3. Governments should support the shift from brown to green through both incentives and disincentives
G20 countries have committed US$297b to fossil fuel production since early 2020 — a trend that could unfortunately be accompanied by a slowdown in investment in green energy investment.26 To avoid such a trend, governments should look at how they use both incentives and disincentives across all aspects of society to support their net zero ambitions. As we outlined above, they need to encourage the private sector to scale up the production of mature green technologies. Governments must also nudge businesses across all sectors to make net zero commitments and consumers and citizens to change behaviors.
Policy options could include assessing new planning applications against greenhouse gas emissions targets, reviewing taxation policies, subsidizing home improvements and funding training programs and research grants. These policies can help to accelerate the shift to green innovation and investment. They can also reduce the cost of transition for those least able to afford it and mitigate the negative impact of transition on communities previously reliant on “brown” industries.
Helping businesses to improve their efficiency and drive down costs by taking advantage of green policy incentives is a straightforward way to boost innovation and investment – from start-up incubator programs to industry collaborations.
In Australia, the New South Wales (NSW) Government’s renewable energy roadmap will target AUS$32b (US$32b) of new private investment in electricity infrastructure by 2030 to replace aging fossil infrastructure with a cleaner, more efficient system (including the development of renewable energy zones and energy storage projects). An Electricity Infrastructure Investment Safeguard will support it. Under the agreements, the government will offer an electricity price floor to projects that align with its strategy, ensuring the right investment signals are being sent to the market to build the right projects in the right places while also working to reduce the risk and cost of finance for the projects. The roadmap is expected to reduce electricity sector emissions by around half and turn NSW into one of the lowest cost regions in the developed world. Modeling undertaken by the NSW Government suggests that the plan would reduce retail electricity prices by an estimated 8%, compared to a scenario where no action is taken and would save around US$12.4b in energy system costs. And it will support the creation of 6,300 new construction jobs, with a net gain of 23,600 jobs expected across the wider economy between 2032 and 2037.
By stimulating private investment and collaborating with businesses, government can also target secondary markets for green technology. By licensing proprietary technologies from innovators and specializing in the manufacture and distribution of those goods, some countries may be able to participate in the syndication of the huge number of electric vehicles, solar panels, turbines, batteries and circuits that will be needed.
4. Financial institutions must do more to support transition and green innovation
More funding needs to be directed toward green initiatives by the financial services sector. While current financing may be sufficient to satisfy current demand in some parts of the world, total funding requirements for the global transition will rise. Financial institutions have a role to play in promoting demand and facilitating the supply of green money through new green finance products. Working with governments and regulators, they can identify policy and regulatory changes to enable financial product and service innovation, simplify guidelines, harmonize taxonomies,27 and track green money flows to ensure that transition needs are being met worldwide.
Reallocating capital to low-emission, resilient infrastructure is equally urgent. The financial sector needs to do more to integrate climate impact into investment decisions and to incentivize transparency and disclosure in financial markets.
The green bond market is by far the most developed example of financial services involvement in transition. Worldwide, green bonds worth a record US$269.5b were issued in 2020, and new issues worth US$400b–US$450b are predicted for this year.28 China is currently the world’s second-largest green bond market after the United States, but its sales of green bonds exceeded those in the US in the first quarter of 2021.29
The Association of British Insurers (ABI) recently announced its Climate Change Roadmap for the insurance and long-term savings industry.30 The roadmap sets out a plan for making £900b (US$1.2t) of investment available to businesses looking to meet net-zero targets by 2035. This would amount to £60b (US$82b) per year and could contribute up to a third of the UK’s total finance requirement for reaching its national net-zero target.
5. Businesses’ net zero commitments can be a catalyst for change
Businesses are under increased pressure to develop their own net-zero strategies and to demonstrate that their investment decisions, as well as their products and services, are both carbon-efficient and likely to help deliver sustainability goals. As more organizations make that commitment, and ideally accelerate plans in place already, they will stimulate demand for green energy, transport and manufacturing capabilities.
Investing in emerging green technologies may be one way in which they can both demonstrate commitment to reducing their own emissions and also enable nascent technologies to scale. They should also consider how they use green financing, such as sustainability-linked bonds, to fund at least part of their transition plans.
Businesses should help to stimulate consumer demand by prioritizing the development of sustainable products and services that offer an affordable alternative to current ones. EY research has shown consumers are keen to choose green, but cost remains a significant barrier. Companies may also need to partner with financial institutions to help their customers transition to green products and services. Consumers will require new financial products that support the sharing economy, where payment is based on usage rather than owning a product. Household will also need support to take on the initial costs of greening, such as retrofitting a house with more sustainable insulation and replacing fossil fuel heating systems.