At CPI Rio, we investigated two alternative explanations for the slowdown in deforestation: market conditions and conservation policies. On the one hand, falling agricultural prices may have inhibited the clearing of forest areas for the expansion of farmland. On the other hand, conservation policies introduced in the second half of the 2000s may have contributed to the curbing of deforestation. Using regression techniques to disentangle the impacts of policies from those of other potential explanatory factors, such as agricultural price cycles, we assessed the contribution of Brazil’s policies to decreased deforestation rates. Our analysis shows that approximately half of the deforestation that was avoided in the Amazon in the 2005 through 2009 period can be attributed to the conservation policies introduced in the second half of the 2000s. The reduction in deforestation is equivalent to an avoided loss of 62,000 km² of forest area, or approximately 620 million tons of stored C (2.3 billion tons of stored CO₂), which our estimates value at 11.5 billion US dollars

For the executive summary and full working paper version of the study, please click here.

Federal energy incentives such as tax breaks and loan programs are the subject of vigorous public debate. This attention is at least in part due to the politics surrounding the failure of the solar manufacturer Solyndra (which received a $500 million government loan), the cost to government of tax incentives for oil and gas production when industry profits are at all-time-highs, and the level of government debt. However, the debate is also a part of a broader national conversation about the appropriate role of government – and in particular about the role of the federal government in the supply and use of energy.

This role is of particular interest to us here at CPI: energy generation and use in the U.S. is responsible for the lion’s share (87%) of the nation’s greenhouse gas emissions which contribute to global climate change. We’re interested in how federal policy is influencing these emissions, and how well it’s working.

Before we can judge whether the federal government’s actions on energy and climate are appropriate or effective, it helps to understand what it’s currently doing. How does the federal government influence energy supply and use? How much does it spend doing it? Since nearly all federal government activity related to energy depends on support from the U.S. budget process, we analyzed the federal budget looking for spending and revenue collection which substantially influenced energy supply or use in 2010. We found that:

• Annual energy-related spending is substantial – $290-610 billion (the range reflects different views on what share of security spending is energy-related) or about 6-14% of all federal spending and tax breaks in 2010 (nearly $4.5 trillion). To put this in perspective, the Solyndra loan is less than a day’s worth of federal energy-related spending while the total spent by the Department of Energy on renewables over the last 33 years ($29 billion in 2010 dollars) amounts to about a month of federal energy-related spending.
• Most energy-related spending is public investment ($240-560 billion), very little of which focuses on reducing emissions. This includes spending on energy-related infrastructure ($104 billion), energy-related security spending ($46-368 billion), and energy procured for government activities ($88 billion). Less than 10% of these investments focus on reducing emissions. Most ($175-500 billion) support petroleum-based transportation such as highways, jet fuel for military aircraft, and defense spending to secure oil supplies. The $27 billion in fees collected from these investments (such as payment for electricity services) recouped merely 5-11% of the investment.
• Energy incentives ($47 billion) account for less than 2% of federal spending and tax breaks, and just one third of these ($17 billion) are for low-emissions technologies. This includes $11 billion in tax breaks for renewable and energy efficiency technologies and $5.5 billion in grants and loans for low-emissions technologies. The remaining incentives include over $14 billion for fossil fuels, $3 billion for transportation, $6 billion for biofuels, and nearly $5 billion for basic energy-related science. Most of the renewable energy and efficiency tax breaks ($9 billion) have now expired, or will expire in 2012 absent new legislative action.
• Energy taxes on fossil fuels help reduce emissions and provide revenues ($48 billion) which offset the cost of energy incentives.
• Total spending to reduce greenhouse gas emissions was $38 billion, less than 1% of federal spending and tax breaks. $13 billion of which is temporary spending from the Recovery Act which has already ended or will end by the end of 2012 without legislative action.

So we see that incentives for clean energy and fossil fuels – the topic that dominates the debate – are a small fraction of energy-related spending. Discussions about the appropriate role of government in energy supply and use would benefit from stepping back and considering the full range of public investments made in energy-related infrastructure, security, and government procurement.

Nevertheless, while they comprise a small portion of overall spending, federal incentives are an important source of global clean energy finance. For low emission technologies, the $5.5 billion of federal grants and loans in 2010 were comparable to global technology venture capital funding of $7.8 billion that year. Similarly, the $11 billion in federal tax expenditures represented a sizeable fraction of the $34 billion U.S. private investment in renewable projects in 2010.

