A central theme of the talks at the Glasgow climate summit is how countries can mobilize the private sector to finance decarbonization. In a workshop that the IDB group organized with Fundación Chile yesterday , we discussed some solutions – beyond green financial regulations, concessional climate funds, and carbon markets – that are often overlooked in international conversations.
In Chile, almost 80% of greenhouse gas emissions come from burning coal, natural gas, diesel, and gasoline. It is thus essential to replace fossil-fuel power plants with solar, wind, hydro, and geothermal energy; and, in parallel, replace the use of fossil fuels with electricity in all sectors. A study by the IDB, with the Pontifical Catholic University and the University of Chile, shows that these and other measures make it possible to achieve carbon-neutrality in 2050 while increasing the country’s economic growth by more than 5%.
Zero-emission technologies exist and are largely competitive
Many of the technologies required to reach net-zero emissions already exist and are competitive. Wind and solar are the cheapest sources of energy in the world – that is why 90% of the investment in power generation globally is renewable. Electric vehicles are also getting cheaper, thanks to spectacular advances in the cost of batteries. And to electrify uses where batteries don’t work, green hydrogen is a promising solution for the next decade.
Why, then, does the transition not happen more quickly? Part of the problem is financing, and part of the solution lies in public policies.
The example of electric buses in Santiago is a classic. Electric buses consume much less energy and have a much simpler powertrain than diesel buses, so they cost much less to operate. But they also require a higher initial investment. The financial analysis throughout the life cycle is positive, but for the bus operators the investment represents too high a risk, which the private banks could only finance at prohibitive rates.
Government regulations can make or break private financing
The solution was to change the regulations and separate, in government tenders, the operation of a bus line and the ownership of the bus. Specifically, energy companies such as Enel, Engie and more recently COPEC are now able to buy electric buses, which for them represent a smaller investment, and rent it out to the licensed bus operators. Three years later, Chile has the largest fleet of electric buses outside of China.
This example shows that updating the regulations of sectoral government agencies, such as those that oversee public transport, allows mobilizing sources of private financing, in this case electricity utility companies, and work with another part of the private sector, here the operators, to provide decarbonized solutions. A fresh perspective on what private-sector climate financing looks like.
The case of electric buses is just one example, and a small part of the solution. This year, the IDB supported, with loans and studies, about 50 regulatory reforms to enable private investment in variable renewable power, create private markets for energy storage, promote electric cars for taxis and households, and help finance the development of a green hydrogen industry. As always, we did this with an angle of gender equality and citizen inclusion, supporting participatory processes.
Governments need a map of the barriers to climate financing in all sectors
Beyond the decarbonization of energy, achieving carbon neutrality means reducing greenhouse gases in agriculture, waste, and industrial processes. And because all emissions cannot be easily eliminated, afforestation and the restoration of other carbon-trapping ecosystems is required to reach carbon-neutrality.
This means that governments need to map dozens of changes that cover all sectors, from improving compost rates to changing livestock practices and establishing protected natural areas. The next step is asking what prevents these from happening. When they do so, countries will find that barriers abound, from political economy issues to perverse incentives and lack of capacity.
A subset of these barriers: current regulations prevent private-sector adoption of zero-carbon solutions. The example of electric buses shows that once the net-zero goal is converted into a roadmap of concrete sectoral measures, the question of financing climate action may become more practical, and sometimes allows for solutions as simple as updating regulatory frameworks.
Chile’s climate strategy can help us rethink private sector mobilization
Chile is a global leader in terms of climate planning. The country was one of the first in the world to commit to reaching net-zero emissions by 2050 in its Nationally Determined Contribution (NDC) under the Paris Agreement. Yesterday, the country published its long-term climate strategy, which is recognized as one of the three most sophisticated in the world, and highlights more than 400 measures that all ministries will pursue between now and 2050 to transform their sectors. No doubt that many of these measures will require regulatory reforms to enable private sector participation.
It is no secret that the IDB group, like many countries in the region, frequently looks at Chile’s experience for inspiration to solve the challenges we all face. With its long-term climate strategy, Chile helps us rethink what mobilizing the private sector entails, as an investor and as a provider of sustainable development solutions.
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