Around the world, governments have spoken. To make good on their climate promises, they now need to step up their actions.
As of today, 191 countries have ratified the Paris Climate Agreement, and more than 50% of world GDP is generated by countries that have made net-zero pledges. President Biden has announced that the US will target reducing emissions by 50% or more by 2030 (compared with 2005 levels) on the way to net zero emissions by 2050. The EU plans to be carbon neutral by 2050. China’s president has committed his country to achieving carbon neutrality by 2060.
But getting there will take a lot of work. Annual global emissions of carbon dioxide equivalents amount to about 51 gigatons. We estimate that existing technologies can eliminate about 25% of current emissions, and technologies in early adoption can address another 40%. This leaves approximately 35% of current annual emissions, for which we need new technologies if we are to achieve net zero.
The private sector must do its part, and we recently outlined the mindset change that is required, including looking at companies as providers of solutions rather than only sources of emissions, focusing on new sources of revenue over rising costs, and seeking transformative models rather than incremental improvements. Many companies have announced ambitious climate goals, and more and more are coming to understand that companies can create business advantage and value while accelerating climate action.
In similar fashion, governments can boost economic growth and develop new sources of high-paying jobs with support for what we call climate solution innovation. Climate innovation is a huge opportunity to create value. There is clear evidence that countries can build a sustainable competitive advantage, as China and South Korea did in the last decade with photovoltaic (PV) cells and batteries, respectively. Our research has shown that companies winning in the climate transition deliver superior TSR results, comparable to those of big tech. Winning countries can deliver superior job creation and economic growth.
THE NEED FOR GOVERNMENT ACTION
Venture capital and private equity investments in climate innovation have been growing about 14% a year since 2016, with most of the funding going into mobility, renewables, and waste. Investment totaled about $30 billion in 2019 and $37 billion in 2020. But this is not nearly enough. Separate analyses by BCG and the Global Financial Markets Association (GFMA) on global climate finance requirements lead us to estimate that the world is between $90 billion and $210 billion short of the yearly investments in climate-altering technology needed to achieve net zero.
Public funds are needed to meet these targets. The barriers to private investment, which include uncertain returns, lack of a demonstrable track record, and lengthy time frames to payback, are too high for many investors—both the general partners that run venture capital and private equity firms and the limited partners (including many major institutions with fiduciary responsibilities to their investors) that invest in these vehicles. Governments can both bridge the gaps and overcome the ecosystem and investment cycle challenges. Plenty of advanced technological R&D requires governments to support and promote basic research while helping build the infrastructure and defining standards needed to undergird a more resilient distributed industrial base. This includes work in technologies that harness nature’s design principles and manufacturing capabilities to design and operate at the atomic level of organic and inorganic matter.
For proof of what governments can achieve, look to the US, where the Defense Advanced Research Project Agency (DARPA) has produced such major technological innovations as the internet and GPS by thinking big and taking chances. Or to China and South Korea. China’s subsidies for photovoltaic technology drove down the cost of solar energy dramatically. PV solar panel costs fell 80% from 2008 to 2013, and global installed PV capacity increased 14-fold from 2010 to 2019. China is now the leading PV producer. South Korea’s investment in battery technology supported key breakthroughs, leading lithium-ion battery costs to drop nearly 90% from 2010 to 2019. South Korean battery producers took a leading market share in 2013.
Public funding via co-investment and matching mechanisms helps lower risk perception and mobilize increasing venture capital and private equity investments in climate innovation. Patient public funding can help close current funding gaps by compensating for the impatience of private capital for extended payback cycles and lengthy public funding processes.
By Joerg Hildebrandt, Dave Sivaprasad, Marco Duso, Chafic Mourad, Daniel Kiefer, and Bernard Graf
Read the full article at https://www.bcg.com/en-mx/publications/2021/developing-a-climate-funding-plan.