As more and more world leaders call for action on climate change, a difficult challenge arises: How do we pay for it?
It will take an estimated $5-7 trillion per year over the next 15 years to solve climate change and to meet the other U.N. Sustainable Development Goals ("SDGs"), from ending extreme poverty to ensuring clean water and sanitation for all. That’s a staggering amount of money.
Annual government grants today only punch in at $142.6 billion. Philanthropy produces about $400 billion per year in the U.S., though only a small percentage of this goes to environment or sustainability issues. That leaves a huge financing gap.
Closing that gap is likely the most important thing an environmental CEO like me can focus on.
Despite the scope of the challenge, there’s good news. Institutional investors—pension funds, insurance companies, sovereign wealth funds—have an estimated $90 trillion in private capital under management, and some have shown a willingness to invest in projects that can achieve strong financial returns while achieving critical environmental goals. The key to unlocking large-scale environmental and social progress is incentivizing those dollars to flow toward addressing the SDGs.
There are three main keys to catalyzing these flows:
Designing smart government policy is the most important step toward mobilizing private investment in a sustainable future.
We often get this right. Consider the emerging renewable portfolio standards in the U.S., now in place in 29 states. These policies have unleashed huge investments by the private sector. Likewise, solar tax subsidies in the US (and complimentary policies in other countries) have catalyzed enormous private capital flows and driven the cost of utility-scale solar energy down some 75% since 2009.
Another good example is Brazil’s Forest Code, which requires landowners in parts of the Amazon to maintain 80% of their property under native vegetation. While enforcement of the code has been challenging, it's had a hugely positive impact. For example, it led to the Soy Moratorium, a voluntary ban on the sale of soy from any land deforested after 2006. The result: an 80% reduction in deforestation in the Amazon—one of conservation’s biggest wins ever.
Even a clear and visionary statement by a government can have a positive impact at scale. Take the Chinese government’s recent declaration calling for 20% of all new cars sold in China to run on alternative fuel by 2025. Companies like GM are counting on China to be an ever more important market in the years ahead. It's not surprising to see GM now making its own bold announcements about its electric car ambitions.
The policy that environmentalists like me would most like to see is a price on carbon. Most economists agree that there is no better way to quickly lower greenhouse gas emissions. By relying on market signals, a carbon price would work on the lowest-cost basis and with the least amount of government interference. It’s one of the few plans that has broad, bipartisan support.
There are many other examples of leveraging government leadership to catalyze private sector investment. The key point is that if we really want to make comprehensive and speedy environmental progress at scale, and if we want commercial capital to drive it, government policy is the most important thing to get right.
From the municipal level to the international stage, we’re beginning to see new mechanisms to unlock private financing for conservation. These new solutions often resemble traditional finance vehicles—with an environmental twist.