Move to low carbon economy ‘will cost Europe €2.9 trillion’

Banks will have to supply 2 per cent of Europe’s GDP, or €2.9 trillion, to meet consumer demand for projects and technologies that tackle climate change, according to a new report from Barclays and Accenture.

The report took what it calculated to be the likely level of demand for things such as wind farms, energy efficiency measures and electric vehicles and estimated how much capital would be needed to fund these.

In a way, this looks like good news: demand is likely to be so high that it could provide a real opportunity for the banks. Rupesh Madlani, head of European renewables and cleantech equity research, told Energy Source: “There is a lot for the banks to play for here.”
But there are two bits of bad news: 1) there is little evidence that the financing will be forthcoming and 2) even if it is, this amount is unlikely to be enough for the EU to meet its 2020 emissions targets.

High demand

First, the good news. The researchers calculated that demand for such technologies would be high, especially as solar and wind power, with its reasonably consistent returns, became cheaper.

The biggest chunk of the financing would go to solar and wind power infrastructure, which could suck up €617bn as the technologies become more efficient and widespread. Making buildings more energy efficient, meanwhile, would cost €600bn and could deliver 18 per cent of emissions savings. Transport is also important - especially commerical transport – which could provide 19 per cent of the emissions cuts with a €528bn capital injection.

This level of demand would create a major new market for banks and other sources of private funding. But Barclays and Accenture say the most important financial innovation to help satisfy that demand would be a functioning secondary debt market in the sector.

Low financing

What they are calling for, effectively, is for banks to be able to adjust their risk by securitising cleantech debt and issuing “green bonds”. But given that banks are currently unwilling to lend for such projects, it seems likely to be a long time before other investors are prepared to buy that debt from them.

Madlani insists however:

The primary market is somewhat recovering… The returns have gone up and the response from the money lending institutions has been to allocate more capital to this segment.

But he does admit that it could be three years before a liquid market in securitised green debt is up and running.

Call for action

The reports authors say their report is meant to do two things: the first is to encourage policymakers to stick to long-term, stable policies; and secondly to not shake market confidence by changing incentives or retroactively cancelling subsidies.

But given that is what every single investor in the sector wants, the more interesting message is the one given to banks: “If you build it, they will come.

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