Green Bonds - Executive Summary

Canadians now rank the environment as the single issue with which they are most concerned in this country, trumping health care and security. The Government of Canada has responded by committing itself to ensuring a prosperous yet sustainable economy by 2050, with an interim goal of 20% reduction in greenhouse gases by 2020. Achieving these laudable goals will require significant changes to the way in which we produce and consume energy.

To that end, we propose the creation of a Canadian Green Bond: a government-backed financial instrument designed to engage the public by raising capital to accelerate renewable energy production. By addressing a significant temporary market gap and accelerating deployment of low-carbon technology, we argue that Green Bonds would contribute to the broader goal for 2050 and the interim goal set for 2020. Ancillary benefits of job creation and economic competitiveness are also expected.

A key deliverable of this proposal is a cost-effective way of reducing carbon emissions. This policy proposal can provide incremental (to business-as-usual) Greenhouse Gas emission reductions well in excess of 25 Megatonnes/year of CO2 equivalent by the year 2020, at an estimated cost to the government of between $1 and $13 per tonne.

Green Bonds directly involve the Canadian public in a positive way on the climate change issue. In a recent poll conducted by Nanos Research, 81.8% of Canadians support the Green Bond initiative and 62.2% say they would purchase Green Bonds with an interest rate similar to a Canada Savings Bond.

This proposal leverages the resources, creativity and incentives of the private sector in managing the funds raised. Its efficiency, measured as the cost to government per unit of C02 reduction, compares very favorably to other initiatives such as tax credits and direct subsidies. The funds raised are to be provided as low-cost debt capital to producers of renewable energy, accelerating renewable energy production and creating demand for renewable technology.

This proposal complements the larger regulatory framework of a long-term carbon emission price signal, as recommended by the National Roundtable on the Environment and the Economy. Nevertheless, our proposal is neutral with respect to whichever long-term carbon emission policy is adopted (carbon tax, cap and trade, etc.), although under a purely regulatory scheme, this proposal is capable of providing additional incentives to increase renewable production that regulations cannot.

There is a precedent for this sort of initiative. The European Investment Bank issued a Climate Awareness Bond in 2007, which is used to finance up to 75% of European renewable energy projects.

POLICY SUMMARY

Temporary Solution: Green Bonds are a temporary measure, designed to bridge a market gap until the long-term regulatory framework provides a clear market signal for carbon emissions. In the shorter-term, there is an unambiguous point defined as to when technologies drop off this subsidy.

Low-Cost Capital: Many renewable energy producers cannot gain access to low-cost capital. We recommend that funds raised through the sale of Green Bonds support low-cost capital loans to energy producers. Since capital costs are a significant portion of production costs for renewable energy, this will reduce total energy production costs. While this is our recommendation, the specifics of deploying the capital are fungible.

Targets “Threshold” Technologies: ‘Threshold technologies’ are defined as those with minimal technology risk that would become price competitive with their fossil-based counterparts given access to low-cost capital. Initially the focus is to accelerate deployment of those technologies that can immediately deliver emission reductions to help reach the interim goals set for 2020. Later stages of the policy proposal will focus on providing market pull on higher-risk technologies, with the longer-term benefit of helping to build the Canadian renewable energy technology economy. Although this proposal focuses on energy production, we also recommend that energy efficiency technologies and process are included.

Private Sector Engagement: We recommend that the bond be issued and the funds be managed by an arms-length private financial institution, overseen by a Board of Directors composed of private sector experts in renewable energy and government representative(s). This approach would leverage the considerable resources of the private sector, and compensation can be geared toward specific Fund performance measures, particularly the unambiguous efficiency measure of cost to the government per tonne of emissions reduction.

Risk-Mitigation Options: Risk appears primarily as defaulted loan and is principally mitigated through sound governance and oversight, a limited bond issue size, capital matching from borrowers and liens on assets. Management fees can be linked to loan default rates to provide the proper incentives.

Government Cost and Liability: Total costs to government include defaulted loans, management fees, cannibalization of Canada Savings Bonds and promotional costs. The most significant cost exposure is defaulted loans. Liability appears as a contingent liability, represented by a percentage of the total bond issue. Our upper- bound estimate of total cost to the government is capped at 25% of the bond issue, but the actual rate should be much lower4. Total cost per tonne of CO2e is estimated at between $1 - $13.

Efficiency: As the only significant cost to the government is in the form of defaulted loans – the rate of which can be controlled by a good risk mitigation strategy and incentives to the private sector – the ratio of dollars generated as renewable infrastructure capital to dollars cost to the government is quite high – higher than either tax credits or other direct subsidies can provide. Complements Existing Government Approaches: Green Bonds complements government incentives provided in the form of R&D tax credits and SDTC funding. Green Bonds provides market ‘pull’ for technologies that get ‘pushed’ by these sorts of incentives.