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).
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