Green Bonds 1 – An Idea is Born

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Note: First of a two-part series. Green Bonds is a public policy proposal produced in conjunction with Action Canada Fellows.

Originally published in Corporate Knights Magazine, May 2008

With my arms gesticulating wildly at a B&B in Canmore, Alberta, I told my Action Canada colleagues about the sort of geeky vision that haunts the dreams of a Cleantech engineer and financier like myself. Eyes wide open, they heard how windmills circling Hudson’s Bay might power the North American grid, how the Bay of Fundy holds more power than a fist-full of nuclear reactors, and how geothermal could transform the way we heat and cool our buildings. Canada is uniquely positioned – our geography speaks not just to our being an energy superpower but a renewable energy superpower! Forget the tar sands, let’s mine Hudson’s Bay!  How do we get there, I asked – and, more importantly, how do we engage Canadians in this vision? “Green Bonds!”, shouted my colleague Andrew Sniderman. A public policy project was born.

This way of seeing things may be a bit ‘enthusiastic’, but the Government of Canada has committed itself to deep, long-term greenhouse gas and air pollutant reductions. Outlined in the Turning the Corner regulatory framework, we’re committed to a 60-70% reduction below current levels by 2050. We ain’t gonna get there with compact florescents and hybrid cars – we need massive renewable energy infrastructure and we need to start building it now.

The only long-term solution to the carbon crisis is a strong, market-wide pricing signal – preferably a global pricing signal (see Cleantech Issue ’07, Vol 6.2) – but that pricing signal will come only slowly and incrementally. No-one wants to shock the economy. The National Roundtable on the Environment and the Economy (NRTEE) has concluded it will take a price on carbon of around $270 a tonne to get to that commitment.  That price level won’t be reached for years and years. In the meantime, energy producers are investing in energy infrastructure that will last a lifetime. How to change their behaviour today, before that pricing signal really hits?

Here’s where Green Bonds comes in – a government backed financial instrument designed to engage the public by raising capital to accelerate renewable energy production.  Raise money from the public, guarantee it by the government, nad lend it at low rates to energy producers who choose renewable methods of production.

The Europeans – ahead of us as always on the climate change issue – have issued their Climate Awareness Bond in June, 2007. The idea has been tested, and it works

If I want to build a coal plant today, I can borrow from the bank at a super-low rate. Why? Because commercial banks are comfortable with coal, it’s been around a long, long time. It’s safe. If I want to build a commercial-size bio-gas plant, or an industrial-scale tidal plant, the rate at which I have to borrow is high – really high. That means renewables face a significant disadvantage – and we propose to address that market gap by supplying cheap debt to qualified companies for qualified technologies.

What we call a “threshold technology” is one that has been proven from an engineering perspective (it’s won’t rust on the bottom of the ocean, or stop turning in the wind) and would become price-competitive given cheap capital. Most renewables are high-capital costs, low operating costs – perfect for a low-cost debt solution. There are proven pilot projects funded by Sustainable Development Technology Canada that cry out for commercial-size funding.

We can’t wait for the commercial banks, they’re just too stodgy. Let’s face it – that’s why we like them, they’re safe. But that cozy, safe feeling comes at a price – they cannot play an enabling role for large-scale, massive rollouts of renewable energy production.

Why a bond? Why not just have the Feds issue a Treasury Bill? Don’t underestimate the importance of engaging the public in a positive way on the climate change issue. Canadians are biting at the bit to do something other than change a light-bulb. We conducted a poll through SES Research: 81.8% of Canadians support this initiative and 62.2% say they would purchase Green Bonds.

Green Bonds is not a magic bullet, nor a permanent solution. It’s designed to fill a temporary market gap until a carbon pricing signal can take over – Green Bonds will accelerate the rate at which we build our renewable infrastructure.

On June 2nd, at the Action Canada conference in Toronto, we will release all the nitty-gritty details of our proposal. Glen Hodgson, Chief Economist of the Conference Board of Canada will be there to keep us honest.

Next issue I’ll give you the real goods. What are the bond mechanics? How are the funds disbursed? How is the risk of defaulted loans mitigated? Most importantly – why is this policy more efficient at accelerating the adoption of low-carbon technology than tax credits, or other direct subsidies? Stay tuned for those details.

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