Clear as the science seemed, economics emerged as the key problem. Something was not working.
At a high level, he describes the global economy as an incomplete system, missing a key price — for risk — that could help resolve the climate problem. Activists like Greta Thunberg, says Chen, argue that we already have all the facts and solutions to solve the climate crisis: “I’m saying that’s not true. We don’t have all the answers because the fundamental economics of carbon pricing appear to be incomplete.”
To fill this gap, Chen proposes a new digital global currency, created by central banks to fund a wave of global monetary policy that he calls Carbon Quantitative Easing, or CQE. That new currency is used to pay out Global Carbon Rewards, a flow of incentive payments to permanently fund the mitigation of greenhouse gases.
Chen’s theory is complex, and much of it exceeds my financial fluency — for deeper details, see links at the end of this note. That said, its high-level features are accessible and link to real world developments.
They include:
Carbon currency. One wouldn’t use Chen’s carbon coin day to day to buy groceries or gas. Rather, each virtual coin is “struck” based on the value of one metric ton of CO2 equivalent mitigated for a century. Central banks will manage the rate of conversion — into dollars, Euros, renminbi, etc. — to appreciate annually.
Because its value rises, the coin creates a reliable price signal to help companies finance costly transition plans — such as the shift from oil to green hydrogen — that are hard to finance today absent a known future value of carbon removal.
Governance and knowledge base. This system would require the transformation of existing institutions and the development of new ones too. Longer term decisions about setting the target value of the coin would be set by an authority, guided by a cost abatement curve for the planet. As the value of the coin goes up, year after year, markets would have a rising incentive to tackle increasingly gnarly decarbonization challenges.
To manage the award of coins, this system would include a registry of registries, tracking worldwide claims on carbon abatement to avoid double counting and related abuses. Such a library of methods and successes promises other benefits, too: a global, open-source repository of best practices to accelerate mitigation.
Social benefits. Today’s carbon frameworks fail profoundly to price in harder-to-quantify damage to people, culture, and ecosystems — from the extinction of a species to the desertification of rain forest. As part of the coin’s governance system, stakeholders — from indigenous peoples to environmentalists — would have input into the valuation of reward allotments.
Precursors
As Chen’s plans gain attention, real-world financial trends that are moving in a similar direction:
Central banking. Chen’s CQE stems in part from the emergence of quantitative easing (QE) around 2008. In response to the mortgage-backed securities crisis, the Federal Reserve deployed a then new approach, which — at the risk of oversimplification — let central banks issue new debt with one hand while buying it back with the other, thereby creating new assets, and keeping credit flowing into an economy at risk of freezing up.
Skeptics howled the tactic would unleash a tsunami of inflation. They were wrong. And since then, QE has become a favorite of the world’s central banks. To date, they have funneled over $25 trillion in QE funds into the global economy, including some $9 trillion in response to COVID-19 economic disruptions, per an Atlantic Council tracker.
At a few trillion dollars per year, the river of money already created through QE is in the ballpark of the anticipated price tag for climate adjustment. And as central banks adopt the technique, they are beginning to harmonize efforts.
Chartered to maintain financial stability, sometimes measured by unemployment and inflation, central bankers are beginning to regard climate in the same frame, Chen contends. From implicitly defending housing lenders in 2008, it’s not a far leap to imagine bankers recognizing climate collapse as a fundamental systemic risk.
There are early signs of such a shift. The Network of Central Banks and Supervisors for Greening the Financial System (NGFS), launched in 2017, is a group of 80-plus central banks and supervisors, including the Federal Reserve. Besides advancing finance sector practices around climate risk management, NGFS members are working “to mobilize mainstream finance to support the transition toward a sustainable economy.”
Verification. The elements necessary to validate a global carbon currency are also coming together. Such a regime would require a platform of trusted technologies to assess and track carbon remotely in order to allocate payments.
Verification technologies are multiplying quickly. Startups such as NCX today use satellite imaging and AI processing to better monetize forestry carbon credits. A new generation of satellites able to remotely assess methane emissions is already outing previously unidentified mega-sources of GHGs. And these same systems can likewise pinpoint the growth of CO2-sequestering greenery.
Precedents for a coordinated global currency action exist.
Meanwhile, the technical and regulatory infrastructure of carbon offset tracking — however imperfect — is improving. In North America alone, a half dozen or more have emerged, including the Alberta Emission Offset System Registry and the California Air Resources Board.
Precedents for a coordinated global currency action exist, points out Frank Van Gansbeke, professor of the practice at Middlebury College, where he focuses on finance and capital markets. Though he developed his work independently from Chen’s, the two now regularly review and discuss developments.
Where Chen approaches the financial problem as a science-based outsider, Van Gansbeke comes to it as an former investment banker, focused more on working with existing financial institutions. He considers the planet’s finite carbon reserve the ultimate monetary policy target, from which all other debt instruments should be priced.
Van Gansbeke points to Special Drawing Rights as a possible precursor. Created in 1969 by the International Monetary Fund, as a kind of meta-currency, the IMF uses SDRs today to support national economies suffering balance of trade or other economic crises.
Used together with other reserves on the IMF balance sheet, SDRs could be used as collateral to create a climate coin. Designed as an anchor currency, the IMF unit would be a “stablecoin”: a blockchain-supported currency backed by a share of real assets in land and forestry, new climate technology ventures and the top 150 ESG compliant companies.
With a modified remit, says Van Gansbeke, the IMF has the operational capacity and expertise to take such a step. For their third-party verified GHG reductions, emerging market countries would receive a settlement in IMF climate coins.