With this basic picture in mind, CPI is focused on the impact this spending has. Does it help reduce emissions by deploying clean energy technology and bringing down its cost in an efficient manner? Or does spending instead support incumbent, higher emissions modes of energy supply and use, thereby making it harder for clean technologies to compete? We will return to these questions in our future work on energy policy effectiveness.

Unlocking long term investors’ money

The recent CPI report on the Landscape of Climate Finance estimates global climate funding at around USD 97 billion and identifies four major sources of climate finance: public money (official aid and policy money), private finance (i.e. project developer money), carbon offset markets, and global capital markets (institutional investors, high-net worth individuals, and lending institutions).

Out of all the existing major sources of finance, institutional investor finance might have the most transformative effect. CPI analysis highlights the fact that the amount of private finance is almost three times greater than public finance. Therefore, diverting more institutional money towards new mitigation and adaptation uses becomes critical. The financial institutions that participated in our outreach events indicated that such investors have the appetite to invest but that a lack of dedicated instruments and vehicles has prevented significant investment.

Participants also named risk aversion and aversion to change as major barriers to investment. Existing businesses are slow to accept new models and instruments. Using simple and known structures can alleviate their concerns, as can new information on the effectiveness of finance (USD per ton of GHG avoided) – that is, knowing how to use money most effectively can help unlock additional funding.

Getting the policies right to attract capital

Policies can curb GHG emissions, but getting the policies right is not a straightforward matter.

Recent CPI analysis [link] highlighted the fact that policies incentivizing the deployment of renewables in the US and Europe have also had significant impacts on project financing costs. Policies that affect costs and revenues, however, are just part of the picture. Getting the tariff right is another part, since the signals that policymakers implicitly send to investors matter too. Investors’ confusion in the wake of the 2010 Spanish solar tariff cuts is one illustration of this. The credibility of climate policies has become a prime concern.

Another area of ongoing concern for institutional investors and lenders is the impact of financial regulations (Basel III and Solvency II) on their ability to get involved in climate projects. Likewise, on the public side, what we’re witnessing these days is a shift from policies that solely target emissions reductions to policies that have co-benefits (green jobs and green growth) as major objectives.

The alignment of public and private interests therefore becomes crucial to ensure the sustainability of policy support. This need is particularly acute in developing countries.

Making sources of finance “comfortable” with adequate financing structures and instruments

Making sources of finance “comfortable” means providing them with investment alternatives that are (1) at least as profitable on a risk-adjusted basis as BAU investments, (2) simple to understand and invest in (cheap and short due diligence), and (3) able to address investor-specific requirements (matching liabilities profile or diversification). In this respect, not everything can be addressed with public finance. This is where financing structures, private arrangements, and financial engineering are needed to complement public finance.

Out of the events’ discussions, two (complementary) ways forward emerged. One approach is to rely on straightforward, “plain vanilla” structures that are familiar to investors. In this vein, I believe that structures involving debt or public money leverage will continue to play a critical role. Given what is required to make sources of capital comfortable with the risks of projects, it also seems clear to me that arrangements such as PPP (public-private partnership) and climate funds that tap both private and public money are part of the solution (the UK DFID suggested “accelerating the takeoff by putting taxpayers money”). Still, the challenge with this first approach is that generic structures do not expressly target investor requirements.

The second way forward involves resorting to more complex structures with asset-backed securities, derivatives, or guarantees. It is critical to isolate financial investors from the risks they are likely  to bear (early technology, price, and policy risks) by reallocating these risks to the most able parties. Citigroup’s proposal of a “green” monoline insurance for clean energy projects (“a global OPIC”) is a step in the right direction. The challenges with this second approach, however, are, first, to put the public and investors at ease about using structures associated with the recent financial and economic crisis and, second, to deal with the additional work involved in creating a pocket of money to look after .

In 2012, CPI will be exploring case studies that should shed light on some of these issues; we’ll share our findings over the next months.

The meeting was the first in a series of events organized by the American Council on Renewable Energy (ACORE), Electric Power Research Institute (EPRI), Climate Policy Initiative (CPI) and other organizations. The events are designed to explore strategies, opportunities, challenges and barriers for expanding the use of renewable energy in the U.S. The event was a rare opportunity for leaders of the utility, regulatory, technology and finance worlds to engage in a frank discussion about a shared challenge.

We heard from utility executives about their interest in and commitment to renewable energy, so long as policy supports it, and they pointed to a range of benefits and challenges from integrating renewable energy sources into their systems. The states demonstrated differences in their level of commitment to renewables, and state regulators presented a wide range of approaches to encourage renewable energy. In particular, they articulated just how difficult it is to balance keeping electricity rates low with realizing the benefits of renewable energy technologies. Technology and business innovators demonstrated the value of a range of technologies and new business models. Financiers expressed optimism about a growing and maturing market, but concern about uncertainty around the future of support policies.

