Energy transition

The Netherlands signed the Paris Climate Agreement in 2015. The Dutch commitment is to limit global warming to 1.5 degrees Celsius, preferably, but certainly to 2 degrees Celsius. The targets as set out in the Dutch Climate Act include being climate neutral by 2050 and achieving a net greenhouse gas reduction of at least 55% by 2030 compared to 1990. In recent years, the Netherlands has already taken steps towards achieving the targets. For example, the Climate Fund, if passed by the Senate, will provide €35 billion for the necessary investments and subsidies. Tailor-made agreements are also being forged with industry.

Despite the available subsidies, more needs to be done in some sectors. Pricing, such as taxes on emissions from cars and factories, and standards, such as rules for minimum insulation in buildings, can be used to help meet the targets more efficiently and effectively. The less time remaining until the 2030 and 2050 target dates, the higher the costs – and the more difficult it will be – to meet these targets.

Energy prices have soared since Russia’s invasion of Ukraine. To mitigate the financial impact, the government introduced compensation measures for 2022 and 2023. However, high energy prices are actually a financial incentive for homeowners to invest in improving the sustainability of their homes. At the same time, a DNB analysis shows that more than a million households are financially vulnerable to high energy prices. People in this group tend to live in (social) rental properties, giving them no opportunity to invest in sustainability measures while leaving them fully exposed to the volatility of the energy market. Priority should therefore be given to making these homes more sustainable.

Subsidies or pricing?

Current Dutch climate policy is mainly focused on subsidies. Subsidies for investments to combat climate change are relatively generous in the Netherlands. This has a number of significant drawbacks. Subsidies draw on scarce public resources, the government must determine the best technical solutions before granting subsidies, and windfall profits may also be generated because subsidies often find their way into projects that were already profitable.

Emissions pricing works

Ultimately, the lack of financial incentives is the main reason why green investments and solutions are lagging behind. Private parties need to make a return on their investment, but the return is undermined by low taxation on carbon emissions in most sectors. If carbon taxes were higher, green investments needed to meet climate targets would become more lucrative. Pricing encourages sustainable behaviour and discourages polluting behaviour. Setting clear standards will also make it clear to businesses and citizens what is expected of them. Pricing and standardisation can therefore contribute to making the energy transition both efficient and cost-effective. The spring 2023 Interdepartmental Policy Study (IBO) on Climate contains effective pricing and standardisation measures for sustainable mobility, industry, buildings and agriculture.

Bottlenecks in green financing

Besides the fact that carbon pricing is too low, there are other bottlenecks in the financing of green investment. For one thing, investment costs are recouped over the (very) long term, exposing banks and investors to relatively high liquidity risks. And because different measures of sustainability/climate impact are not easily comparable, financial institutions cannot properly assess exactly how sustainable investments truly are. Another bottleneck is that it is difficult to estimate the expected return from innovations, which makes it more difficult to obtain credit or a loan from a bank. This is why entrepreneurs depend on venture capital for innovations, which is not easily found in Europe. Lastly, scale can be an issue. Performing a thorough risk analysis for small-scale projects is often not worth investors’ while. 

Recommendations for green finance

It would help if large, institutional investors, such as pension funds and insurance companies, played a bigger role in financing, but lack of scale is often problematic. In this area, the government could consider bearing the cost of pooling and standardisation. Private equity and venture capital investment funds could potentially also play a greater role. It is precisely these parties that entrepreneurs can turn to for investments in innovative, sustainable technologies that involve high risks. Read more about our research and recommendations on financing the energy transition.