Stimulating Private Investment in Green Infrastructure – A How To Guide

GLOBE-Net, December 1, 2012 – A new report from OECD identifies how governments can scale-up private investment towards greener infrastructure, e.g. in energy, transport and water sectors, to address climate change and local development goals.

The report, Towards a Green Investment Policy Framework: The Case of Low-Carbon, Climate-Resilient Infrastructure, notes filling the infrastructure investment gap and engaging private sector investment provides an opportunity to integrate consideration of climate change along side of other sustainability criteria in infrastructure planning.

Achieving low-carbon, climate-resilient development is a policy goal of many governments today, and investment in built-infrastructure – in the energy, transport, water and building sectors – is a central part of that challenge.

Growing infrastructure needs and fiscal constraints in many economies has resulted in significant infrastructure deficits that can only be dealt with through large-scale private sector investment.

[stextbox id=”custom” float=”true” width=”200″ bcolor=”add3d5″ bgcolor=”add3d5″ image=”null”]Why is low-carbon, climate-resilient infrastructure important? Choices made today about types, features and location of new and renovated infrastructure will lock-in “commitments” to future levels of climate change and to vulnerability or climate-resilience for decades to come.[/stextbox]

Investment in infrastructure needs to be scaled-up significantly in the coming decades to meet both development and climate change policy goals.

While public finance will remain a key ingredient in many infrastructure sectors, fiscal constraints and the magnitude of the investment challenge suggest that such transformative change requires private sector engagement and the creation of enabling conditions for business to “go green.”

But mobilizing private investment to support climate action in infrastructure sectors will require unprecedented shifts in policy both in engineering practice and in investor behaviour.

There is little policy experience on how to integrate climate and other environmental policy goals into investment policy frameworks and infrastructure planning, particularly policies that stimulate private sector investment in infrastructure.

While many programs focus on environmental and climate change policies to support a transition to a low-carbon, climate-resilient (LCR) economy, the OECD report suggests other factors play a critical role to achieve this transition.

It offers useful advice for governments on establishing policy frameworks to shift and scale-up private sector investment in green infrastructure to finance the transition to a lower carbon economy and to promote greener growth.

It cautions green investment policy frameworks must address three key investment conditions crucial to private sector investors: i) the existence of investment opportunities; ii) the return on investment, including boosting returns and limiting the costs of investment; and iii) the risks faced by investors throughout the life of projects.

The key elements of policy frameworks to stimulate such transformational change are: set clear goals and align policies across government; strengthen market incentives for low-carbon climate-resilient infrastructure investment; establish financial regulations and instruments to provide transitional support to new green technologies; harness resources for green R&D; and promote green business and consumer behaviour through corporate reporting and consumer awareness programs.  See below

Elements of a green investment policy framework

1. Strategic goal setting and policy alignment –  Clear, long-term vision and targets for infrastructure and climate change; policy alignment and multilevel governance, including stakeholder engagement

2. Enabling policies and incentives for LCR investment –  Sound investment policies to create open and competitive markets; market based and regulatory policies to “put a price on carbon”, remove harmful subsidies and correct for environmental externalities

3. Financial policies and instruments –  Financial reforms to support long-term investment and insurance markets; innovative financial mechanisms for risk-sharing such as green bonds; transitional direct support for LCR investment

4. Harness resources and build capacity for a LCR economy –  R&D, human and institutional capacity building to support LCR innovation, monitoring and enforcement, climate risk and vulnerability assessment capacity

5. Promote green business and consumer behaviour –  Corporate and consumer awareness program, corporate reporting on climate change, information policies, outreach

One approach does not fit all

The report cautions that policy instruments need to be packaged and coordinated to increase their effectiveness and must be tailored to tackle specific investment and infrastructure market barriers of different market segments.

Any policy framework should been seen as a dynamic schematic that may be used as a decision support tool rather than a prescription for policy. The elements of a framework must be interdependent and feedback loops must exist between them.

For instance, strategic goal setting, policy alignment and sound investment policies may be prerequisites in terms of sequencing to optimizing other policies that can support private sector investment.

Such policies need to create certainty, but they also need to be flexible enough to “learn” from monitoring and evaluation information, as well as to take into account evolving understanding from climate change risk assessment; and views and perspectives over time from key stakeholders.

Regulations and procurement methods such as public-private partnerships (PPPs) need to be supported both by a sound regulatory framework and by programs to build administrative capacity. Integrated pricing and public revenue raising strategies can be a major driver for improving the public acceptance of pricing instruments, and in securing long-term public financing for green infrastructure.

For example using green taxation or other market instruments for climate policy (e.g. GHG emission trading, carbon taxes) can provide new revenue sources which can both assist with fiscal consolidation and help to scale up public sector support to fund green infrastructure.

Green bonds, broadly defined as fixed-income securities issued by governments, multi-national banks, financial institutions or corporations, may be in order to raise the necessary capital for projects that contribute to a low carbon, climate resilient economy.

Such bonds involve issuing entity guarantees for repayment over a certain period of time, usually with either a fixed or variable coupon payment and can be asset backed securities (ABS) tied to specific green infrastructure projects or plain vanilla “treasury-style” bonds issued to raise capital that will be allocated across a portfolio of green projects.

Beyond this, putting a price on carbon to attract private investment will have a very different impact depending on whether the targets for greening of infrastructure are consumer- or firm-level decisions and behaviour, such as in the case of buildings, industrial innovation or building of new infrastructure systems across urban areas.

The OECD report is available here

Citation: Corfee-Morlot, J.et al.(2012), “Towards a Green Investment Policy Framework: The Case of Low-Carbon, Climate-Resilient Infrastructure”,OECD Environment Working Papers, No. 48, OECD Publishing.