3 ways the public sector can spur investment in next-gen climate solutions

Three years into the “decisive decade” of the 2020s, while the upward trajectory in capital flows to climate-aligned opportunities is encouraging, the target for scale and speed of investment coverage in climate solutions is not being met.

And while this decade's climate action will largely revolve around the deployment and scaling of existing technologies like wind and solar power generation, the 2030s will be different.

In the 2030s, abatement will rely on breakthrough technologies such as energy efficiency solutions, hydrogen-based fuels, bioenergy and carbon capture, utilization and storage solutions among others. How effective these technologies are, though, will depend on what we do now. A prerequisite to the successful expansion and deployment of these breakthrough technologies in the 2030s is their validation at commercial scale in the 2020s.

Significant capital must be made available this decade for the timely industrial decarbonization of hard-to-abate sectors and a global energy transition. To this end, the Financing the Transition to a Net-Zero Future initiative has launched the “Policy Action to Mobilize Climate Finance, and Market Responses” report, outlining how public policy support can scale investments.

While the upward trajectory in capital flows to climate-aligned opportunities is encouraging — estimates suggest more than $2.5 trillion has been invested in clean energy in 2023 — investment in breakthrough technologies such as clean hydrogen or sustainable aviation fuels (SAF) is still in the low billions, concentrated in a handful of large deals. This is particularly alarming because these technologies are crucial to unlock emissions abatement in some of the highest-emitting sectors of our economies the post-2030 period.

High-risk and capital-intensive investments are difficult for the private sector to fund alone, but the public sector may be able to help.

A supportive public sector, in fact, has an important role to play in creating the conditions necessary to increase the mobilization of private and commercial capital towards climate solutions. In recent years, there have been encouraging gains in this area, but immediate market-wide action is required to achieve the multifold increase in capital flows needed to adopt, validate and expand breakthrough technologies. This relies on co-designed solutions, including innovative financing approaches, new ways of doing business and, importantly, targeted public intervention.

In a renewed context of government support, the Financing the Transition to a Net-Zero Future initiative has deep-dived into recent public-sector announcements from the US, Europe and the UK to identify the role that public incentives play in mobilizing additional sources of capital towards sustainable aviation fuels (SAF) and hydrogen. The market response to the increase in public support has been positive, with sustained incentives improving commercial viability of net-zero projects for investors. Notwithstanding, the financing community continues to face important challenges, including market-wide and systemic obstacles.

The Policy Action to Mobilize Climate Finance, and Market Responses report details three priority actions that can guide the public sector’s efforts to support the private sector and mobilize additional private-sector funding at the speed and scale required.

The public sector can drive activity from other actors, namely producers of the technologies, offtakers of the solutions and financial investors. Catalyzing action may take the form of financial incentives on the demand and supply side, or other mechanisms such as mandates or penalties, to help commit demand towards climate solutions and ensure a steady revenue stream for producers. Incentives are most effective when they are accompanied with mandates that effectively create demand.

The public sector should look to create certainty for climate investment, by pushing for long-term regulatory support and ensuring a predictable and simplified environment. Regulatory certainty is required to encourage funding from financial instruments and can act as a powerful de-risking mechanism. To the extent possible, public actors should provide certainty around the longer-term commitment of current policies, for example through longer-term tax credits, or by simplifying red tape, for example through the legislative proposal of the Net-Zero Industry Act initiative of the Green Deal Industrial Plan.

The public sector can set standards, for example via taxonomies to help credentialize green products and services that ensure actors are aligning to net zero and avoiding green-washing concerns. An increasing amount of regulatory activity surrounding sustainable financing has involved setting definitions and standards around the underlying economic activity being financed.

Importantly, the successful deployment of funds for breakthrough technologies rests on close collaboration between all stakeholders involved across the investment value chain — from project developer to equity providers, debt capital providers and critical de-riskers such as multilateral development banks and governments. As concluded by the Financing the Transition to a Net-Zero Future community in its report published in collaboration with Oliver Wyman: immediate market-wide stakeholder action backed by enabling public policies is required to address the investment gap towards net zero.

The World Economic Forum’s First Movers Coalition is improving the commercial viability of decarbonization solutions by enabling the creation of new markets for net-zero technologies and products. As part of the Coalition, more than 90 companies use their purchasing power to accelerate the adoption of innovative clean technologies across hard to-abate sectors, through over $15 billion in commitments made to date. The demand aggregation reduces the risks associated with new technologies and encourages investments.

The private sector needs to continue to act alongside sustained public support — doing so will mean that the promising technologies in their early stages today and scaled in time to have the maximum impact on the fight against climate change.