The proceeds could then be used either as collateral, as means to repay debt or as a tool to undertake debt restructurings or foreign exchange intervention. The IMF climate coin would not only impart strong pricing signals across all market segments, but also facilitate capital allocation in a carbon adjusted manner.
For more Van Ganspeke’s plan, check out his detailed post at Forbes.com,
What next?
Could a carbon currency make the leap from science fiction to reality? When Chen’s seminal paper was published a few years ago, it might’ve been easy to wave it away as deeply researched wishful thinking.
But in the years since, much has changed: climate urgency is rising and the financial zeitgeist is shifting, as economists and financiers ponder the once-imponderable, such as minting a trillion-dollar coin.
Rewriting the rules of the global economy to manage a risky transition isn’t all that rare, either. In the 20th century, it happened twice: once, with the 44-nation agreement at Bretton Woods to reboot the world’s economies after World War II; and again, in the 1970s, with a shift away from the gold standard. Today, the rise of digital currencies and growing risks of climate change are so disruptive that another transformative moment seems likely.
Both Chen and Van Gansbeke are moving forward with implementation plans:
At the upcoming COP26 in Glasgow, Van Gansbeke and a team of finance experts will announce the Rethinking Bretton Woods initiative, in which a climate coin will be a track.
For his part, Chen is focusing on testing. His nonprofit is seeking sponsorship and grants to create a proof-of-concept demonstration in California. The demo will include a few other countries and will last a few years to showcase a variety of technological innovations. Central banks are not essential to this trial, says Chen, because their monetary role will be simulated.
In the realm of carbon currency, reality is beginning to overtake the hypothetical, as Kim Stanley Robinson put it in an interview with Bill McKibben:
It's one of several things that’s happened since my novel came out that made me realize that in some ways, I was behind the curve in Ministry for the Future.... I found it very encouraging because we need these things. And there’s a general tendency over social media to doom and despair. We cannot get into doom. We have to actually look at all of the good work that's already being done.
Maybe you first knew him as chief executive of the Carbon War Room or as the co-founder of Generate Capital. Or maybe you came across him as a LinkedIn mega-influencer, GreenBiz contributor or even as a former co-host of The Energy Gang podcast — he’s the one with the ready laugh and the sharp takes.
Chances are, you already know Jigar Shah. He’s spent the past two decades making a compelling case for the climate-fixing, profit-generating potential of clean energy, all the while batting down ill-informed skeptics and bad business models.
Now, as part of the Biden administration’s effort to jump-start economy-wide decarbonization, Shah has been granted more capital — and a bigger platform — than he might ever have thought possible.
The total: $46 billion, according to Shah. That’s the lending capacity he can mobilize at the Department of Energy’s Loan Programs Office (LPO), which he was appointed to oversee in March.
To make the “once-mighty” office — as his boss, Energy Secretary Jennifer Granholm, put it — mighty again, Shah faces big challenges. The office has been all but dormant for much of the past decade, due in part to Trump-era deprioritization but also hampered by a lingering reputation for bureaucratic dysfunction.
Barely three months into his new role, Shah joined this week’s VERGE Electrify virtual event to kick off the conference and share his plans to get the loans flowing once again, in a keynote conversation with GreenBiz Group’s Senior Transportation Analyst Katie Fehrenbacher, who co-chaired the event.
Re-booting the LPO. Following a decade of dormancy, the office has moved into a fast-forward mode, fueled by Biden’s climate agenda and Shah’s contacts — he’s reached out to over 100 CEOs since he joined. “People are starting to realize that we’re open for business,” he said. “If we got maybe three applications all of last year, we’ve gotten three a week recently. That comes from people trusting the program will be there for them.”
A catalytic role. Deep as LPO’s loan pool may be, Shah sees his office’s role as narrowly targeted — providing catalytic funding at a key stage, before companies are able to access commercial debt. Consider the example of nuclear energy innovators such as Oklo, NuScale or Holtect. “Small modular reactors are going to be built across the country,” said Shah. But they’re not likely to be able to raise commercial debt until the technology is de-risked. Shah sees LPO’s role as building a bridge to bankability: “Then, we’re done.”
Streamlining the process. By pushing an easier, more user-friendly approach, Shah is tackling head-on the office’s lingering reputation for being too costly, too complex and too long-odds. “We’ve dropped all the application fees,” he said. “And we don’t charge any of the other fees that we used to until you’ve received the loan and started to draw it down.”
Energizing climate justice. Shah sees a space where the LPO has the potential to both modernize the grid and benefit historically disenfranchised communities. Virtual power plants offer an opportunity to advance grid-scale energy services while helping cities and communities upgrade energy infrastructure and cut energy costs. That could mean building solar with storage on low-income housing or affordably financing grid-responsive smart air conditioners or water heaters. Models such as these promise to “not only get essential appliances affordably into the hands of people who need them,” said Shah, “you’re also able to get higher utilization rates from the existing distribution infrastructure.”
Swings at bat. To the vexing question of how to pick winners from among emerging technologies, Shah brings the perspective of a seasoned climate tech entrepreneur. “We have to take a lot of swings at bat,” said Shah, “and we are going to have misses.” But misses — with a nod to the failure of Solyndra, a Obama-era solar startup — can be offset by towering successes, such as Tesla, to which the DOE lent $465 million in 2010, a moment when the then-nascent EV maker was far closer to failure than world domination. Today, it’s the world’s most valuable carmaker and has sparked a competitive race to electrify the automotive industry. “That’s what the president has talked about,” said Shah. “We want to make sure from a technology standpoint, we’re leading the pack worldwide.”
