- 27 March 2009
In March 2009, The Climate Group caught up with James Cameron to discuss his recent call for climate bonds, which he believes could fast-track investment into the infrastructure projects that will put the UK on the path to a low carbon future.
You recently called on the UK Government to use climate bonds to stimulate investment in infrastructure. Why?
As the need to tackle climate change becomes more urgent, we need to find ways to finance solutions now and at scale. During the Second World War the Government sold war bonds. The people of Britain were encouraged to part with their own savings to support a meaningful cause with a financial return. The money raised was ploughed into the war effort and by the end of it the UK Government had invested £1,754 million.
I believe that we have reached a point where this level of response is needed to tackle climate change. I would like to see the Government act quickly to issue climate bonds to enable investment in measures that will reduce greenhouse gases.
Is the timing right for such a radical approach when the Government is focused on fixing the economy?
This is exactly the right time. We can and should be thinking about building an economy that will support a low-carbon world. Without linking the two, Britain is in danger of wasting an opportunity to invest in clean technology which would reduce climate risk and manage energy security better, especially if we really do hit peak oil soon. Equally we could make the fatal error of investing in old, carbon wasteful technology that will lock in liability for future generations.
The UK has great research, design, professional service and entrepreneurial competencies but we don't yet have an industrial base in modern clean technology. We could be a leader in carbon capture and storage, building integrated solar, wave and tidal - but we have to invest first. We might get an A+ for our research but when it comes to scaling up we barely scrape a pass.
How would climate bonds work?
A climate bond could work in the same way other Government bonds and guarantees work. Investors or individuals (as was the case with the war bonds) invest into a fund that the Government or a specially constructed entity backed by the Government, would use specifically to finance tangible green infrastructure.
The bonds could be fixed or index-linked, offering modest but guaranteed rates of returns over the longer term. This would be possible with Government backing and investment into projects that are built to last. It would offer a prudent approach to financing the much needed long-term investment in tangible assets that will improve the quality of life and secure a future that supports our ability to avoid dangerous climate change.
These kinds of opportunities would surely attract institutional investors used to looking at low risk returns. But would they interest individuals?
Climate bonds would likely be attractive to those looking for long term but safe returns on their investments, such as pension funds, or to more risk adverse individuals disillusioned by the decline in the stock market and poor performance of financial products they cannot relate to.
I think the current financial crisis is making people think more carefully about where they put their long term savings. Couple that with a heightened awareness of climate change and the emotive desire many have to secure a more prosperous world for their children and grandchildren, the time is right to provide an opportunity for people to be part of the solution.
I believe people want to put their money to productive use and don't want to rely solely on their bank to do the right thing. Giving people a sense that their money helped to deliver a smart grid or carbon and capture and storage plant has huge appeal. The war bonds demonstrate that people are willing to support something worthwhile that will benefit generations to come.What kinds of projects would climate bonds finance?
What kinds of projects would climate bonds finance?
A variety of well-understood renewable energy assets - wind, wave, biomass, mini-hydro - balanced to include different levels of risk but designed to meet public policy objectives.
Success could be amplified by supporting complementary infrastructure investments, such as electricity grids. Smart grids enable better management of energy supply and use, in addition to managing the challenging peaks and troughs that renewable energy sources such as wind and solar produce. The initial investment costs are large but the technologies are already developed and, in the long term, investors would see a return due to the cost savings gained through improved efficiencies.
Another specific example might be piping hot water from existing power stations to deliver community heating for housing and businesses. Typically, the upfront investment required to install this infrastructure, (ie. laying lots of new pipes) would be uneconomical compared to laying gas pipes. But when you factor in the long-term cost and carbon savings, it starts to look like an attractive investment.
It sounds promising. What must the Government do to make this happen - and to ensure climate bonds prove effective?
The Treasury has a significant role to play in creating the financial mechanism to make this happen. More broadly, the Government would need to strengthen policy that supports low carbon infrastructure development. And lastly, although equally important, there needs to be a communication campaign - to paraphrase an old poster: "Climate Bonds - the present for the future." This is a practical approach, one that has worked before. We need to be bold and take this action now. If we do this, we will build a better energy system which will deal with the systemic problem of climate change.
This is not about a quick fix: it is about leaving a legacy to be proud of.
The views presented in the Viewpoint Interview series are not necessarily representative of the views of The Climate Group.
James Cameron is an Executive Director and Vice Chairman of Climate Change Capital, an investment management and advisory firm specialising in the opportunities generated by the global transition to the low carbon economy.
He has held academic positions at Cambridge, London, Bruges and Sydney and is currently affiliated with the Yale Centre for Environmental Law and Policy. He is the Chairman of the Carbon Disclosure Project, a treasurer of REEEP, a senior advisor to The Climate Group, and a member of the board of GE Ecomagination, the Copenhagen Climate Council and the World Economic Forum Climate Council.