The new ‘made-in-Ontario’ environment plan misses the mark in many ways. The plan is based on the outdated assumption that reducing carbon emissions threatens jobs and the economy. It weakened Ontario’s carbon reduction targets, precisely as the scientific community issued a call for more ambitious action. But let’s focus on a potential opportunity: how Ontario can accelerate private sector investment in the transition to a low-carbon economy. Specifically, the proposed Ontario Carbon Trust (OCT) needs to use public funds to mobilize private capital and deliver local climate solutions.
The OCT is an opportunity to demonstrate the economic benefits of investing in the low-carbon future, by creating new jobs and opportunities for investors and industry. With sparse details on how this agency will work, we offer three principles for the OCT: effectively leverage private capital, avoid free-ridership, and achieve deeper carbon emission reductions faster.
To have impact, investment decisions need to consider factors such as a project’s potential to be catalytic, to build capacity for businesses to deliver solutions at scale, and community benefits like public health and addressing energy poverty.
The government intends to leverage the $400 million allocated to the trust four-to-one with private sector funds, which could amount to $2 billion in total investment. This is doable, in fact, deploying a combination of affordable loans, credit enhancements and grants could meet or exceed this leverage amount. But leverage isn’t everything. To have impact, investment decisions need to consider factors such as a project’s potential to be catalytic, to build capacity for businesses to deliver solutions at scale, and community benefits like public health and addressing energy poverty. Simply funding the lowest cost per tonne allows companies to game the system, putting taxpayers on the line for measures that already have strong business cases, and which companies would have undertaken without public funds. That is why the government’s proposed $50 million for a Reverse Auction, which has been criticized for “paying polluters”, should be re-allocated into the broader OCT.
To maximize impact, OCT funds need to be deployed strategically, adapting proven financing mechanisms to address specific barriers. For instance, some climate solutions with sound business cases have challenges accessing affordable project financing because of perceived risk or because of their small-scale, but specifically designed loans and financial services like warehousing and aggregation can help. Credit enhancement, including loan guarantees or performance insurance, is another important financial product that can help unlock private capital where perceived or actual risk is high; it also builds a track record of success that will help commercial investors increase their exposure and reduce their costs over time.
Grants are the tool of choice for initiatives that are not yet economically viable without a subsidy, but serve a strategic purpose – like creating wider public benefits. One way to achieve greater impact through grant-making is a matching requirement or reserving public funds for the non-commercial part of a project. Think energy efficiency upgrades of our schools – this may not be the cheapest way to reduce a tonne of carbon, but there is growing evidence that it can also improve indoor air quality and enhance student achievement and health while reducing school operating costs.
We’re surprised at the low ambition for the Ontario Carbon Trust – it is only expected to deliver 4 per cent of the carbon reductions targeted. Drawing on The Atmospheric Fund’s 27-year experience of financing low-carbon solutions, catalyzing investments by demonstrating and de-risking new approaches and driving wide market adoption is worthy of greater effort. Even with good product design and stellar leveraging strategy, $400 million of working capital over four years falls short of what’s needed, and what’s possible. Even leveraged up, it’s 90 per cent less than the revenues from the (now cancelled) cap-and-trade program.
The proposed environment plan seems to consider climate action as a burden for Ontarians rather than a tremendous opportunity for investment and social, environmental and economic benefit. Hopefully, with some strategic tweaks, the Ontario Carbon Trust can change that dynamic. It needs significantly more capital to invest and leverage. It needs to include a range of products and offerings – such as financing, credit enhancements, grants and incentives – that are designed to break barriers and maximize public benefits. And it needs to avoid free-ridership, because implementing only the lowest cost measures will not be enough to achieve Ontario’s 2030 climate target. Done right, private capital will be lining up to co-invest in Ontario’s low-carbon economy.
Learn more about this, in a recent Clean Economy Alliance webinar Julia was in.