Tips for loan candidates. “Don’t be scared! Come in early,” advised Shah. To be sure: There will be many forms, but Shah’s team is working to ensure that the process is easier to navigate than before. Over the past month, the office has added more than 10 people to escort applicants through the loan process. “We want every person who thinks they have a good idea that deserves funding to have a shot.”
If you’re one of those people, the initial review process takes six weeks, typically. Once qualified, getting the approval stage takes four to five months of diligence.
By that timeline, Shah’s office will announce the first batch of new loans under the Biden administration by autumn, if not sooner.
Better standards could help cut climate risk by deepening markets for green debt to fund low-carbon solutions
In the struggle to recover from the COVID-19 economic crash, the European Union has set out to rekindle growth via green stimulus. In early September, European leadership upped the bloc’s already ambitious green goals, aiming to cut emissions 55% by 2030 against 1990 levels, up from an earlier reduction target of 40%.
To fund the effort, Europe mapped out plans to issue €225 billion ($267 billion) in green bonds as part of the overarching €750-billion Next Generation EU coronavirus recovery fund. Some 37% of the fund will target climate-change projects such as hydrogen power, energy-efficient building renovations, and one million electric vehicle charging points, reports The Wall Street Journal.
The program accelerates Europe’s already world-leading push to hit net-zero emissions by 2050, a goal formalized as part of the European Green Deal. As a secondary benefit, a surge of EU-backed green bonds could help transform a nascent market with increased liquidity just as the appetite is growing for long-term, stable, green-tinted investments among insurers, pension funds, endowments, and other long-term investors.
Green bonds are growing quickly, but remain a niche in global debt markets. From less than $1 billion a decade ago, issuance of green bonds eclipsed $250 billion in 2019 (chart, via The Financial Times, or FT), comprising about 3.5% of the global total of $7.15 trillion, according to a recent note from the Bank of International Settlements.
Rising appeal — and challenges
Green bonds offer a way to raise long-term, lower-cost funds for projects that target climate change and/or benefit the environment. Green bonds let companies and governments tap into rising demand for environmentally-focused investments from insurers, pension funds, ESG funds, and the like.
Yet for all their appeal, green bonds are selling a promise of sustainability that, so far, lacks the sort of rigorous rules and rating regimes that define legacy bond markets. For that reason, a bigger wave of green bonds will up the pressure to improve standards and deepen confidence in a financial tool that could help firms and governments alike mobilize trillions of dollars of capital to fund climate-related transformation.
As green bond volumes rise, so too has scrutiny. In 2019, a top executive at Japan’s Government Pension Investment Fund — the world’s biggest pension fund — expressed concerns over the space. He told the FT that, without greater volume and higher confidence in selection standards, the asset class risks becoming “a passing fad.” Such doubts could slow green bonds’ growth.
In the wider bond market, where tiny differentials in risk and yield can rapidly redirect huge capital flows, green bonds’ smaller market size, relative immaturity, and rising popularity can lead to unexpected outcomes. For instance, in 2019, Verizon issued $1 billion in green bonds that were oversubscribed eight fold. This led to a yield that was lower than the company’s conventional bonds.
Verizon’s successful listing, albeit anecdotal, suggests that green bonds may benefit from the sort of investor enthusiasm that has already lifted flows into green equity markets. Stock funds focused on environmental, social, and governance (ESG) factors have outperformed conventional investments over the past decade. To be sure, green bonds are subject to different market dynamics, yet both asset types could benefit from rising public sentiment.
Cultivating greener standards
Debt markets could see similar gains unfold in green bonds but are more reliant on an ecosystem of regulated ratings processes and investment standards. Hence, the need for more evolved rules around — and understanding of — what qualifies as “green” in a bond, and why it should thus merit different pricing and risk consideration.
Specialized green standards are emerging, and Europe is taking the lead. In 2019, the EU approved a set of guidelines (see the April 2020 EU technical report on sustainable finance here) better defining what counts as a sustainable investment. The new rules are “a clear signal to the financial markets that sustainable investment should become the new mainstream,” Bas Eickhout, a Green MEP told the FT.
These extend a foundation of green bond certifications and standards developed by private rating agencies. Issuers can get a green label if individual projects are in line with standards set out by the Green Bond Principles (GBPs) of the International Capital Market Association (ICMA).
To widen these criteria, Torsten Ehlers, Benoit Mojon, and Frank Packer at the Bank of International Settlements have endorsed an approach that would create firm-level ratings based on carbon intensity (carbon emissions relative to revenue) that would complement project-level bond assessments.
Their proposal addresses another concern in the nascent market, where green bonds are not yet generating measurable carbon reductions for their issuers: “green bond projects have not necessarily translated into comparatively low or falling carbon emissions at the firm level.”
When factored into project-based bond issuances, a firm-wide measure of carbon intensity could help would-be buyers and rating agencies better assess the overall climate impact of a green bond offering.
By this logic, automaker ABC Co. with an all-electric fleet would be rated somewhat higher on a green bond to fund a new EV plant compared with legacy car company XYZ Inc. issuing a similar bond to build its first EV factory. Such a system could reward ABC Co. with a lower cost of debt, thereby incenting long-term, systemic commitments to a low-carbon strategy.
Imperative innovation
This is a helpful reminder that, for all of the necessary minutiae around green bond ratings and standards, the higher goal is to fund investments that cut carbon.
