Climate Finance: Making More Green Together 

By Daniela Nyiri, Green Bank Policy Consultant 

Since 2020, billions in public and private capital have been going toward the clean energy transition. Many states across the country have developed climate invention plans, set targets, or passed legislation. Thousands of companies across industries have made net zero commitments. Now with the Inflation Reduction Act, the US can even say that they’ve finally passed climate legislation, but is it enough?

Progress is being made, but not every state is on the same page. When we use global temperature as a metric to track our progress and see our impact, it continues to disproportionately rise and experts are only increasingly more concerned. 

More Money, Fewer Problems.

To attain a net zero economy by 2050, the US will have to address a series of gaps, and they're all pretty expensive to fill. There’s a knowledge gap, education gap, financing gap, market gap, technology gap, supply and demand gap! Many organizations and public and private entities have been trying to chip away at these problems, but we’re noticing that it’s not happening fast enough. 

Time is slipping by, but we can make up for it if we combine forces. To reach our goals, both public and private sectors will have to work alongside each other through 2025 to increase annual investment flows by $3.8 trillion. If the US fails to do so, all these gaps will continue to widen much faster than we can fill them.  

This is why the Inflation Reduction Act is a big deal. It’s a down payment to help us solidify our partnership with the private sector and grow the pie so we can all enjoy a piece.

Using Climate Financing To Work Together.

Equitably accelerating clean energy adaption everywhere is a difficult and expensive task because there are a variety of barriers that vary in degree. For example, high upfront costs, accessibility, infrastructure, politics, supply, and demand, are associated with higher levels of perceived risk in markets where income and socioeconomic status have been historically low. 

To address this obstacle, policymakers and stakeholders have embraced a growing policy tool known as “climate finance,” a funding mechanism that draws from public resources to attract double the private capital. This method is used to incentivize investments toward adaptation and mitigation efforts to address climate change by using public dollars as a downpayment to mitigate risks.

Traditional financing institutions think of a bank, prioritize profit, and are very cognizant of risks; these financing entities typically shy away from new and evolving industries like clean energy and markets where risks are high! 

For example, energy efficiency upgrades will have long-term benefits for our planet and our wallets, but in the interim, it costs a lot of money to make those upgrades. Chances are if you’re already struggling to pay the bills, a bank might not be willing to do the underwriting necessary to loan you the money needed to receive IRA tax credits AND save on energy. 

Climate financing helps us bridge the financing gap by creating a vehicle that can mobilize the private sector alongside the transition instead of against it. When we minimize private sector apprehension we can redirect resources towards clean energy and underserved markets. For example, Since 2011, the American Green Bank Consortium’s cumulative public-private investment has surpassed $14.85 billion. This amount includes $4.20 billion of public capital and $10.66B of private capital.

This is why climate financing is an innovative approach to climate policy because it helps fill that gap, making it possible for everyone to feel and see green. 

Make More Pie?

You have 12 guests coming over for dinner, but only enough money to buy 1 pie. 

This is policymaking in a nutshell. Sometimes there’s not enough money to make the pie big enough for everyone to have a piece and if you decide to cut the slice too thin, you’ll just end up with hungry guests.

The Inflation Reduction Act includes $369 billion dispersed over a 10-year period to accelerate the transition, but in 2022 alone, extreme weather left the U.S. with a tab of $165 billion. If we treat IRA like a pie, there won’t be enough to give everyone a piece. 

To maximize the lifespan of every IRA dollar invested, policy architects used climate financing as a tool and allocated $27 billion to the Greenhouse Gas Reduction Fund, a program tasked with making more pie to make equitable outcomes possible. 

Using Climate Financing To Address Environmental Justice

When we have massive problems, limited public resources, a diverse population, and unaddressed structural injustices, equitable outcomes seem impossible to achieve. But if we embrace an approach that removes financial limitations, like climate financing, we can enable all communities across our great country to adapt to a changing climate.

Climate financing tools like the GGRF can help us address historical burdens and injustice because they can: 

1. Build a Green Market: Facilitate collaboration among governments, private sector actors, non-governmental organizations, and local communities.
2. Safeguard public investment: Treat public resources as a one-time investment to build a financial system that can regenerate additional capital and leverage private investments.
3. Sustain a Feedback Loop: Keep equity at the forefront of our transition goals and actively navigate resources toward underserved and neglected markets to empower vulnerable communities on the frontline of climate impact to be a part of the solution.

Investing in clean energy projects has a whole host of benefits. It will help us contain global temperatures, mitigate climate impacts, create job opportunities, promote technological innovation, and enhance energy access for everyone, but it comes with a hefty price tag. 

This new approach to climate policy plays a vital role in our ability to scale and streamline these initiatives because it helps us unlock additional capital to account for the high up-front costs and risks associated with changing our energy economy. When we use climate financing as a tool to increase access to these solutions in frontline markets, then we can also achieve equitable outcomes.

To truly facilitate a just transition, both public and private sectors need to work together and climate financing helps us build that bridge. When we collaborate, we can lean on our strengths and make up for lost time to create a resilient, green economy that addresses the climate crisis and ensures equitable benefits are shared by all.