According to the International Energy Agency (IEA), achieving the Paris Agreement targets requires doubling investments in renewable energy and energy conservation, dubbed "green investments", by 2020 and doubling them again after 2030. The Netherlands, too, must step up its efforts.
The main reason for stagnating green investments is the absence of financial incentives. The majority of green investments is made by private parties, who need their investments to bring returns, but investment returns are undermined by the fact that theharmful effects of carbon emissions are not sufficiently priced in. A surplus of emission allowances under the European emissions trading system (ETS), which uses market forces to help reduce carbon emissions, is keeping allowance prices very low. Energy taxation in the sectors outside of the scope of the ETS is not producing consistent or adequate carbon prices. Uncertainty about long-term government policies is pushing up the risk costs of green investments.
Even if carbon pricing is effective, there are several bottlenecks in green investment funding (see the accompanying DNB Position Paper for a detailed explanation). Firstly, investment costs for green investments often take a long to very long time to recoup, meaning that banks and investors are exposed to relatively high liquidity risks. Secondly, the different sustainability and climate impact standards in force are not mutually comparable, which makes it more difficult for financial institutions to properly assess the level of sustainability of investments and take climate risks into account. Thirdly, there is a shortage of venture capital. As returns on sustainable innovations in their infancy are often difficult to estimate, they are more likely to be funded with risk-bearing capital than bank loans. By contrast with the United States, however, there is limited venture capital around in European countries. A survey by PBL Netherlands Environmental Assessment Agency shows that a relatively large number of green start-ups in the Netherlands do not survive. Lastly, scale can be an issue. Performing a thorough risk analysis for small-scale projects is often not worth investors' while.
It's not so much that homeowners wanting to invest in renewable energy sources or home insulation have trouble obtaining funding, but aversion to borrowing and uncertainty do play a role. A poll in DNB's Household Survey revealed that homeowners mainly use their savings to finance investments to greenify their homes. Only 4% of households investing to increase the sustainability of their homes had resorted to bank loans. Of the households not making investments to greenify their homes in the past decade, a mere 1.4% said that this was because they had not been able to get a bank loan. More frequently stated reasons include a lack of savings and an aversion to running up debt. Respondents also indicated that they have trouble comparing costs and benefits, or that installation costs are too high. Another point is that the investment recouping time almost always exceeds the period of subsidies and tax relief guaranteed by the government.
Bringing the level of green investments in line with the Paris climate ambitions first and foremost requires more effective carbon pricing. The European Commission's current proposals to reform the ETS are insufficient to secure a sound carbon price. In non-ETS sectors, the system of energy tax needs improvement to guarantee consistent and adequate carbon prices. In addition, the government should provide more certainty in policy terms by committing to a long-term perspective on the required transition, mapping clear targets and transition paths for all sectors.
Although some of the funding bottlenecks (maturity mismatch, standards, venture capital) can be partly removed by enlarging the role of institutional investors, lack of scale is often an issue. This implies a potential role for the government to facilitate and fund pooling and standardisation. The risk of government failure must be monitored, particularly in terms of politically driven risk assessment, assuming risks that should be borne by private investors, and efficiency. Given the large number of subsidy schemes, resources and tax incentives currently available to encourage sustainable investments, fragmentation is a real danger. Follow-up studies are needed to identify unnecessary barriers for institutional investors from a supervision perspective and how to remove these barriers. One of these studies is currently being performed by the Sustainable Finance Platform, a partnership of financial market operators, government agencies and supervisory authorities. The aim of this platform, set up by DNB, is to promote and encourage attention for sustainable funding in the financial sector.