While there were many interesting points and issues that were discussed, there were a few that stood out:

• More efficient use of the electric grid will allow the U.S. to use more renewable energy. Some participants pointed out that while integration of variable renewable energy sources can be a challenge, one of the best solutions to this problem may be to expand the geographic area over which the grid is operated, rather than having to build new power lines. Several panelists attributed the success of the Midwest Independent System Operator (MISO) in integrating wind energy to the vast geographic area covered by one single electricity market planner, operator, and balancing authority. However, there are clear political challenges to integrating disparate grids.

• In areas where fossil fuels are used for most electricity generation and electricity consumers expect very low electricity rates, regulators and utilities face significant political and business barriers to deploying more renewable energy. Utilities and their regulators have historically been tasked with providing inexpensive and reliable electricity supply – and these are tasks that existing business models and regulation excel at. However, renewable energy and other new technologies present a challenge to this model. For example, how does a regulator balance low rates with the benefits of renewable technologies? Or, what does increasing focus on renewable energy, distributed generation, smart grid technology and energy efficiency imply for existing utility investments that may be made obsolete by new policies and technologies?

• The loss of federal incentives will be a short-term setback to the continued growth of renewable energy, though the long-term effects are less than certain. Without federal incentives, market actors will increasingly rely on state-level renewable portfolio standard (RPS) policies to drive deployment and cover the cost of renewable energy. However, cost caps and consumer preferences for low rates may be significant barriers to RPS-driven growth in renewable energy. In states without RPS policies, growth will likely slow down considerably without the incentives, particularly if natural gas prices remain low.  Reductions in the costs of renewable energy technologies and new financial structures show some promise for filling the gap left by federal incentives in the mid-to-long term, although these too depend on policy and continued market expansion.

At times, the utilities, regulators, technology developers and financiers appeared to speak the same language. The participants demonstrated a shared commitment to renewable energy, were excited about the prospect of new technologies, and acknowledged that electricity regulation, financing, and business models all needed to change to encourage more renewables. At other points, however, it was noticeable that these worlds collide infrequently, and each group of stakeholders identified different barriers and solutions for renewable energy. It was clear to all that there was great value in bringing these groups together to address the continuing growth of renewable energy – and many in the room voiced their commitment to keeping this important conversation going.

CPI analysis explores a number of these topics, including:

• How policy impacts the cost of financing renewable energy projects in the US and Europe,
• How European power market designs could integrate renewable energy more effectively,
• How US states limit the cost of their renewable support policies (forthcoming).

Photo by flickr user theregeneration

I didn’t. Just one of many interesting things I learned at the China-US climate update event at Brookings on 2 February.

CPI-Beijing Director Qi Ye presented key findings from CPI’s Annual Review of Low Carbon Development in China. It’s always good to be reminded of how much China is doing, and not-so-good to be reminded of how much further they (and the world) have to go before we’re on a low carbon path. China’s CO₂ emissions from energy have more than doubled since 2000, and more than trebled since 1990. Back in 1990, China’s emissions were less than half of the US’s. By 2009, China’s emissions were one third higher. And the gap is growing fast. China needs the most environmentally and cost effective portfolio of policies it can devise to turn this trajectory around.

Mark Muro from Brookings spoke about US energy policy. Not good news. He identified four key requirements for decarbonising the energy sector: regulation, stable demand for clean energy, finance, and continuous innovation. How’s the US doing? It has a partial and shaky policy framework (though some states are doing well), this is not catalysing strong demand, the whole development chain for clean energy is hard to finance (and with federal incentives expiring, the industry is heading into another bust), and while the US still has enviable early stage innovation systems, without sustained investment its innovative capacity will slip. “Other than that, we’re doing fine.”

Casey Delhotal from the US Department of Energy then talked about US-China energy cooperation. This cooperation is nothing new; it’s been happening since the 1970s. What is new is that China is now a “partner” in energy innovation – much like Japan and Europe. Long gone are the days where China was a junior player seeking help. This brings new opportunities: innovation requires the exchange of ideas, and collaboration will deliver benefits to both countries. But it brings challenges too. Trade disputes are getting lots of attention; intellectual property rights too.

