Originally published in Corporate Knights Magazine, June 2008
On June 2nd the Green Bonds proposal – first discussed in CK last issue – was unveiled publicly for the first time. After nine months of consultation and detailed policy development, we – the Green Bonds Team – gathered stake-holders into a conference room at the Royal York to initiate what we hoped would be an on-going public debate about the merits of our proposal. Green Bonds – a Victory Bond for the environment – was an exciting proposal (of this we had no doubt), but would it withstand the scrutiny of Bay Street? Of my fellow Clean-tech entrepreneurs? Of think-tanks and academics? Would anyone even show up?
We packed the place to standing-room only. Over 120 people, from finance to energy producer, from banker to policy-wonk, attended to hear our presentation of Green Bonds, listen to a panel of experts kick the tires, and engage in a lively Q & A session. Not only did the policy withstand scrutiny and debate, but the room was charged with excitement. It’s time for Green Bonds to enter the national debate on the economy and the environment, and on June 2nd we kick-started that process.
What’s all the excitement about? In a nutshell, here’s how it works: Canadians buy a government-backed bond (like a Canada Savings Bond), to raise funds to accelerate renewable energy production by providing low-cost debt to renewable energy producers. At the core, it’s that simple.
There are details, of course. Public-engagement is one thing – Green Bonds will spark excitement by providing an answer to those Canadians asking “What can I do for the environment?” – but the financial details are another. Our analysis suggests that Green Bonds are more efficient and more flexible than other policy options on the table. Bottom Line? The Green Bond proposal is one of the cheapest and most effective ways for the government to reduce carbon emissions.
The nuts-and-bolts? The government backs the bond, and provides a mandate to the private sector to run the fund. The fund manager lends the money at low rates to renewable energy producers. The mandate is technology-neutral, has a clear measure of success (e.g. cost to government per tonne of carbon reduction), and financial incentives to maximize that success. Since renewables are typically high capital cost and low operating cost, the low-cost debt reduces the cost of renewable energy production, making it competitive in the short-term with fossil production.
It’s not the company that’s doing R&D on a better wind-turbine blade – or bio-gas technology – that get the money, it’s the company that want to build the next wind-farm, or the next bio-gas plant.
Some questions come to mind ….
Why private sector management? The government shoulders the risk, so why separate risk from management? First off – no-one like the idea of the government picking winners. More importantly, we want to leverage the creativity and efficiency of the private sector, by offering the right financial incentives, to deliver a really efficient policy.
If success of the policy is measured in $ per tonne of carbon emissions reduced, and the mandate is technology-neutral (no picking winners!) then the private sector responds with sound technology choices, strong due diligence and aggressive asset recovery in the case of loan defaults – to minimize cost to the government. Technologies are chosen according to existing market conditions, and would typically be those proven technologies with minimal technology risk. Borrowers would be single-source large impact players – so no mom-and-pop operations. Liens would accompany loans – on equipment, on Power Purchase Agreements, on potential carbon credits, on whatever the fund manager and borrowers negotiate.
What’s the cost to government? We’ve done some math. The main cost is loan defaults (which the fund manager is motivated to minimize) with other variables such as asset recovery rates, management fees and whether the borrower has to put up matching funds. In the three scenarios we ran, costs ranged from $1 to $13 per tonne of carbon removed. The lower end of that range corresponds to a quite realistic scenario, and the upper end to the worst-case-the-sky-is-falling analysis required by the folks at the Ministry of Finance.
That’s s cheap as it gets. Carbon trades at $40 per tonne in Europe and both current and previous federal governments have proposed buying carbon for $15 per tonne. Why is our proposal so cheap? It effectively limits the government’s exposure to paying only for those loans that are defaulted, and the loan agreements and risk-mitigation efforts sit squarely in the hands of the private sector. Each dollar cost to the government is multiplied many times into actual capital deployed to produce renewable energy.
It’s flexible. Technology choices, lending rates – all the details of implementation – can change according to market conditions. It targets a much broader range of companies than either tax credits (to benefit from these you need to be profitable) or fixed subsidies, and costs less per tonne of CO2 reduction.
It’s temporary – this subsidy will quite naturally drop away as costs of carbon emission compliance increase (slowly, over time) or as commercial banks indicate their willingness to lend at similar rates for renewables.
Green Bonds is no magic bullet – it is one tool of many the government must bring to bear to solve the most complicated and massive problem this generation has faced. Green Bonds certainly a darn good tool to put into the policy toolkit.
The possibilities don’t end here. Andrew Heintzman – co-founder and president of Investeco – reminded the audience on June 2nd that the national railroad was built because of innovative public-private financing mechanisms. The sky’s the limit as far as nation-building projects Green Bonds could: high-efficiency DC lines up to Hudson’s Bay, opening it up to wind developers, for example.
Build the Bond, and the buyers will come.
Contact us, and get full policy details at www.greenbonds.ca