Tuesday, November 25, 2014

Can Green Bonds Bankroll a Clean Energy Revolution?

Green Mountain Wind Farm - Green bonds can finance large-scale renewable energy projects like wind farms. (Credit: Leaflet/Wikimedia Commons) Click to Enlarge.
Looked at from one angle, climate change is an infrastructure problem.  To limit global warming to 2 degrees C and avoid the worst effects of climate change, about $44 trillion will need to be invested in low-carbon projects like wind farms, solar panels, nuclear power, carbon capture, and smart buildings by 2050, the International Energy Agency estimates. That’s more than $1 trillion a year — roughly a four-fold jump from current investment levels. 

Where’s the money going to come from?  Maybe from green bonds, say bankers and environmentalists alike.  Green bonds, which are also known as climate bonds, are fixed-income investments that are designed to finance environmentally friendly projects. Pioneered by international development banks — the European Investment Bank issued the first climate bond in 2007, followed a year later by the World Bank — they are today issued by state and local governments (Massachusetts, Hawaii, New York, and the cities of Stockholm and Spokane, Washington, among others) and by big companies (Bank of America, Unilever, and the French utility GDF Suez). 
Proponents of green bonds say that all the buzz they are generating is, by itself, valuable because it raises awareness of green investments.  Governments and businesses are making new connections with environmentally oriented investors, they say.  If investors in the fixed-income market, where an estimated $80 billion to $100 billion of bonds are sold every year, shift even a fraction of their purchases to green bonds, they will provide new and much-needed financing for low-carbon infrastructure.  If money continues to flow into green bonds, their yields — that is, the interest they pay, which is currently the same as ordinary bonds — could drop, which would make green projects cheaper to build.

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