Indeed, vital as energy innovations are –– from high-output wind turbines to low-cost batteries — to solving the climate crisis, markets face a related urgency to advance the technology behind the financial instruments needed to efficiently fund the decarbonization of energy systems. Accordingly, financial instruments that advance environmental sustainability are a growing priority for asset managers, corporate debt issuers, and governments alike.
Financial innovation sits at the heart of the 2015 Paris climate goals. The accord includes language committing signatories to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”
By this logic, the imperative is clear. For green bonds to fulfill their promise — to drive decarbonization and lower climate risk — the finance industry must advance reliable rules to incent long-term investments that begin to deliver real reductions in carbon intensity.
Adam Aston is a senior writer, editor, and content consultant specializing in energy and climate. Connect with him on LinkedIn and Twitter.
Improved climate model narrows prediction uncertainty and raises the odds of serious climate impacts from global warming
Risk managers and climate scientists share a fundamental challenge: How to identify, weigh, and process a dizzying mix of signals to better model a range of possible future outcomes. Accordingly, the complex mathematical methods underlying both disciplines tend to advance slowly. It’s rare to see big improvements in the precision of their forecasts.
Yet this past July, climate scientists achieved just such a leap, with the publication of an outlook — conducted under the World Climate Research Programme (WCRP) and published in the Review of Geophysics — for global warming that, for the first time, merges three disparate data sets and methodologies. Important as the technical improvements are, however, the conclusions have broader bearing for both climate science and risk managers.
The improved model predicts more warming in a world where CO2 levels hit twice their pre-industrial level, a threshold anticipated to hit mid-century, rather than closer to 2100. The findings thus boost the probability of serious climate impacts to energy operations, financial markets, human health, and the environment.
How much more warming by when?
To better understand the recalibration of this forecast, it’s helpful to revisit its predecessor. Since a landmark study published in 1979, scientists have expressed their outlook for temperature increase as a range — given a doubling of CO2 to pre-industrial levels — from a lower bound of 1.5°C to an upper limit of 4.5°C. From regulators to boardroom executives, planners have used this range as a reference for policy and business strategy over the past 40-odd years.
The new study narrows the bounds of this forecast range. It raises the lower limit of the estimate to 2.6°C while slightly reducing the upper bound, to 3.9°C by 2100. (See chart, via Science.)
“Narrowing the uncertainty is relevant not only for climate science but also for society that is responsible for solid decision making,” said Masahiro Watanabe, a professor at the University of Tokyo’s atmosphere and ocean research institute and one of the report’s authors, in an interview with The New York Times.
The study underscores a rising sense of certainty that the rate of warming is increasing. Today, global temperatures are already 1.2°C higher than their pre-industrial average.
The goal of the 1.5°C target was enshrined in the 2015 Paris climate accords, and has galvanized policy, business and public attention in part because it also represents what many scientists believe may be a critical threshold, a temperature gain beyond which the destabilizing effects of warming could accelerate sharply.
How is this study different?
For the first time, the new assessment unifies findings from three previously independent fields of climate research and analysis spanning vastly different eras.
The oldest numbers were taken from records of prehistoric temperatures preserved in sediment layers and tree rings. The next youngest come from direct measurement of temperatures taken since the start of the industrial revolution in the 1800s. And the most recent set of inputs was drawn from satellite measurements and computer models beginning in the 1980s.
On their own, none of these data sets could help refine the range of the temperature outlook. Simply synthesizing the disparate data sets was a challenge without precedent. The researchers were also able to enhance the precision of how feedback loops shape the outlook — for instance, how the loss of highly reflective white sea ice accelerates how quickly polar waters absorb heat. By merging and refining each vintage of findings, the meta-analysis delivered precision greater than the sum of its parts.
What’s more, the data proved to be more convergent than researchers anticipated. Co-author Gabriele Hegerl, a professor of climate system science at the University of Edinburgh, told The New York Times that she was surprised by the way the models converged. “We don’t expect these three lines of evidence to agree completely,” she said, but they did.
Data from the refined forecast will be used by the U.N.’s Intergovernmental Panel on Climate Change (IPCC) for its next major assessment in 2021 or 2022, Science magazine reports. From there, the data is likely to ripple into other national, academic, and private-sector models and inform projections for sea-level rise, economic damage, and other climate impacts.
Implications for risk managers
When offered equally probable good and bad outcomes, most folks tend to be too optimistic. Human nature is biased to think the good outcome is more likely; conversely, people tend to spend too little time thinking through the implications of the bad outcome. Put plainly, a lot of us tend to translate uncertainty as things should be okay.
Yet as risk professionals know all too well, uncertainty is always a double-edged sword. In the realm of climate change the risks vary from less severe and arriving more slowly to more intense and happening faster. To date, evidence is mounting that the outlook is tilted towards the bad, with disruptive changes happening faster and sooner than prior models anticipated. This has much to do with the complexity of the science behind modeling planet-sized physical systems. It also stems from science’s conservative culture: scientists tend to err on the side of caution when forecasting.
In the here and now, energy risk planners are already reckoning with climate phenomenon that are hitting energy markets and operations harder and faster than anticipated:
Wildfires are happening earlier, growing larger and impacting wider areas, in Australia, Russia, and the western U.S., damaging facilities and disrupting the extraction, processing, generation, and distribution of energy.
The intensity of hurricanes and tropical storms is rising at unseen speeds in the warming waters of the Atlantic Ocean and Gulf of Mexico, imperiling petrochemical plants.
