How blended finance might help lower 'the green premium'

The COP 26 agenda reflected the need to scale up the technological innovations needed to achieve net-zero emissions by 2050 — and make them more affordable.

“There’s not a question that we have more resources going to innovation, a much better understanding of what the drivers of greenhouse gas emissions are, and how much we need to develop from a technological perspective,” said Jonah Goldman, managing director of Breakthrough Energy, a network of initiatives that billionaire philanthropist Bill Gates established along with a coalition of private investors in 2015.

There’s been a tenfold increase in venture investing in clean energy innovation from 2016 to 2021, Goldman said, and now, technologies that have been proven to work need to start scaling.

Breakthrough Energy Ventures, which started in 2016, has built a portfolio of 75 companies over the past five years, from the duct and air sealing company Aeroseal to the battery recycling startup Redwood Materials to the hydrogen-electric aircraft developer ZeroAvia.

In June, Breakthrough Energy launched a blended financing mechanism that aims to bring down the costs of early-stage climate technologies in four areas: long-duration energy storage, sustainable aviation fuel, direct air capture, and inexpensive green hydrogen. Breakthrough Energy Catalyst plans to deploy most of its capital in high-income countries, where it sees more potential for innovation to be scaled initially, with the ultimate goal of making these technologies affordable in low- and middle-income countries.

The goal, Goldman said, is to lower the cost of what Gates describes as the green premium.

“In order to scale these innovations, to get to zero, we need to reduce the cost difference between the current products and the green products — a difference I call the green premium,” Gates said earlier this month at the World Leaders Summit at COP 26. “The cost of the transition must be low enough that the whole world can afford it.”

At the summit, Gates also announced IKEA Foundation, Citibank, and State Farm as new partners that have joined Breakthrough Energy Catalyst.

Gates has said before that donor countries, including the United States and the United Kingdom, need to focus not just on driving their own emissions to zero, but on making it easier for all countries to get to zero, by reducing the green premium.

In other fields, scaling happens naturally when innovations are better or cheaper than what they are replacing.

“But here we have the opposite conundrum,” Goldman said.  

Natural market forces do not drive the adoption of clean energy innovations such as green cement or green steel, which are often more expensive and less effective than existing technologies.

“There’s no way you end up getting to a climate future that we’re interested in without India being able to use green cement and green steel,” Goldman said. “And right now there’s zero percent chance of that happening without us significantly bringing down the cost.”

Private sector partners have committed over $1.5 billion to Breakthrough Energy Catalyst, which Goldman said he expects will double over the next year, with the goal of leveraging more than 10 times that much in total public and private financing. It’s just one example of an effort to create the markets needed for clean energy solutions to scale.

“If we just focused on the market as it stands right now, this transition not only wouldn't happen on the timeline we need it to happen, it never would happen,” Goldman said.

The blended finance mechanism is drawing on tools ranging from philanthropy to investment to policy in an effort to make it cheaper and less risky to build commercial-scale demonstrations of these technologies.

But while philanthropy can be a useful lever as part of this blended finance mechanism, there tends to be a misconception of what philanthropy can and cannot do when it comes to lowering the green premium.

“It just can’t sit on its own,” Goldman said. “These challenges are way, way, way too big. These markets are way too big. These are the most efficient markets on the planet … We need to fundamentally disrupt that, in a way that doesn’t fundamentally disrupt life on earth, which is what we’re worried about.”

Coming out of COP 26, Goldman said he hopes the high-income countries most responsible for causing climate change will consider how they can reduce green premiums.

“The biggest value we can provide is to allow the developing world to live the lifestyles we live, but not to do it in a way that will make it almost impossible to live in those countries,” he said. “The only way that happens is if we’re able to provide technology to countries at a price where they can afford to implement them.”

Update, Nov. 22, 2021: This article has been updated to reflect the number of companies in the Breakthrough Energy Ventures portfolio.

This coverage exploring innovative finance solutions and how they enable a more sustainable future, is presented by the European Investment Bank.