Greener policies needed to release private sector funds

Green government policies would boost economic recovery by encouraging investment of huge private surpluses in renewable energy, energy efficiency and low-carbon vehicles, according to a report published today (26 January).

There are currently huge funds in the private sector that could be used to invest in low-carbon technologies and infrastructure, if governments provided the right signals through policies and regulations. Unlocking this capital would create jobs and generate tax revenues without the need for a big increase in public spending, according to Dimitri Zenghelis, a senior visiting fellow at the Grantham Research Institute on Climate Change and the Environment, and the Centre for Climate Change Economics and Policy at the London School of Economics.

“There is no lack of private money in the current market. However, there is a perceived lack of opportunity,” according to Zenghelis. For example, “As a result of reduced spending and investment, private sector financial balances have reached record, or near-record, post-war surpluses in the UK, standing at £137 billion in 2009, and in the US, where companies had balances totalling $4.8 trillion in 2009.

This could provide a “bountiful source” of funds for investment in green technologies, the report says. However, the market for green investment requires clear policy signals to become viable. “If governments can shoulder some policy and regulatory risk through a commitment to clearly identified market-based policy instruments, involving long-term carbon pricing, standards and regulations, together with carefully-designed technology support, the private sector can invest with confidence,” Zenghelis says.

“This would generate profitable new markets and drive private investment without further aggravating public sector deficits or compromising public sector consolidation plans. All that is required is that politicians, officials and economists grasp the opportunity. If instead governments fail to act, then not only do they risk missing an opportunity to lock in new low-carbon infrastructure, they also risk unnecessarily extending the present economic crisis.”

The paper points out there was a marked increase in patents for renewable energy technologies after 1997 when the Kyoto Protocol was signed committing developed countries to cut greenhouse gas emissions. “The role of environmental policies and policy instruments in setting expectations and providing the right incentives for the development and diffusion of environmental technologies cannot be over-estimated,” says the report.