The $13.6 trillion question: how do we pay for the green transition?

To do that, governments around the world are weighing up options from wealth taxes to levies on shipping. The US is planning to fund the IRA by raising $US300 billion over the decade by requiring large corporations to pay a 15 per cent minimum tax on their profits, as well as through a stock buyback tax, among other measures.

The importance of rapidly raising the cash has become even more apparent after almost 200 countries agreed last year to “transition away” from fossil fuels by 2050, as well as triple renewable energy capacity and double energy efficiency by 2030.

The issue has become so important that this year’s COP29, which is due to take place in Baku, Azerbaijan, in November, has already been dubbed the finance COP. A large part of the discussion centres on agreeing a global goal for climate finance aimed at helping poorer nations transform and adapt their economies. But richer nations too are grappling with the cost of the transition.

Across the industrialised world, politicians expect the private sector to be prominent in financing many aspects of the shift to a greener economy, but taxpayers will also have to foot some of the bill.

The International Energy Agency estimates that the public sector will have to stump up about 30 per cent of climate finance globally needed, with the rest coming from the private sector. Governments are expected to play a key role in financing infrastructure that is crucial to the green transition, such as grids, as well as in adapting economies for climate change, for example by building sea walls or flood defences.

To afford this, governments will have to make sure of a “wide range of levers”, according to Kate Levick, associate director for sustainable finance at climate consultancy E3G, from taxes to financial instruments such as carbon credits.

But politicians are increasingly worried about piling charges on consumers at a time when many are struggling with a cost-of-living crisis. Others have been chastened by a backlash against green measures and the politicisation of climate change.

Carbon tax

“We all struggle with finding the best ways of going through the green transition,” says Dan Jorgensen, Denmark’s minister for development co-operation and global climate policy. “We are dealing with a very complex challenge.”

Paul Kenny knows first-hand the balancing act required when it comes to climate finance. A chartered engineer who ran an energy non-profit with a retrofitting business, he is now an adviser to Ireland’s climate minister and was closely involved in changes to the country’s carbon tax, which puts a price on fossil fuels.

While about 40 countries have introduced some sort of carbon pricing mechanism, the revenues generated are often used for general government spending rather than dedicated to climate efforts.

But in 2021, Ireland said it would progressively increase its carbon tax to €100 a tonne of carbon dioxide emitted by 2030 and ring-fenced the increased revenues for financing climate-related investment and preventing fuel poverty.

“It was hard to do because you’re raising the price of fossil fuels. It is a price increase and that’s hard to do because populist politicians talk about the cost but not the value,” says Kenny.

As well as providing support to lower-income families struggling with rising fuel bills, 55 per cent of the increased revenue generated from the levy has been allocated to retrofitting homes. This includes upgrading social and low-income housing with new heat pumps, insulation and windows, as well as providing grants to wealthier families to improve energy efficiency. About 50,000 houses were retrofitted last year, says Kenny.

He says the plan to spend a large chunk of the revenues on retrofitting provides businesses, such as heat pump installers, with certainty. “You have future growth built in. It allows the retrofit industry to mature and grow,” he says. “It’s the boring certainty that you need.”

Many other countries are also looking at new taxes. In the UK, the opposition Labour Party has proposed its so-called green prosperity plan would be funded by a windfall tax on oil and gas giants.

A supplemental “extraction levy” on fossil fuel majors in the world’s wealthiest countries could raise $US720 billion by 2030, according to a report released in April, backed by environmental groups and nonprofits including Greenpeace and Stamp Out Poverty.

Others are looking at using tourism taxes. This year, Hawaii Governor Josh Green proposed a tourist tax – in the form of a $US25 hotel check-in fee – to help the state deal with the impact of climate change. Last year, more than 100 people were killed in wildfires, fuelled by a changing climate, on the island of Maui.

In Barcelona, which is experiencing a drought emergency, the city council has earmarked €100 million from the popular holiday destination’s tourist tax to install heat pumps and solar panels in state-owned schools.

But governments are scrambling to find other options. At COP28, countries including France, Kenya and Barbados launched a taskforce to look at how “innovative sources of finance”, such as shipping and aviation levies, could be used to fund climate action. The various taxes and levies under investigation could generate $US2.2 trillion a year, the taskforce said.

Laurence Tubiana, the French economist who was a key architect of the 2015 Paris Agreement, is co-heading the taskforce. She says a global agreement on many of these taxes would be difficult, but the idea is to put forward “several options backed by several countries” by COP30 next year.