Heat and heat-related illnesses kill more Americans each year than any other form of severe weather, according to the National Weather Service. Worldwide, similar patterns are likely, as heat stress raises physical and liability risks for workers and customers.
For business leaders, the challenge is growing more urgent. While the new scientific study shifts up the long-term temperature forecast, it remains in many ways a pure abstraction — an estimate off in the future.
And for risk managers, the challenge is to take these multi-decadal temperature forecasts and translate them into material risk recommendations. How will another degree — or more — of warming change business conditions? Over the next five years, the next decade, or by mid-century? Where and in what ways could the increase manifest?
In cleantech, as in most realms of emerging technology, venture capital acts as a sort of incubator for the youngest, most promising technologies. That’s why it’s a cause for concern when venture capital investment slows or shrinks.That’s just what happened last year. In 2011, venture capital investment in early-stage cleantech companies fell by 4.5 percent, to $4.9 billion, compared with the 2010 tally, according to a round-up of full-year data by Ernst & Young published Feb. 1, based on data from Dow Jones VentureSource.Whether this downtick is cause for concern is open to argument. The question links to hot-button issues being debated in Congress, on the campaign trail, and in the media. I, for one, believe that given the headwinds facing cleantech, the numbers are cause for optimism. They’re good news, but I wish they were better.To make my half-full case, note that cleantech venture capital investment has been resilient despite both economic and political headwinds. Last year’s funding remains 29 percent higher than its 2009 total, when overall venture flows crashed in the wake of the global financial crisis.
What’s more, cleantech is nurtured by other streams of capital. As I reported last month, global investment in mature renewable energy technologies — new wind farms, solar panels, and the like — expanded by 5 percent, to $260 billion last year. That rise helped put total investment in renewable energy, efficiency, smart grid and related technologies over the trillion dollar mark last year.
Still, I’m a worrier. And there are reasons to furrow my brow at these numbers.
However promising cleantech may be, venture capitalists are finding more alluring options in other sectors. Cleantech’s decline comes despite a 10 percent rise of overall venture capital investment. Globally, for the year, investors placed $32.6 billion into 3,209 venture deals, according to Dow Jones Venture Source.
So while cleantech retreated, investment in healthcare and IT startups remained roughly steady. The big winner? Consumer information services — think Twitter, LivingSocial and Zynga — pulled in $5.2 billion, up 23 percent from the prior year.
But before I complain any further that clean technology shouldn’t be losing out to Twitter, let alone Facebook, here’s a bit more on what went down in cleantech over the past year.
• Battery technology is hot. Energy storage continues to attract interest, and growing flows of money. Venture investment in batteries rocketed up by 253 percent. And this is bound to accelerate. Growing volumes of electric vehicles, plus the graduation of wind and solar from emerging-tech status to mature technology, are all driving demand for energy storage, in a dizzying array of niches.
And while some segments of battery manufacturing are mature — increasingly subject to the sorts of commodity price dynamics driving down prices of solar PV — there is arguably bigger potential for scientific discovery to upend today’s batteries.
• Investment is tilting towards more mature plays. Cleantech companies already generating revenue garnered 69 percent of the funding, up from 50 percent in 2010.
• M&A exits dominate. Given the parlous state of IPO offerings, mergers & acquisitions continue to be the main path to maturity for cleantech players. In 2011, a total of $2.9 billion in M&A deals involved cleantech startups, some 79 deals, according to Ernst & Young’s analysis.
• IPO drought lingers. Just five companies IPO’d in 2011, not many more than the three that listed a year prior. Biofuels dominated last year’s public debuts, with Solazyme, Gevo, and KiOR. Intermolecular, a semiconductor R&D company focused on cleantech listed in the final quarter, as did Rentech, a clean energy solutions provider. The five raised a total of $688 million.
The low count of IPOs for cleantech is an indicator of a growing backlog and is one reason why new cleantech investment may be slowing. Without a clear line to exit, venture funders will steer their money to sectors where it’s easier to cash out.
Thus, Facebook. Good things may yet come of Facebook’s super-hyped IPO. Perhaps it will improve the atmospherics around cleantech IPOs?
But on balance I find the din disheartening. The very big IPOs by Twitter et al. smack of hype. To emphasize my point: Facebook’s pending IPO is likely to raise around $5 billion, more than was invested by VCs in the entire cleantech sector last year. Indeed, Facebook’s valuation is verging on speculation, maybe even magical thinking. The offering is slated to value the total company at $100 billion.
Compared with the foaming enthusiasm for all-things-Facebook, it can feel like cleantech has drifted into a period of backlash, however undeserved. Investment continues apace to be sure, but the narrative around cleantech is growing more polarized.
Long-time cleantech investor Ira Ehrenpreis put it this way, as quoted in GreentechMedia.com: “While I’ve never been more bearish on U.S. cleantech, I’ve never been more bullish about global cleantech.”
Blame domestic politics for the widening gap in cleantech prospects here compared with global markets. Leading the negative push—recklessly so—are House Republicans, who seem intent on vilifying federal support of renewable energy, using Solyndra’s failure as a political bludgeon against President Obama. Likewise, the GOP presidential aspirants have retreated on cleantech: far-right opposition of climate change is so dogmatic, even discussions of cleantech have become off limits despite the fact that practically all the Republican candidates have championed renewable investment in the past.
