New report notes that private capital alone isn’t sufficient to meet goals
Necessary for deployment of current clean energy technology
Key Points:
- Private sources of capital are unlikely to be sufficient to finance the low-carbon economic transition, especially during the 2020s when the effort is new.
- To ensure industrial competitiveness and quality of life, the United States should establish a Green Bank to mobilize finance for low-carbon infrastructure and business in America.
- In order to ensure that capital is available for this transition, the committee calls for the establishment of a Green Bank to mobilize finance with at least $60 billion ($30 billion initially with an additional $3 billion per year through 2030].
- U.S. companies have to compete globally with German, British, Indian, and Chinese firms, among others, all supported by government-backed financial institutions that have a specific public policy mandate. The German KfW, UK Green Investment Bank, China Development Bank, and Industrial Development Bank of India are a few examples.
- The United States currently has no domestic independent development, investment, or Green Bank at the federal level, but it has periodically used them in the past.
- At least nine states have established Green Banks or funds, ranging from the Connecticut Green Bank to the Colorado Clean Energy Fund. There are also a number of local funds that serve specific communities, such as the Solar and Energy Loan Fund (SELF) in Florida. These investments also mobilize private sector investment into a project by reportedly three to six times the amount of public sector dollars at work (NREL, 2017).
- The committee recommends that a federal Green Bank be established with a specific public mission to finance low- or zero-carbon technology, business creation, and infrastructure. The rationale for an independent Green Bank as opposed to an entity like a Clean Energy Deployment Administration is to allow it to operate more nimbly than would be the case if the Green Bank was a federal entity.
Full recommendation below or read the full report online:
Although the transition might be achieved while spending only a fraction of GDP that the nation currently allocates to its energy system, the transition will be much more capital intensive than businessas-usual (Chapter 2). Private sources are unlikely to provide the needed capital, especially during the 2020s when the effort is new. To ensure industrial competitiveness and quality of life, the United States should establish a Green Bank to mobilize finance for low-carbon infrastructure and business in America.
Partial financing by a Green Bank would reduce risk for private investors and encourage rapid expansion of private source capital. Such a bank would underpin the broad economic and social transitions required to achieve net-zero emissions by midcentury. The new bank should lend, provide loan guarantees, make equity investments, cooperate with community banks to increase the availability of finance at the local level, and leverage private finance consistent with a national strategy to compete internationally in lowcarbon industries and transform the U.S. economy.
It should make particular effort be a source of credit for innovative small and medium-size enterprises that may be locked out of commercial markets owing to their size. The Green Bank can be a lead investor on big decarbonization projects that serve the public good, de-risking and leveraging larger commercial investors. It should address inequities in the financing system, working with local banks, co-ops, and rural and other marginalized communities. It can also play a countercyclical role by scaling up lending operations when private banks contract (Luna-Martinez and Vicente, 2012), which is essential to sustained and uninterrupted access to finance during the low-carbon transition.
U.S. companies have to compete globally with German, British, Indian, and Chinese firms, among others, all supported by government-backed financial institutions that have a specific public policy mandate. The German KfW, UK Green Investment Bank, China Development Bank, and Industrial Development Bank of India are a few examples. The German KfW is one of the largest development banks in the world, with assets exceeding €500 billion. It was initially the sole lender in Germany to solar companies, prior to financing from private banks.
The China Development Bank holds assets exceeding $1 trillion and likewise has invested heavily in renewable energy and low-carbon infrastructure (GriffithJones et al., 2018). The UK established the world’s first green investment bank in 2012, which financed more than £12 billion of UK green infrastructure projects between 2012 and 2017. This bank backed the construction of the Rampion offshore wind farm and invested in four other offshore wind farms. In 2017, the UK government privatized the bank in order to access additional capital and pay off public debt. It was acquired by an Australian firm, Macquarie, and it now operates as the Green Investment Group. All of the taxpayer money was returned with a gain of £186 million, but the UK government announced in 2020 that it would create a new state-backed Green Bank in the UK.
