In this week's blog, Paul Goldrick-Kelly, Economist, NERI argues that the public sector can play a leading role unlocking finance for green investment.
The global shift to environmental sustainability will require substantial changes to existing investment patterns. This is true for global carbon emissions. To limit warming to 1.5° C, investment to decarbonise the “supply-side” of the global energy system - things like resource extraction, power generation, fuel conversion, energy transmission and storage - would need to reach between 1.6 and 3.8 trillion USD dollars annually between now and mid-century. These investment needs are, in turn, affected by our success in limiting final energy demand and promoting energy efficiency throughout the global economy. These “demand-side” efforts – such as building retrofitting - will similarly cost money. The Committee on Climate Change in the UK estimates that the transition to a net zero economy by 2050 will cost between 1-2 per cent of GDP. The scale of investment needed is probably similar in Ireland.
The public sector should play a leading role both in terms of direct capital investment (as we discuss in our recent long read) and schemes to facilitate increased investment from the private sector. More stringent environmental regulations and detailed long-term plans from government should also incentivise investment as enterprises become more certain of a business climate that will reward green economic practices. However, the state can provide an enormous market in its own right, which can ensure markets for new or revamped enterprises and effect long-term change in investment priorities.
The plan to implement green procurement standards in the Climate Action Plan is positive. The government should act to mandate these standards in procurement processes as soon as possible. To facilitate a just transition for workers, government procurement standards should also reflect decent labour conditions to uplift labour standards elsewhere. The government should also reform public guidelines for cost benefit analysis, which evaluate the pros and cons of prospective projects. These guidelines should include more explicit environmental criteria, including carbon costs, which are not solely based on the price currently assigned to them by the market.
These analyses also incorporate discount rates which are used to calculate the current value to benefits which may occur in the future. Conventionally discount rates imply that these benefits should be of lower value to us than those occurring in the present. The higher the discount rate, the lower the implicit value of future benefits. Applied discount rates should reflect the need to incorporate long-term, intergenerational costs of inaction. NESC advocate a reduction in this rate, and a specific low rate for GHG emissions. This will likely have the effect of frontloading state spending on mitigation, incentivising shorter-term changes in enterprise practice in contracted enterprises and beyond.
The state should also take steps to ensure finance is available to market actors who want to engage in green activity. The international literature suggests that there are substantial financing gaps in key sectors such as in low carbon energy resulting from a number of barriers. Public banks and/or the existing publically owned funds could be directed to provide capital to encourage green activity and mobilise private capital at lower cost to loan recipients. These bodies could also facilitate private sector “crowding in” as they affect market perceptions of risk. These financing bodies could also incorporate regional development mandates, and fill gaps in local investment activity. State investment banks can provide patient strategic finance and play a countercyclical role, counteracting downturns and encouraging activity. The former is particularly important in light of technological advances required to fully decarbonise and retool the economy on a sustainable footing. Funding for innovation can also, alongside direct public expenditures on R&D, play a particularly important role in the pursuit of productivity gains. Innovations can lead to competitive advantages in green industries which can encourage activity in supplier sectors, entrenching development. This can promote high road development emphasising high productivity with consequent high quality jobs that are well paid, well protected and incorporate investment in skills.