Bad credit now threatens the international effort to limit carbon emissions.
At the Paris climate conference next month, policymakers will pledge massive rollouts of wind and solar. But the issue of financing is mostly addressed as an afterthought. You can’t end global warming by decree; you need money, lots of it. If renewable energy is to grow on a scale anywhere close to what’s required, rich countries need to guarantee solar and wind bonds in the developing world. It is in the developing world where most of the additional carbon released into the atmosphere will come from.
Renewables are particularly impacted by bad credit as all the costs for building the project must be paid upfront. There is no fuel that can be bought as you go. And unlike, say, an aluminum smelter or a new refinery, there is no product to export which can earn global revenues. Nearly every dollar spent is spent on day one by global investors and needs to be paid back in local currency. This makes the financing challenge truly astronomical.
Bad credit is due to high sovereign debts and currency fluctuations and also poor governance, lack of contract enforcement, limitations on capital repatriation, political uncertainty and more. The global investors who have large amounts of money to spend naturally want a very high return for an IOU in places like India – where there’s great uncertainty as to what they’ll exactly get back. Financing costs in many developing countries are 2 to 3 times what they are in the U.S. or Europe, and so renewable power is 2 to 3 times as expensive. Corporate and institutional investors routinely get loans for U.S. projects at 5% interest. In India the rates are 10 to 14%. As a result, China, the one economy that is both developing and enjoys good credit, has the largest number of solar and wind plants, followed by the United States, Germany and Japan.
The best way to fix bad credit would be to resolve the underlying issues: improve sovereign balance sheets and tame currency fluctuations, and also tackle poor governance and contract enforcement and other issues. But these reforms take time, and we don’t have time to address carbon emissions. As it is for individuals, the shortcut to good credit is to find a guarantor. We should not do this for all things that emerging countries may wish to buy, but we should do it for clean energy. Climate change is affecting us all, and so it is in our own self-interest to fix their credit.
There are clear precedents for mutualizing credit. The European Union mutualized over 2 trillion euros of sovereign debt during the financial crisis. With Germany and others guaranteeing the bill, the cost of sovereign debt became several times more manageable. As a result, the financially weaker nations may actually pay back their debts. Although insufficient on its own, international contract enforcement would also help. Precedents include the World Trade Organization’s dispute settlement body and the recent Trans-Pacific Partnership investor-state dispute resolution mechanism. The purpose is not to guarantee investment returns, just to remove the wild card from the deck.
The other ingredients are already in place. Technological progress over the past decade, from solar panel efficiency to energy storage, has vastly reduced the cost of renewable energy. Political will, as demonstrated by the commitments made ahead of the Paris conference, is strong. Capital to invest is also plentiful globally. Pension and sovereign wealth funds, insurance companies and corporations collectively hold trillions of dollars of long-dated funds that could be allocated and deployed to solid projects around the world.
There are pitfalls and moral hazards, but done the right way, extending good credit for renewables would cause financing costs to plummet. And developing nations would be likely to pay back these debts, with (low) interest. Extending good credit via globally guaranteed solar and wind bonds should be a primary goal of the Paris climate talks. If countries like India could benefit from credit costs similar to the United States or Western Europe, magic would happen for renewables.
Ion Yadigaroglu is managing principal of Capricorn Investment Group, an investment firm founded to demonstrate investment potentials linked to global social problems.