Questions from the audience ranged from the role of natural gas to the prospects for a global (or at least G20) carbon tax; from the status of carbon capture and storage technologies to the loss of US manufacturing jobs to China. In responding to the last, Dr Delhotal reminded the audience that we live in a global economy. The US makes some things, China makes others. Value – including jobs – is generated along the way. In the case of solar technology, the US makes polysilicon and industrial equipment. China makes solar modules. The US installs equipment and generates clean energy. Overall, the US has a trade surplus with China in solar technology, and globally is a net exporter of solar energy products (to the tune of almost $2B in 2010).

Take outs for me? China will need to try new policy tools not part of its traditional toolkit. Trade and job dimensions continue to dominate US thinking on clean technology. And CPI could help China and the US achieve low-carbon growth by demonstrating – through real world examples – how we can all benefit from strong action on climate.

Why look at the military?

The world has changed significantly since climate talks began two decades ago in Rio. It is no longer shaped by two rival superpowers. New economies — China, India, Brazil, Korea, Indonesia — have grown in size and standing.

These new players define their political and economic status in the global order without relation to the old poles of developed and developing, state and market, the West and the Rest. Pushed by a will to lead instead of follow and enabled by the public spending that comes with fast economic growth, these new players increasingly are implementing their own policies, blazing the path that any international accord will ultimately reflect.

Another surprise is that, instead of the top-down approach of the Kyoto Protocol, the emergent structure must reflect a bottom-up, multipronged process that builds upon on-the-ground successes. Whereas the Kyoto Protocol established a single, international architecture based on a cap and trade program and large transfers of wealth from developed to developing countries, the new framework will be built upon innovative national initiatives in both developed and developing countries, enveloped in a web of multilateral, bilateral and regional agreements.

[...]

[Supporting development while conserving resources] should be welcomed in the United States, where we have successfully innovated in many areas, including Internet technology, food science, medicine and biotech. Unfortunately, we have been so focused on the financial downturn and confused by the growth of emerging economies that we deny climate science and pay scant attention to the opportunities on our doorstep.

Thomas C. Heller, Stanford Law Professor, one of the world's most renowned advisors in environmental policy, says that emerging countries will lead the transition to a more sustainable economy

Why does this happen?

The great majority of nations still treat the money spent on sustainability as lost investments, which, of course, is a serious mistake. Since its return usually occurs only in the long term, it is very difficult to persuade countries in crisis, such as most developed economies today, to allocate large amounts to environmental programs. This is one of the reasons why the establishment of targets for reducing carbon dioxide emissions and the creation of the 100 billion dollar green fund were postponed to 2015 and 2020, respectively. These resolutions were expected to be approved immediately, but many countries were reluctant to make a commitment that they know will be costly to fulfill. What most analysts did not realize is that a new world order began to take shape, in Durban, led by emerging economies like Brazil, India, and China.

Of what new order are you talking?

The scant progress made in Durban was only possible because the emerging economies fronting the negotiations joined the proposed goals and forced the signing of an agreement. Seven years ago, when the Kyoto Protocol entered into effect, such leadership was unlikely. Henceforth, however, it will be increasingly evident, and for one simple reason: developing countries will have to create ways to raise – by a large amount – productivity in their economies, to support the inclusion of 3 billion additional members of the middle class in the next twenty years. This means developing more public policies to encourage sustainability and investing heavily in innovation and urban planning – something that the emerging economies are in a position to do, since their finances were not eroded by the global crisis.

Are you not being too optimistic? The new members of the middle class will want to consume more food, fuel…

It depends on how the question is dealt with. Indeed, a huge number of people are hungry for consumption, and they will go from a daily income of 10 to 15 dollars to one of about 50, even 100 dollars per day. All of these people want to buy better meat and take their children to school, which will have a strong impact on the environment. But emerging economies have no choice but to commit themselves to mitigating this impact. If we look closely, we see that it is already happening. In CPI’s global landscape of investment in green initiatives, made in 2011, we found that 22% of resources devoted to this type of project have come from emerging economies. In my travels, I have noticed a growing concern among governments about the damaging effects of climate change. Many of these countries, after all, are strongly dependent on their resources.

Even China?

Yes, precisely – the most emblematic case is China. Despite being the biggest polluter, the country is also currently the biggest investor in renewable energy. This is not only to improve the country’ss image in the world, but also because the Chinese know they cannot be so dependent on coal, a scarce natural resource, to move their production. Since 2005, China has dedicated 400 billion dollars to clean energy projects and energy efficiency. This will increase the proportion of wind energy that the country consumes from 1.5% to 3% of the total by 2015. This is quite an achievement, considering that this will enable a reduction of some 400 million tons of carbon dioxide released into the atmosphere every year – 5% of what is currently released. There are several other initiatives, such as a massive program to expand public transportation and water treatment plants for water reaching the cities. According to an assessment we did for the Chinese government last year, although China has not yet managed to reduce its total emissions of greenhouse gases, it has reduced by 20% its level of pollution in relation to GDP.

