The Green Deal, the roadmap of the European Commission towards a net-zero and circular economy in 2050, will require massive investments over the next decade. Part of the money will be raised from the European budget, but the Commission also relies heavily on private parties to invest. So what drives companies to invest in sustainable projects?
To achieve the ambition set by the European Green Deal, significant investments are needed that require mobilising both the public and private sectors. To this effect the European Commission (EC) has outlined plans to mobilise 1 trillion EUR in sustainable investments over the next decade. Leveraging both public and private capital, this amount will be mobilised by greening the EU budget and also through private-public partnerships, according to the scheme pictured in Figure 1.
About half of this funding (about 500 billion EUR) will come from the EU budget, while 114 billion EUR will come from the Member States in the form of either public or private co-financing of projects.1 The rest of the 1 trillion EUR mobilised by the EU will need to come from private sources, some of which will be backed by guarantees by the European Investment Bank (EIB).
Nonetheless, the 1 trillion EUR does not represent the full cost of the transition that will be needed in the years ahead. The European Commission estimates that achieving the current 2030 climate and energy targets will require 260 billion EUR in additional investments annually, i.e. 2.6 trillion EUR over 10 years.
With these figures in mind, it is clear that a significant part of the investments needed to make a green transition over the next ten years would need to come from the private sector. Is there a business case for private parties to invest in projects that support the Green Deal?
1 National co-financing is the share of project expenditure that is not covered by the EU budget, and has to be guaranteed through national contributions from either public or private national sources.
Over the past years we have seen a ‘greening trend’ among investors and corporates alike. Financing is therefore to some extent already driven by private rather than public money. Three drivers lie behind this trend: stakeholder pressure, government policy and profitability of green investments.
2 Harvard Business Review (2019), The Investor Revolution.
3 OECD Observer, Sustainable investment: A new landscape, November 2019.
4 EU taxonomy for sustainable activities
Some companies are already able to combine profitability and environmental sustainability. The renewable energy sector is one example where this is happening successfully, as the global expansion of renewable energy shows. Renewables accounted for at least 70% of total capacity expansion in almost all regions in 2019.5 Wind and solar accounted for 90% of all the added capacity in renewables in 2019.6 This is against a background where global investments in renewables have grown steadily for more than a decade.7 In terms of market activity, the multitude of transactions in this segment indicate investor appetite to finance those projects.
One way of looking at these trends is to use a Marginal Abatement Cost (MAC) curve as a tool for presenting the costs of various technologies that can help reduce carbon emissions. The abatement cost is the cost of reducing emissions, and the marginal abatement cost is the relative cost of reducing one more unit of emissions (usually tonnes of CO2). Marginal abatement costs can be negative if a low carbon option is cheaper than the business-as-usual option, but costs rise steeply as more CO2 is reduced.
If we look at a stylised marginal abatement cost curve for CO2 emissions (see Figure 2), we are now at a point where some types of investments in the energy transition are becoming profitable. Projects such as wind and solar have a negative marginal abatement cost (they are below the zero line), meaning that they represent profitable options to reduce CO2 emissions. For example, solar PV and offshore wind projects have shown declining costs over the past decade (see Figure 3). Globally, the cost of energy has dropped by 82% for solar PV, 39% for onshore wind and 29% for offshore wind since 2010.8 Because of this, offshore wind farms in the Netherlands, which started out being heavily reliant on government subsidies, will in the future be able to operate without subsidies.9
Once we have collected the low hanging fruits to the left on our graph, the costs of the energy transition will increase because marginal abatement costs rise steeply as more CO2 is reduced. At the right end of the graph are the large scale projects, such as switching from natural gas to green or blue hydrogen, or implementing large-scale carbon capture and storage (CCS) projects. These are new technologies in development that are still very expensive.
However, five trends are helping reduce costs as technologies move from above to below the zero line on the MAC curve:
5 Except in Africa and the Middle East.
6 IRENA (2020), Renewable Capacity Statistics 2020.
7 EEA (2019), Renewable energy in Europe - 2019..
8 IRENA (2020), Renewable Power Generation Costs in 2019.
9 PwC (2018), Unlocking Europe’s Offshore Wind Potential.
Manon van Beek (CEO) and Otto Jager (CFO) on TenneT, corona, and the energy transition
"In the coming years, that investment agenda will increase to four to five billion euros a year, with some ninety percent being directly related to sustainability."