The net zero funding challenge
A sustainable transition to net zero can only be achieved if there is sufficient inflow of capital, and by now we should realize that public capital alone won’t be enough. In our blog the cost of the transition we already anticipated that decarbonization investment are expected to triple for 2021-2025 compared to current investment levels. Government financing might support the development of immature technologies through co-investment, and around 30% of these investments could flow from corporations themselves. Therefore mobilizing private capital becomes crucial. Moreover, private capital is going to have to take a big step up, and quickly.
We need to bring together different sources of public and private capital in technology-specific financing blueprints. These “climate finance" markets are also requiring a systemic change. Perhaps they should strategically change how do they assess success. They might need to start focusing more on explicit mobilization target and less in the preservation of capital. But to achieve those pivotal changes structural mechanisms need to be put in place to enable transformative business models where industry participants and capital providers work together to establish new contracts and ways of doing business to increase the probability of commercial success.
One of the showstoppers in the investment arena is the risk, private investors are less likely to support high risk programs. Along the series of blogs and what is summarized in the survival package for the chemical industry we learned that, unfortunately, we must rely on several technologies that are initially uncompetitive relative to existing technology and exposed to considerable uncertainty regarding how policy will develop or how enabling infrastructure will emerge. Investors, banks, and insurers need to develop new products and services to help companies finance risky low-carbon capital expenditures and transfer new risks.
The climate investment would need to be met with private and public finance, both equity and debt. Given that equity by definition is risky capital, typically de-risking would apply to debt financing, that is loans and bonds.
Putting oneself in someone’s shoes is important to set the strategy right, so what are the investment firm looking for in first place? These firms look at three dimensions:
Strategy and targets
Evidence of transition-related investment activity
Governance mechanisms to ensure that the transition takes place
So, having a clear strategic roadmap and adhering to independent frameworks on top of having already started your own small scale investment activity, are steps to take into consideration prior to start collaborating with other investment parties aiming to scale up. A business is a strong candidate to get public and private capital inflow when it can be taken serious. And to do so, having done some homework helps in the proceeds.
Financing the decarbonisation of heavy industry sectors
An example of how Sweden looks into the matter including the specifics for the petrochemical industry in the country. Key argumentations on systemic changes in material flows can be found in the lines below.
The baseline of the study includes carbon capture and storage with continued fossil feedstocks, bio feedstocks, and mechanical and chemical recycling, with the latter being the pathway analysed in the report. Significant investments are needed to address both point-source emissions and end-of-life emissions, and there is a large need for financing. Production cost increases are also high, and there is a high risk of carbon leakage.
Focusing on the chemical recycling system as main alternative, the investment decision is a national, regional and EU policy issue, that can be extrapolated to other countries, due to the connection to incineration of plastics and power sectors.
If a chemical recycling system for plastics has similar economies of scale as current plastics production, only a limited number of recycling plants are needed in the EU, as these are large-scale industrial systems. The challenge for the petrochemical sector is capital-intensive, but regulations on material flows are critical and will determine whether there are viable new business cases.
It is also well known that in the absence of strong carbon pricing signals, the incentives for investing in new low-carbon production methods are low and the risks for individual companies are high. With the EU ETS system of free emissions allocations remaining in place over the coming decade, there is a clear need to identify mechanisms for risk-sharing between private and public actors in order to accelerate the pace of change. Societal and business drivers are pushing up demand for low-carbon production and creating a greater willingness to invest in this transition. For plastics it may be the case that with the right regulations in place, the need for public risk-sharing will be limited. In contrast, petrochemicals require fundamentally new production processes and larger upfront investments, but the OPEX using recycled material would depend on systemic changes in material flows.
Moreover, creating a system where a large percentage of plastics can be processed for new production is a major challenge, given that in the EU only about 6% of plastic demand is met with recycled material, while most recovered plastic waste is incinerated, generating carbon emissions that are not covered by the EU ETS.
From previous argumentations in this blog, I can place the uncertainties that circularity is still facing waiting for the “right” legislation to be in place. Despite its potential, those recirculated materials make up only about 20% of the chemical industry and therefore we must realize its limited impact compared to other options. Yet it remains a contributing element to decarbonise the industry.
I don’t share the perspective of focusing on only one path forward. Maximizing resource efficiency has a high potential, specially when we are able to bend the economical models from a linear to a circular approach, adopting design for recycling guidelines and improving the sorting and recycling capacities to increase efficiencies along the value chains. But the are other concept paths to de-risk a prove as well.