Meanwhile, media find it hard to resist the counter-intuitive appeal of the “cleantech is failing” tale, and are amplifying the meme. Picking up on the GOP’s talking points, the tally of stories of Solyndra’s failure far outpaces coverage of the fact that it’s been a record year for solar capacity growth in the U.S. Or that plummeting solar prices are a windfall for buyers of the technology, enabling even energy-poor regions such as India to light up.
Witness Wired magazine’s February story “Why the Clean Tech Boom Went Bust.” While its author, Washington Post’s Juliet Eilperin, actually offers a reasonably measured take on the impact of cheap natural gas and the Solyndra scandal, you’d have a hard time figuring that out from the headline or the explosive artwork illustrating the story (at right, by Dan Forbes).
Lurid pictures of exploding wind mills, fiery biodiesel canisters, and a shattering PV panel left me thinking that John Doerr must be on the verge of switching back coal heat for his mansion. Meanwhile, elsewhere on Wired.com, the breathless all-technology-is-pretty-much-cool coverage of green developments continuesapace.
Wired’s schizophrenic take on cleantech is not unique, but it deserves special attention because the magazine has been such a vocal, effective champion for innovation as a driver of economic growth. The editors’ tabloid take on cleantech is sure to gather clicks: scores of contrary comments and irate tweets suggest the story has generated a lot of attention.
But in gunning for controversy, Wired goes off target, loosing sight of the bigger, better idea that cleantech is a near-ideal innovation catalyst for U.S. economic growth. That’s why we should keep our fingers crossed that venture capitalists will keep steering more money into the sector too.
Global investment in clean energy capacity expanded by 5 percent in 2011 to $260 billion. The growth comes despite the considerable drag from economic crisis in Europe and weak growth in the U.S.
Up from $247 billion in 2010, last year’s rise in spending on clean energy capacity offered reasons for optimism along with rising cause for concern. Note that this data includes spending on renewable energy technologies, but not advanced coal, nuclear or conventional big hydro.
The good news: Spending has quintupled in the past seven years, with outlays for solar power leading the expansion — soaring by 36 percent to $137.5 billion during 2011.
And in the global horse race for green energy leadership, the U.S. regained its lead over China for the first time since 2008. U.S. spending hit a record, at $55.4 billion, up 35 percent, as investment in China rose by just one percent to $48.9 billion.
“The performance of solar is even more remarkable when you consider that the price of photovoltaic modules fell by close to 50 percent during 2011, and now stands 75 percent lower than three years ago, in mid-2008,” Michael Liebreich, chief executive of Bloomberg New Energy Finance, said in a statement.
But lurking behind those big numbers are worries that U.S.’ resurgence in 2011 may turn out to be the lunge that precedes a stumble. Spending in the U.S. was buoyed by a big surge of stimulus funds, originally set aside in the 2008 stimulus bill, that will taper off sharply in the year ahead.
“The U.S. jumped back into the lead in clean energy investment last year,” Liebreich added. “However before anyone in Washington celebrates too much, the U.S. figure was achieved thanks in large part to support initiatives which have now expired.”
As those incentives shrink, the global wind and solar industries are set to consolidate. Supply in both the wind and solar markets exceeds demand significantly, leading to bankruptcies and pullbacks. In the solar space, Solyndra is the most visible, but one of a growing number of startups that crashed under pressure from falling solar cell prices.
Dominated by mature conglomerates such as GE and Siemens, the outlook for wind is dimmer than for solar: Global investment fell by 17 percent to $74.9 billion. To try to compete with lower-cost Chinese manufacturers Vestas, the world’s largest producer of turbines, yesterday announced it was shuttering a factory, and cutting 2,335 jobs, or about 10 percent of its staff.
Of course, oversupply means lower-cost energy systems for buyers. And even as subsidies are declining in the wealthy West, non-financial policy support remains resilient. In the U.S., renewable portfolio standards in 29 U.S. states represent a $400 billion investment opportunity, as other states finalize similar commitments.
Meanwhile, stepped up subsidies in emerging markets — especially Brazil and India — are upgrading energy services to virgin markets. Spending in these areas will replace some of the investment that is retreating in North America and Europe, said Ethan Zindler, Head of Policy Analysis at Bloomberg New Energy Finance.
Financial innovation remains a weak spot, however, especially in the U.S., where clever capital solutions could help fill the gap left by shrinking federal subsidies. Given the multi-billion dollar scale of many clean-energy investment projects, there’s been a dearth of the sorts of high-efficiency financial instruments that can bundle up batches of projects, and finance them at low cost in public markets, Zindler added.
There have been some promising precedents — such as PACE loans and solar lease-to-own programs. But nothing has yet emerged to substitute for large-scale, multi-billion federal subsidy programs. Proposals such as green bonds or a national infrastructure bank are stuck in the starting gate, said Zindler.
Institutional investors, meanwhile, are hungry for more diversified ways to put money into greener projects. “Investors need diversified, sustainable strategies that maximize risk-adjusted returns in a volatile investment environment,” said Ceres head Mindy Lubber, which directs the Investor Network on Climate Risk, a network of 100 institutional investors with collective assets totaling about $10 trillion.
The retreat of subsidies may enhance the competitiveness of products and strategies already honed to deliver higher efficiency and energy savings, said Marc Vachon, vice president of ecomagination at GE. He added that GE’s ecomagination product line is growing at twice the rate of the rest of the company, having already generated $85 billion in revenues to date.
