Financing climate-friendly energy development through bonds

Abstract

In this paper we review the various instruments that have been proposed and implemented for financing renewable energy and low-carbon technology projects, in both the developed and developing world, with a focus on private sector involvement. We consider their common features and compare their total impact so far with the scale of renewable energy funding likely to be needed over the next several decades, as estimated by such bodies as the International Energy Agency, which puts the amount at one trillion US dollars per year. An increase of this magnitude in the required financing provides opportunities for developing new financing instruments, based on what has been accomplished so far, and for regional development banks to be involved in the process, subject to sound risk management principles.

Keywords:

• climate bonds
• green finance
• green bonds
• global warming
• low-carbon technology

Notes

¹All bonds are issued with a ‘coupon’ or designated interest rate payable, stated on the bond certificate.

²The World Bank maintains a webpage devoted to the Green Bonds, with the latest information: http://treasury.worldbank.org/cmd/htm/WorldBankGreenBonds.html

³The estimated totals (CTF allocation plus co-financing) for the 13 currently endorsed CTF Investment Plans (in US$ billions) were: Colombia (2.9), Egypt (1.9), Indonesia (3.1), Kazakhstan (1.3), Mexico (6.2), Morocco (1.9), the Philippines (2.8), South Africa (2.3), Thailand (4.3), Turkey (2.1), Ukraine (2.6), Vietnam (3.4) and the regional Middle East and North Africa concentrated solar power plan covering Algeria, Egypt, Jordan, Morocco and Tunisia (5.6). For a discussion of how the various climate funds might work together, see World Bank (2010).

⁴See for example Doornbusch & Knight (2008), especially the discussion of climate bonds in paragraphs 71, 72 and 73, and UNFCC (2008); as well as calls for greater involvement by the financial system by Avato & Coony (2008), Doornbusch et al. (2008), Spratt (2009) and Ward et al. (2009).

⁵The IEA further estimates that cumulative investment of $46 trillion between 2006 and 2050 would halve carbon emission by mid-century (IEA, 2010).

⁶Some other terms used are ‘green bonds’, ‘environment bonds’ and, in a similar vein, ‘development bonds’ or in some specific instances, ‘rainforest bonds’. We consider ‘climate bonds’ the most suitable label for what promises to be a very broad category of financial instrument.

⁷Under the umbrella of the United Nations Environmental Program (UNEP), the Global Environment Facility and CarbonRe, an insurance consortium known as insurance4renewables has been established, bringing together CarbonRe, RSA Insurance Group and Munich Re to provide financial risk management for renewable energy projects around the world. The World Bank Group also offers insurance on sovereign risk for development projects under the Multilateral Investment Guarantee Agency.

⁸See sources such as Davis & Steil (2004) or Eckhart & Mullen (2005) for comprehensive reviews.

⁹See Veys (2010) for a useful overview of the experience of the UK bonds market and prospects for green bonds.

¹⁰The world's largest 300 retirement funds grew 10.9% in 2010 to a record US$12.5 trillion, according to an annual survey conducted by Pensions & Investments and Towers Watson & Co (P&I/Towers-Watson, 2011). See a summary of the report online: www.pionline.com/specialreports/towers-watson-300

¹¹UNEP/SEF Alliance (2010) provides a discussion of the role of publicly-backed guarantees as a means of promoting investment in clean energy projects.

¹²IETA (2010) makes such a link between carbon credits and green bonds.

¹³We refer here to the Desertec project, which envisages solar power generation facilities in North Africa being linked via high-voltage direct current lines to the European electric grid, forming a single transcontinental super-grid powered by renewable energy. For a discussion, see Battaglini et al. (2009).