Bringing Down the Green Premium

There’s broad consensus today about the need to achieve net zero carbon emissions by 2050 to avoid the most severe consequences of climate change. A key milestone will be halving emissions by 2030. The challenge is figuring out “how” we get there in time.

To go from the 51 billion tons of greenhouse gas emissions the world emits today to zero will require that we change just about everything we make.[1] It will require an unprecedented era of innovation and an unprecedented amount of investment to spur that innovation.

Clean goods, transportation and energy are still much more expensive than those that emit greater amounts of greenhouse gases. For example, sustainable aviation fuel costs 140% more than kerosene.[2] The difference between those two costs is what we call the green premium. Until that premium is reduced, this will remain an intractable problem, particularly in developing countries where resources are already stretched thin.

Scientists and entrepreneurs are hard at work on new technologies and new businesses to help close the green premium on everything from electric vehicles to jet fuel to clean steel.?This is the greatest undertaking in human history and it will take a massive investment: more than $50 trillion in capital is needed before 2050. We need capital to both scale the solutions we have and speed up and commercialize the breakthroughs we need. The private sector, particularly traditional hydrocarbon companies, also has an important role to play. Their experience scaling new technologies for commercial deployment will be critical to driving down the green premium.

How are we going to finance it?

Governments must play a central role. The infrastructure bill pending before Congress, for example, will invest well over $100 billion in climate solutions. But government alone cannot pay for all that’s needed to address climate change. After two years of a global pandemic, most governments are now engaged in unprecedented deficit spending. Fortunately, there are many investors eager to invest in clean technologies. They recognize that the global climate transition will be the source of even more unicorn companies in the years ahead than during the internet age.

But the traditional ways of financing innovation simply won’t happen fast enough or on a large enough scale to solve the problem in the time we have. Not every technology is going to work and not every venture is going to deliver returns. We need capital that’s risk tolerant and flexible and we need some investors who will be willing to take a “first-loss position.” Without that kind of investment, we won’t attract enough traditional funding to achieve our climate goals.

That means developing new models for attracting investment into clean tech industries. We believe new types of partnerships – across the public, private and philanthropic sectors – are the way we can raise the scale of investment necessary. In particular, we need to find new sources of catalytic capital that can be used to mobilize investors seeking market rate returns.

This kind of catalytic capital, which could come from multi-national organizations, private funds, or philanthropic institutions can play a key role in accelerating the development of sustainable technologies and getting them to a place where they’re scalable and competitive. Investing in the development and commercialization of technologies like direct air capture, green hydrogen, sustainable aviation fuel, and long-duration energy storage will be vital to achieving net-zero.

That is why we have partnered with Breakthrough Energy and half a dozen other leading global companies – to launch the Breakthrough Energy Catalyst Program. Breakthrough Energy was founded by Bill Gates and its Catalyst program identifies technologies at critical junctures where investment can reduce the green premium. It has a deliberate focus on carbon intensive sectors like agriculture, housing, and transportation, which are essential to how we live today. The contribution of risk-tolerant, flexible capital will enable these technologies to attract more traditional investors and achieve the scale of capital necessary to achieve a net zero economy. As an asset manager this model creates ways for our clients to participate in the massive investment opportunity created in the transformation of the global economy. Since Catalyst was introduced earlier this year, it has already announced large-scale partnerships with the European Commission and European Investment Bank and United States Department of Energy. The announcement we made today represents the first group of private sector organizations to formally join the Catalyst community of partners.

$50 trillion is a sum that is hard to comprehend, and the urgency of the climate crisis is so great it’s almost overwhelming. But within this crisis there is opportunity, possibility, and most importantly, hope. The solution won’t be down to a single source of capital, a specific fund, or innovation. The solution will come from governments, the private sector, and philanthropic institutions coming together to catalyze the work of scientists, engineers, and innovators so we can develop the technology, and get it to a place where it’s commercially viable and broadly accessible.

[1] Getting to Zero. Breakthrough Energy. https://www.breakthroughenergy.org/our-challenge/getting-to-zero

[2] Gates, B. (2021). How to Avoid a Climate Disaster: The Solutions We Have and the Breakthroughs We Need. Penguin Random House.