The event saw the release of two other reports of note for folks following investment trends in green business and clean tech:
• Global investment consultant Mercer issued a new report showing how leading global investors, including the nation’s largest public pension fund, CalPERS, are integrating climate change considerations into investment risk management and asset allocations. The report, “Through the Looking Glass: How Investors are Applying Results of the Climate Change Scenarios Study” comes on the heels of a Mercer report last year showing that climate change could contribute as much as 10 percent to portfolio risk over the next 20 years.
• Deutsche Asset Management also released a new report, “2011: The Good, The Bad, and the Ugly,” describing generally mixed results on climate investments and policy in 2011 but projecting long-term growth in cleaner energy markets to continue. Positive trends included China and Germany’s continued low-carbon leadership, the U.S. Environmental Protection Agency’s issuance of new rules on hazardous air pollutants, Australia’s new carbon legislation, and Japan’s commitment to supporting the deployment of more renewable energy.
The report also highlights negative trends such as the weak performance of cleantech public equity stocks in 2011 and the expiration of several U.S. federal renewable energy incentive programs, including the “highly successful” Treasury Grant Program that expired Dec. 31, 2011. The report noted that the TGP program, in 2 1/2 years, leveraged nearly $23 billion in private sector investment for 22,000 projects in every state across a dozen clean energy industries.
Last but not least, a plug. If you, like me, have concluded that the “end of coal” is all but inevitable to prevent catastrophic climate change, check out this remarkable presentation — which ended with a standing ovation — by Richard Trumka, President of the AFL-CIO at yesterday’s summit.
Trumka, a former miner, spoke with passion about how the “end of coal” message is landing on the ground in blue-collar coal country, even as he acknowledged the dire need to address climate risks and build a low-carbon economy.
His message is cause to reflect on how labor’s interests are often misunderstood and under-represented in climate policy discussions. Where coal miners see their jobs, housing values, and culture imperiled, it’s no surprise that the politics of climate change become hard to swallow — no matter how chaotic the climate change signals may be. The same labor issues vex the proposed XL Pipeline, about which Trumka says labor remains divided, and natural gas fracking as well.
“Alternative” energy is officially not so alternative anymore. Last year, for the first time ever, spending on projects to generate electricity from renewable sources eclipsed the amount spent to build conventional fossil fuel plants.
In 2010, renewable projects drew $187 billion in investment, 19 percent more than the $157 billion spent to build or augment conventional generating plants, fuelled by natural gas, oil and coal, according to analysis released by Bloomberg New Energy Finance for the Durban climate talks.
As the clean energy sector comes of age it must now reckon with the challenges of more mature industries. Namely, managing the risk posed by larger, more complex projects. According to “Managing the Risk in Renewable Energy,” a report released this week by the Economist Intelligence Unit and Swiss Re, minimizing financial risk is one of the most “acute” challenges facing the sector in the near term.
The renewable energy sector will face an even more uncertain future if it fails to manage the growing risks associated with larger, more complex projects, EIU found. The study was based on survey of 284 senior-level renewable energy executives.
The survey found that renewables have moved to center stage. Power companies increasingly view renewable energy as central to their business strategies, and are developing larger and more complex renewable energy projects. Billion dollar projects, once rare, have become regular.
Worry is rising among renewable energy investors that some of the other 100 or so governments supporting clean energy will cut public subsidies as part of austerity measures, the report found. Fiscal crisis in Europe and economic malaise in the U.S. suggest public support for renewable energy is more likely to shrink than grow in the near term. For example, solar feed-in tariffs are being slashed across Europe: lowered by 15 percent in Germany and up to 70 percent in the U.K.
As public funds dry up, the appetite for renewables remains strong, siginaling a shift to more private funding. “Risk management measures such as insurance will be key to encourage further private sector investment,” said Agostino Galvagni, Chief Executive Officer Swiss Re Corporate Solutions in a statement. “Additional investments into renewable energy are needed to achieve the transition to a low-carbon economy,” he added.
A major issue in renewable energy projects is their high up front costs. Projects are typically capital-intensive and highly leveraged, with up to up to three quarters financed through debt. As companies seek to scale up investments, overcoming financial risks is one of the biggest challenges, according to 76 percent of the survey respondents.
Among plant investors, owners and operators surveyed, other significant concerns included political and regulatory risk (62 percent) while weather-related volume risk comes in third for wind power producers (66 percent). These risks increase further as projects grow in scale and complexity.
The report revealed that while companies are sophisticated in using insurance elsewhere in their businesses, the dearth of risk-management tools in the renewables space has limited their use. About two-thirds of respondents already use insurance to transfer risks. But only half of respondents said they are currently transferring risk successfully, for example through insurance to hedge against the risk of weather-related reductions in output of a solar park or wind farm. Instead, because of the limited availability of suitable risk-transfer mechanism, many retain the risks related to renewable energy assets on their balance sheets due to.
The use of solutions such as weather-based financial derivatives is slowly picking up, even though only 4 percent of wind power producers apply them to their projects. Many solutions on the market today are unsuitable for small-scale projects. In the survey, executives say they would transfer more risk if suitable risk-transfer products become more widely available in the future, particularly more standardized and cost-effective products.
With the next round of global climate talks expected to founder in Durban, the need to develop more efficient private sector investment tools for technologies that mitigate climate change, such as renewables, is only growing. The toll for climate related damage is expected to continue to rise in coming years. In 2011, the U.S. eclipsed the prior worst-year record for extreme weather events, with 14 such events doing more than $1 billion in damage. In 2008, the prior record year, the tally was nine such events.