The United States currently has no domestic independent development, investment, or Green Bank at the federal level, but it has periodically used them in the past. The War Finance Corporation was established during World War I to mobilize finance for the war effort, and in 1932, President Hoover created the Reconstruction Finance Corporation, which later became the capital bank for the New Deal (Omarova, 2020).
However, federal agencies including DOE and USDA do have substantial programs to invest in domestic development through loans and loan guarantees, research grants, and loan and grant assistance. At the USDA for example, the Rural Energy for America Program administered by the Rural Business and Cooperative Service offers loans and grants to rural businesses and agriculture producers to adopt renewable and energy efficiency measures in their farm operations.
At the subnational level, at least nine states have established Green Banks or funds, ranging from the Connecticut Green Bank to the Colorado Clean Energy Fund. There are also a number of local funds that serve specific communities, such as the Solar and Energy Loan Fund (SELF) in Florida. These investments also mobilize private sector investment into a project by reportedly three to six times the amount of public sector dollars at work (NREL, 2017). Legislation has been introduced into Congress for a National Climate Bank with an initial capitalization of $10 billion and an additional $5 billion per year for 5 years to reach $35 billion. The Coalition for Green Capital (2019) suggests this could mobilize up to $1 trillion dollars in investment. While an initial multi-billion-dollar capitalization for the Green Bank would be a significant investment of federal resources, it should be financially self-sustaining and assets should grow over time. There is no magic number for initial capitalization, but to enable the green recovery that is needed in the United States, it needs to be large enough to be adequate to the task and to compete with its counterparts.
The China Development Bank’s current assets equal $1 trillion, Germany’s KfW’s are $575 billion, and Brazil’s National Development Bank is worth $145 billion. A recent proposal for an American Development Bank called for an initial capitalization of $100 billion (Griffith-Jones, 2020). The recent establishment of the U.S. Development Finance Corporation came with authorization of $60 billion, so an initial capitalization of $30 billion in a U.S. Green Bank, rising to $60 billion, may be politically realistic. Equal authorizations would establish that the government cares just as much about domestic investments in green economic development as it does in overseas investments. The committee recommends that a federal Green Bank be established with a specific public mission to finance low- or zero-carbon technology, business creation, and infrastructure. The rationale for an independent Green Bank as opposed to an entity like a Clean Energy Deployment Administration is to allow it to operate more nimbly than would be the case if the Green Bank was a federal entity.
An independent Green Bank formed by the federal government and capitalized with federal funds could forgive loans, something that most governmental entities cannot do. Its remit could be broader, encompassing the financing of other green industries and sectors (e.g., climate adaptation and resilience, fresh water supply), but it must at least devote at least two-thirds of its financing for the energy transition to achieve net-zero emissions by midcentury. Its objectives within the energy transition space would include fostering long-term domestic manufacturing capacity in clean energy and energy efficiency.
The committee recommends:
- Establishment of a federal Green Bank with a specific public mission to finance low- or zerocarbon buildings and technologies, business creation, and infrastructure.
- Congress should provide an initial capitalization of a minimum of $30 billion, followed by an additional $3 billion per year through 2030, resulting in a minimum capitalization of $60 billion by 2030. Cost: $60 billion.
- The bank must adopt good governance procedures and practices, including being transparent and abiding by environment and social safeguards and incorporating labor standards (and Buy American) requirements.
- The staff of the bank must be trained not only in finance but also in engineering, science, technology, and policy so that the bank can make well-informed investment decisions.
- The bank must devote at least two-thirds of its financing to the social, economic, and infrastructural energy transition to achieve net-zero emissions by midcentury.
- The bank must report annually to Congress on its investments and their impacts, including total financing, firms supported, infrastructure created, jobs created, value added, and reduced or avoided GHG emissions.
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