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The Green Bonds Initiative

What is it?

Government backed financial instruments which aim to channel funds to renewable energy producers to create a more competitive renewable energy sector and reduce carbon dioxide emissions.

Who proposes it?

Green Bonds Canada an Action Canada initiative

How does it work?

Green Bonds issued by private fund managers, eager to be perceived as ethical and green, to the public would raise funds to be channeled towards renewable energy producers. The federal government could encourage this creation by guaranteeing the principal and a minimal rate of return which would match traditional Savings Bonds. The Bonds could have a variable rate of return which is above the minimal rate of return which the government guarantees. It is expected that the main cost to the government would be covering for defaulted loans. The Canadian public overwhelmingly supports the issue of Green Bonds and 62.2% of the respondents indicate that they would be willing to invest in the bonds (Action Canada). It seems reasonable to expect that Australian support for the Green Bonds would be quite similar.

If issued, Green Bonds can be expected to raise significant funds to finance a starved renewable energy sector. This is of great significance because the renewable energy sector suffers from a lack of financing. The renewable energy sector faces significant challenges in raising funds because banks are often slow to embrace and fund new technology. Banks, traditionally risk averse and conservative, often need to see a technology in use for 15 years before commercially financing it (Savory 2008). This has created a significant funding gap for renewable energy producers as their technologies are only recently being used on a bigger scale. This is where the impact of Green Bonds can be substantial. With increased funds ready to be dispersed at low costs to finance new renewable energy projects they are likely to facilitate a transition towards renewable energy. The availability of low cost funding is especially important in energy production because capital costs often constitute a significant portion of production costs (Action Canada). As such, if the cost and availability of capital for the renewable energy sector is improved then it is likely to assist renewable energy producers in becoming more competitive with improved employment prospects and environmental benefits as direct consequences.

Initially, the funds generated by the issue of Green Bonds would be targeted at industries and projects with limited technology risks that would become price competitive with access to low cost financing. Eventually, it is hoped that the funding from Green Bonds would increase market demand for renewable energy and radically change the energy that we use.

What makes Green Bonds more compelling that tax credits or subsidies is that they are expected to facilitate greenhouse gas emissions at a lower cost. In Canada it is expected that the issue of Green Bonds could “provide additional Greenhouse Gas (GHG) emissions reductions well in excess of 25 Megatonnes/year (Mt/year) by the year 2020, at an estimated cost to the government of between $1 and $12.88 per tonnes” (Action Canada).

Where has it worked?

The European Investment Bank issued a Climate Awareness Bond in 2007 which is used to finance up to 75% of European renewable energy projects (Action Canada).

The World Bank, in partnership with Swedish bank SEB: Green Bond initiative - financing projects such as wind farms and solar parks in 2008 (World Bank 2009).

The American initiative Green Bonds which provides U$2bn worth of AAA rated bonds issued by the US treasury to finance environmentally friendly development and the recovery of industrial wastelands (Smith).

More Reading:

Action Canada,Green Bonds: A Public Policy Proposal, Retrieved from: http://www.greenbonds.ca/index2.html

Savory, E., (2008), Buy a Bond, Save the Planet, CBS News, Retrieved from: http://www.cbc.ca/money/story/2008/07/16/f-savory-tomrand.html

Smith, L., Green Bonds: Fixed Returns to Fix the Planet, Retrieved from: http://www.investopedia.com/articles/bonds/07/green-bonds.asp

Steed, A., (2006), New Bond Designed to Give all of Euopre a ‘Green’ Tinge, The Daily Telegraph, Retrieved from: http://www.telegraph.co.uk/expat/4204070/New-bond-designed-to-give-all-of-Europe-a-green-tinge.html

The World Bank (2009), First ‘World Bank Green Bonds’ Launched, Retrieved from: http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,contentMDK:22024264~pagePK:64257043~piPK:437376~theSitePK:4607,00.html

Submitted by meganmccarthy99 4 years ago

Comments [1]

  1. Moderator

    Climate Bonds: Fast-Track Solution To Low-Carbon Economy

    Copenhagen 14 Dec 2009: The global bond market could play a central role in the fight against climate change, according to an international think tank.

    Today the international Network for Sustainable Financial Markets launched the Climate Bonds Initiative, designed to foster the use of long-term debt to finance a rapid, global transition to low-carbon economy. The Climate Bonds Initiative is operating as an autonomous project supported the Carbon Disclosure Project.

    While the talks in Copenhagen have been holding everyone’s attention, the role of private finance in what will be the biggest economic transformation in history -- estimated in one recent report to be more than three times the size of the whole industrial revolution -- is a side issue.

    According to a number of recent reports a trillion dollars a year of investment has to flow into low-carbon industries if tipping points for runaway climate change are to be averted. The Initiative aims to encourage that investment.

    Climate Bonds Initiative Advisory Panel members include James Cameron, Vice Chair of Climate Change Capital, Nick Robins, HSBC Climate Change Centre of Excellence, and Jeremy Leggett of Solarcentury.

    Mr Robins said: “Putting the emphasis on private financing allows a different perspective. In place of always talking about the ‘costs’ of climate change, we can talk instead about investment opportunities.”

    "Bonds will be an important source of finance for action on climate change. The Climate Bonds Initiative provides a welcome platform to investigate the policy and market framework that will simultaneously raise capital for low carbon solutions and provide attractive risk adjusted returns for investors'.

    Mr Cameron said: “Bonds have allowed us to finance the building of Europe’s sewer systems, the growth of America’s highway system, and the financing of two World Wars. We can now use Climate Bonds to finance the quick, global transition required to head off runaway climate change.”

    He added: “The transition to a low-carbon economy presents capital with what is likely to become the largest commercial opportunity of our time: investing in clean energy and low carbon infrastructure.”

    Climate Bonds Initiative convenor, Sean Kidney, said there were three work streams for the project: “We are developing policy models and advice for governments and corporations, developing agreed definitions and standards for Climate Bonds, and helping countries develop proof-of-concept projects and bond issues.”

    “Globally, there is no shortage of funding; for example, there is some $120 trillion being managed by institutional investors. In the wash-up of the financial crisis, fund managers the world over are re-weighting their portfolios towards fixed interest debt. But most of the bonds on offer lock institutional investors into the carbon-intensive economy.”

    “Discussion with institutional investors such as pension funds has found a large appetite for bond investments related to climate mitigation projects – as long as they first meet accepted risk ratings and rates of return. Many of funds face pressures from their stakeholder groups - governments, public servants, etc – to both deliver solid returns over the long term and to help address climate change with their investments.”

    The past year has seen green bonds from the World Bank and Climate Awareness bonds from the European Investment Bank. If the Climate Bonds Initiative has its way we will see an explosive growth in what are being called “green debt capital markets”.

    ENDS

    Backgrounder 'Climate Bonds can fund the rapid transition to a low-carbon economy':

    http://climatebonds.net/wp-content/uploads/2009/12/climate_bonds_4pager_14Dec09.pdf

    Contact: Sean Kidney, Climate Bonds Initiative

    4 years ago