“New technologies and innovation in renewable energy will be the only possibilities left should a global policy regime to reduce carbon emission not materialize,” says Andreas Spiegel, Swiss Re’s Senior Climate Change Adviser in a statement.
As the reports sponsor, Swiss Re is eager to “better understand how insurance can mobilize financing for renewable energy projects and identify the most cost-effective ways to reduce risks,” Spiegel added. Insurance can help lower construction and operational risks, by covering losses in the case of accident or delay.
For deeper dive into the survey’s findings, check out the EIU’s summary analysis here [PDF]. Cribbed from that analysis, here are the reports key findings, as well, according to Aviva Freudmann, Research Director at EIU.
1. Renewable energy is growing in strategic significance in the power industry, and is the focus of ever-larger investments.2. As renewable energy projects grow in number, scale and complexity, the industry faces a growing range of risks — as well as significant challenges in managing them.
3. Plant financiers and operators consider financial risks the most significant, particularly in early project stages.
4. Industry players are becoming more cautious, taking a variety of measures to reduce their exposures and transfer the remaining ones. One emerging way to manage certain risks is to diversify by geography and by technology.
5. By a wide margin, the industry chooses insurance to transfer financial risks to third parties, followed by capital-market instruments such as catastrophe bonds.
6. For operational risks, industry players seem unsure whether to continue using current risk transfer mechanisms, which focus on insurance and capital-market instruments. Many transfer operational risks to hardware suppliers.
7. Confusion abounds on how best to manage weather-related volume risks. The industry calls for a broader range of risk transfer products to cover such risks.
As Christopher Short pointed out on these pages earlier this week, American Electric Power (AEP)’s recently suspended operations at its Mountaineer project in West Virginia, a move which underscores how policy uncertainty is having a corrosive effect on viable CCS projects. Short reminds us that, based on Global CCS Institute projects data, Mountaineer is just one of a half dozen US projects that have been shelved partly because of a lack of federal carbon policy.
There’s a second troubling dimension to this policy problem that occurred to me while catching up on what should otherwise pass for good news in the realm of CCS research and development.
In investment circles, the phenomenon is known as the ‘valley of death’. It happens when promising early-stage technologies fail not for lack of groundbreaking performance improvements, but for a lack of finance or other business-related barrier to scaling.
In the case of CCS, the absence of clear policy means that promising research has fewer paths to scale up for commercial deployment.
Here’s what brought the thought to mind. On 12 June, just two days before AEP’s announcement, the US Department of Energy (DOE) expanded by three the group of projects designed to confirm the safety of long-term sequestration of CO2. (Find details of the projects further down.)
It’s welcome news, of course, but given the AEP news, generally dim prospects for US carbon policy, and resulting indecision among both private and public-sector players, there’s a worrisome question over how the results of the DOE’s valuable CCS research can evolve.
Take a step back. Much has been written about the failings of the US R&D machine. The country is inarguably blessed with many of the planet’s finest research universities, and is famously skilled at incubating discoveries. But we’re notoriously poor at commercializing those advances. Exceptions exist, to be sure, such as IT and software, but the spectre of ‘invented here, built there’ haunts much of US economic and job growth policy discussions.
Now there’s reason to argue that just such a pattern is setting up in CCS. And there’s certainly risk that a ‘valley of death’ may open up, distancing CCS R&D projects from crucial commercialization opportunities.
The DOE is seeding numerous R&D projects, but there’s a decreasing population of commercial players who can take on the risk of commercializing them. Likewise, talented researchers drawn to carbon related technical fields face dimmer prospects with the erosion of mid-stage projects.
Now, back to the good news. Cribbing from Carbon Capture Journal, here are details of the projects being newly funded. Funding for the trio will total $34.5 million over four years:
* Blackhorse Energy, based in Houston, Texas, plans to inject approximately 53,000 tons of CO2 into a geologic formation located in Livingston Parish, Louisiana. The project will assess the suitability of strandplain geologic formations for future large-scale geologic storage of CO2 in association with enhanced oil recovery. Additionally, they will test the efficacy of increased storage using short-radius horizontal well technology to inject supercritical CO2 and CO2 foam into the reservoir.
* The University of Kansas Center for Research, in Lawrence, Kansas, will inject at least 70,000 metric tons of CO2 into multiple formations. The project will demonstrate the application of state-of-the-art monitoring, verification, and accounting tools and techniques to monitor and visualize the injected CO2 plume and establish best practice methodologies for MVA and closure in ‘shelf clastic’ and ‘shelf carbonate’ geologic formations.
* Virginia Polytechnic Institute & State University, in Blacksburg, Virginia, will test the properties of coal seams, and evaluate the potential for enhanced coalbed methane recovery by injecting approximately 20,000 tons of CO2 into un-mineable coalbeds. (Click here for further details at Carbon Capture Journal.)
As a signal of continuing commitment to CCS, this is encouraging. Given political realities in the US, where legislative policy is blocked by partisan politics, the White House is smart to use federal agencies—the DOE and Environmental Protection Agency, mainly—to spur the climate policy agenda.
But in the absence of full-blown federal policy, I can only wonder: how far can this approach really go, for how long?
Writer, editor, content advisor, creative leader – energy, climate | Chief storyteller at RMI | Co-founder of T Brand at The New York Times
To make my half-full case, note that cleantech venture capital investment has been resilient despite both economic and political headwinds. Last year’s funding remains 29 percent higher than its 2009 total, when overall venture flows crashed in the wake of the global financial crisis.
Witness Wired magazine’s February story “