Other countries are backing efforts to ditch fossil fuel subsidies, with the aim of freeing up money that is used to prop up the oil, coal and gas industry for other uses. At least $US7 trillion is spent on direct and indirect fossil fuel subsidies a year.

“This money would be much better spent on tackling climate change,” says Rob Jetten, deputy prime minister of the Netherlands, which launched a coalition to phase out fossil fuel subsidies at COP28. Countries including Belgium, Finland, Canada, Demark, Spain and Costa Rica have lent their backing to the initiative.

The Netherlands has started phasing out €4.8 billion of such subsidies, Jetten says. “At the same time, we know that half of all fossil fuel subsidies are tied up in international agreements and we must therefore co-operate with other countries.”

In another sign of co-operation between countries, finance ministers from more than 90 countries have signed up to a coalition aimed at promoting national climate action, especially through fiscal policy and the use of public finance.

Catherine McKenna, Canada’s former climate minister who has since founded consultancy Climate and Nature Solutions, says governments are slowly waking up to the view that tackling climate change is no longer the job of just climate ministers.

“You need the prime minister to be all in, you need your top public sector all in, you need all ministers and most importantly you need finance. When finance isn’t all in, they often look at things extremely conservatively,” she says.

She argues governments can look at the short-term revenue benefits of fossil fuels, failing to ignore the longer-term financial and health impacts of continued global warming. “The ability to understand climate in a more sophisticated economic way is lacking,” she says.

Anika Heckwolf, a policy analyst working on climate action and international finance at the Grantham Research Institute in England, argues that “greening government spending overall” would have a much bigger impact than simply “finding a new pot of money”.

‘Spend time’

Much of the fretting about climate finance misses a crucial point, according to Kingsmill Bond, an energy strategist at international environmental organisation Rocky Mountain Institute (RMI): there is plenty of capital available in the industrialised world. It just needs to be deployed effectively – with better use made of the private sector.

“This is a false problem,” Bond says. “The sums involved are actually quite limited and it’s absolutely solvable. You are increasing expenditure on renewables but reducing it on old energy.”

Over the next seven years, capital expenditure on renewables will roughly double while fossil fuel capex will halve, according to research from RMI published earlier this year. Falling fossil fuel capex will therefore provide about half of the growth in renewable capex, it concluded.

Instead, Bond argues, governments need to focus on “intelligent regulation”. “Governments need to put into place the key regulatory and pricing structures that will allow the money to flow. They don’t need to spend lots of capital, but they need to spend time and do the hard work,” he says.

He points to the EU’s REPowerEU strategy, which set new binding targets for renewable energy, alongside providing grants and loans to boost private sector interest. It has helped drive record deployment of solar, he argues. The EU installed a record 56 gigawatts of solar capacity last year, up from 40 gigawatts added in 2022, according to SolarPower Europe.

Chile has also been effective at leveraging public-private partnerships, he says. Its hydrogen strategy, for example, pushes its mining sector to make use of green hydrogen.

But for many countries in the developing world, the issue is less clear-cut. All countries will need to cut greenhouse gas emissions if the world is to limit global warming. But many of the poorest are struggling with ever-stretched budgets and a global private sector reluctant to invest in emerging and developing economies.

Research published at the start of COP28 found that climate finance globally is concentrated in developed countries and China.

In some cases, developing countries that are rich with natural resources are looking at options such as carbon credits to generate income. India, Fiji and Egypt are among those issuing sovereign green bonds, where governments issue bonds akin to traditional sovereign bonds but with proceeds ring-fenced for green projects.

A range of initiatives, such as the Climate Finance Leadership Initiative, is looking at how to better mobilise private sector finance, both in industrialised countries as well as the Global South.

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Countries including the UK, the United Arab Emirates, Kenya and Colombia backed a global climate finance framework at COP28, which argued that “concessional resources” – or below market-rate finance made available by development banks and others – needed to be used to “unlock private finance”.

But much more needs to be done, Simon Stiell, head of the UN’s climate change arm, said in a speech last month. He argued the financial firepower the G20 “marshalled during the global financial crisis should be marshalled again” and focused on “curbing runaway emissions and building resilience now”.

“Every day, finance ministers, CEOs, investors, and development bankers direct trillions of dollars. It’s time to shift those dollars from the energy and infrastructure of the past towards that of a cleaner, more resilient future,” he says.

In Texas, construction of the True North project is on track. The power generated will be used by Meta, the company behind Facebook, for its operations in the region.

The IRA – helped by its funding through various taxes – is transforming the economy by acting as a backstop, says Avangrid chief executive Pedro Azagra. “[It is] providing business certainty for these projects and ensuring they are competitive against non-renewable energy sources,” he says.

Financial Times