But China is a dictatorship. It has much more power to drive the economy than India or Brazil, for example…

We need not go to China to find signs of change. In Brazil itself, there are interesting stories. Take the case of Mato Grosso. Statistics show that the rate of Amazon deforestation is decreasing – the amount of forest cleared fell 74% between 2004 and 2010. Radical environmentalists do not like to admit it, but in the case of Mato Grosso, this reduction was directly attributable to productivity gains in agribusiness. The logic is elementary: the more cattle that can be bred in the same area, the greater the wealth produced per square foot, and the lower the environmental impact of the economic activity. Moreover, by creating more jobs, agribusiness prevents people from harming the forest to ensure their livelihood. This only proves that, contrary to what the more radical environmentalists usually preach, progress, if well managed, is indeed very beneficial to the environment.

Does this logic only apply to the countryside or can it also be applied to cities?

It applies to both. For rich countries, incidentally, it is within cities that the greatest opportunities for gains in sustainable initiatives are found. And, in the case of emerging economies, this is where the enormous mass of new consumers that I previously mentioned will live. The cities, therefore, need to be at the center of a revolution – one that will change not only how people consume, but also how they live. This will mean considering as assumptions of urban planning data such as each individual’s travel time to places of purchase and the distance between home and work, in order to reduce costs and streamline the use of time. If planning can make cities more productive, they can become more densely populated without becoming urban infernos. On the contrary, they will be more green and pleasant and will also help reduce the number of people living in the suburbs, and therefore the number of car trips and emissions.

How can this be done in practice?

There are several projects being tested. The most promising seem to be green buildings, which have still not been disseminated to housing, but are already very popular among companies. Companies, generally far more advanced in understanding the economic benefits that sustainability can yield, know a green building may cost 5% to 10% more than ordinary buildings. However, they have also inferred that, after a few years, it is up to 50% more economical. It uses less energy and water and even manages to improve air quality. Not to mention that, to get these buildings up and running, you need to develop new technologies, creating a virtuous cycle of innovation that tends to spread to many other sectors.

Are you one of those who believe that there is no sustainability without innovation?

I’m sure of it. All significant advances in human history resulted from great technological leaps. There is no reason to think that this time will be different. This was the case with the Industrial Revolution, which allowed the acquisition of consumer goods on a large scale, the emergence of power distribution infrastructure, and the creation of public transportation systems. More recently, in the 1960s, we had the so-called Green Revolution, an amazing jump in productivity caused by the use of pesticides, fertilizers, and modern techniques of cultivation. Without such radical changes in the production process, we would not have been able to assimilate the planet’s population growth over the centuries. In order to successfully make the transition to this new world order that I speak of, another technological leap will be necessary, as deep as or even deeper than the great revolutions of the past.

You’ve worked with governments for decades. Do you really think they are capable of making this transition?

Innovations capable of assuring a more sustainable future will not start with governments. As in the past, these advances will be driven by private initiative, by entrepreneurs. But it is not possible to think about such comprehensive progress without governments assuming their role, which is to promote the creation of such ventures. We saw this happen in California, where I live, in the 70′s and 80′s, when the information technology industry flourished. What happened then was a combination of positive forces: a group of bright young people, endowed with unique creativity and entrepreneurship, who received infrastructure to open their businesses and government support for the creation of lines of credit within the private sector so that they could thrive. The same can and should be done now, with the adoption of tax incentives and funding sources for companies that intend to create products or technologies that reduce damage to the environment.

What drives companies to be so far ahead of governments in the adoption of environment-friendly projects?

Unlike governments, which are constantly pressed by budget constraints and tend to be overly cautious when they are required to adopt electorally unpopular measures, companies are driven by profit. Large corporations realized more than a decade ago that turning to a sustainable operating model gives good returns. For these companies, their savings in use of water or light or recycling of waste have come to represent not only a source of extra income, but also the chance to improve their public image – which, of course, has helped them close more profitable deals. At the end of the day, it’s all about finding creative ways to manage the available resources as efficiently as possible and preferably before one’s competitors. It is this logic that has to inspire politicians wishing to make their countries drivers of the planet’s economic development in coming decades.