Green economy cannot bloom without incentives

Simon Zadek says trade rules must change while resource prices need to reflect long-term risks

PUBLISHED : Tuesday, 29 January, 2013, 12:00am
UPDATED : Tuesday, 29 January, 2013, 4:36am

According to new estimates, US$100 trillion is required by 2030 to finance infrastructure needs worldwide. This investment needs to be made greener - its design must rely on less carbon and fewer natural resources - if we are to avoid an unsustainable increase in global temperatures of 4 degrees Celsius or more in the coming decades.

At least in the short term, green investment costs more than business-as-usual investment - about US$700 billion more a year worldwide, according to the G20-inspired Green Growth Action Alliance.

These costs are insignificant compared to the economic and other damage implied by unrestrained climate change. But someone still needs to put up the extra money.

Investment in clean energy has increased, with global spending on renewable energy rising sixfold since 2004. But the total remains far too small. While active government support remains crucial to advancing green investment at scale, widespread fiscal weakness is pulling in the opposite direction.

The good news is that there is growing experience in leveraging private investment with relatively small amounts of public finance. More good news is that developing economies are a rapidly growing source of finance for green investment.

Two things must change to translate this good news into the level of investment we need. First, today's trade rules and international development-finance institutions must stop blocking potential industrial and economic gains from green investment supported by tax revenues. This is a crucial issue for all countries - not only major potential exporters such as China, but also smaller countries in Africa and elsewhere that are seeking to benefit from their willingness to go green. A free for all in subsidising exports must be avoided.

Second, financial markets need to take a longer view. As economist Nicholas Stern has pointed out, by not pricing in climate risk investors are effectively betting on - indeed, encouraging - an unsustainable increase in global temperatures. Much can be done on this front, from including environmental risks in credit ratings to fuller disclosure of how investors price carbon and natural resources.

Developing countries with maturing capital markets thus have a chance to jump ahead by shaping those markets in a way that encourages greater investment in tomorrow's low-carbon and resource-efficient global economy.

Failure to "green" infrastructure investment will reduce growth, increase systemic risk, deepen inequality and fuel social unrest. Private investors need incentives to "green" their portfolios - and penalties for failing to do so.

Simon Zadek is currently visiting scholar at Tsinghua School of Economics and Management. Copyright: Project Syndicate