A Marshall Plan to finance the transition of cities and regions?

The first six meetings in our series on the environmental transition of regions and their businesses explored the planetary issues of the ecological transition and the levers for action of the various actors involved. On 6 May, Leonard turned its attention to the question of financing the transition of cities and regions. Contributors to the meeting were Benoît Leguet, Managing Director of the Institute for Climate Economics (I4CE), Benoît Calatayud, Managing Specialist in energy transition at Bpifrance, and Antoine Guillou, head of energy and climate and member of the editorial committee of the think tank Terra Nova.

As the effects of climate change become increasingly clear, initiatives in favour of environmental transition are gaining more supporters. Actors in both the public and private sectors have set out to find the most sustainable models for development. And the transition is playing out first and foremost at the local level: according to the estimations of Ademe, France’s environment and energy management agency, close to 15% of local authority emissions are generated by their own assets and fields of action where they hold direct management responsibility. This estimation rises to as much as 50% if we include fields where local authorities have powers to intervene. Antoine Guillou says: “Local authorities are crucial to ecology transition and have responsibilities in many key investment fields.”

However, they’re not alone. As well as governments, the European Union – whose Green Deal has provoked a lot of discussion recently – is also making moves. The ambitious goals for carbon neutrality by 2050 adopted by the EU bring a continental dimension to the transition begun by regions. The course may be set, but everything remains to be done – the investments needed for transition are colossal and necessitate suitable financial mechanisms and instruments. At the same time, the economic contraction caused by the health crisis is weighing heavily on government debt levels and threatening to indefinitely adjourn plans to invest in the transition.


Climate investment to help exit the crisis

But can we kill “two birds with one stone”? Benoît Leguet, Managing Director of the Institute for Climate Economics (I4CE) co-founded by Caisse des Dépôts and the Agence Française de Développement (AFD), links economic stimulation and climate investments with joint benefits for health. As he says, “What we must do is avoid a repetition of what happened after the 2008-2009 crisis, when the decision criteria used to put in place the stimulation plan took no account of the climate or, more generally, the environment; that was, to say the least, a missed opportunity.”

I4CE is basing its reflection in this area on France’s National Low-Carbon Strategy (SNBC) that, in a continuation of the EU’s goals, identifies the economic sectors that are the priorities and constitutes a set of shared objectives for both public and private actors. The SNBC’s goal is to reduce GHG emissions by a factor of 6 to 8 compared with 1990 and double the number of carbon sinks. Taking as its basis the sectors already identified in the SNBC, I4CE has got down to working out how the strategy can be applied on a national scale and accelerating it in those sectors capable of absorbing a high level of investment.

Among the sectors already being addressed by local actors are transport, energy retrofits, development of heating and cooling systems, public procurement policies, waste management and, for local government authorities, all issues relating to urban planning policy and limiting urban sprawl. Also included is “the subject of renewable energies, above all actions to encourage reductions in demand, which is an area where local government authorities can take more direct action than government and one where France is very behind”, adds Antoine Guillou.


Investments are increasing but remain insufficient

In France, investments in low carbon do not seem to be affected by crisis, having risen from €35 billion to €46 billion in the space of 10 years. Even better, “I4CE’s theory is that investment should accelerate because it concerns sectors that have been able to grow and absorb a growth shock and can make a fairly substantial contribution to an economic recovery,” explains Benoît Leguet. Even so, I4CE estimates that between €15 billion to €18 billion a year of public and private investment is missing if the SNBC goals are to be achieved.

To close that gap, I4CE has produced a stimulus plan that is fed by an annual envelope of €7 billion in public incentives. By raising public funding from €1.9 billion to €2.1 billion, I4CE estimates for example that energy retrofits for private-sector housing could benefit from annual investment of close to €16.1 billion. More substantially, raising public funding from €200 million to €1 billion for low-carbon private vehicles could generate investments of €6.2 billion, provided mainly by private-sector players. At the moment, it’s up to public and private investors to move in this direction.


Stimulate funding to support the climate

To encourage transition, standards can play a decisive role when they nudge investments towards reducing the carbon footprint: “Decisions are more so the realm of governments when it comes to standards for energy retrofits or the EU through standards for vehicles, for example,” says Antoine Guillou. Other efficient levers include lowering the cost of financing for green investments to make them more attractive. Guillou adds: “On this question, a lot is going on at the European level, especially in terms of defining what kind of investment is considered to be compatible with the ecological transition and what isn’t.” It’s a guide that could encourage initiatives that would be restrictive for banks and provide a framework for cautious, precise rules about the investments they finance. “Although a great deal is decided at the national or European levels, we’re also already seeing big local government authorities issuing green bonds; the Paris municipality, for example, raised €300 million recently,” says Guillou.

Measures to help make green projects profitable can also be applied, in particular through the European carbon market, which covers almost half of European emissions and involves mainly industrial sectors and electricity generation. The carbon tax, which in France mainly falls on transport and heating, also helps make CO2 emissions more expensive and in turn makes green investments more profitable by comparison, even though the social acceptability of these measures raises questions.

Lastly, to increase the capacity of local government authorities to invest in the ecological transition, Terra Nova suggests creating a state subsidy for local authority transition, to make full use of the ecological transition contracts created by the government and that are currently restricted to a small number of players, or to also develop energy savings certificates aimed at energy suppliers. All these suggestions will feed into future debate.


“It’s now up to public investors like Bpifrance to get involved,” says Benoît Calatayud

Public investors have already taken a stance in favour of transition. For example, Bpifrance, an indispensable public actor in the support of the growth of French companies, has been supporting green investments since it was formed. With a network of 48 branches throughout France, “90% of decisions are made at the regional level, there where the financing of the energy transition is taking shape”, Benoît Calatayud underlines. Since 2013, Bpifrance’s climate investments have continually risen to reach €2.9 billion in 2019, of which €1.4 billion went directly to financing companies, especially in the field of renewable energies.

The organisation has evolved to boost its action in fighting global warming through the introduction of a Climate Plan. This is structured around five themes: increasing support for transition, especially in transport, industry and construction; an annual measure of the Bpifrance carbon footprint to assess the risk of investing in a given business activity as a function of the activity’s carbon footprint and associated profitability; an operational strategy for the ecological and energy transition of the portfolio of carbon-based activities; integration of the climate factor in risk analysis with the aim of measuring the risks of disposing of a carbon portfolio or investing in one; and integrating climate issues in the internal running of Bpifrance to make the bank an exemplary  model  for carbon matters. As for the DeepTech plan it put in place in early 2019, the aim is to finance investments in breakout technologies. “That’s a strategic priority for us,” says Calatayud.


What about Europe?

Bpifrance is also organising at the European level by strengthening its collaboration with the EU institutions so as to increase resources to fight climate change. “Bpifrance’s objective is to make a massive contribution to European funding through the different tools and mechanisms that will be put in place, including InvestEU and Horizon Europe, and closer collaboration with the European Investment Bank and regional development funds including the ERDF. All these cooperation efforts will be structured around the regional organisations that are now the main beneficiaries of European subsidies,” says Calatayud.

At the same time, the EU is taking action. The Green Deal, an initiative of the new European Commission formed at the end of 2019, is necessarily working in favour of the ecological transition. Antoine Guillou says: “First and foremost, it’s the name of a political initiative that brings together a set of proposals at the European level. At the moment, the Green Deal is more of a project opened up by the Commission than a set of measures that are already on the negotiating table.” So patience is needed, although Guillou stresses: “I don’t want to underrate the importance of what goes on at the European level, but I don’t believe that it’s the EU’s own investment capacity that is the most important. It’s more so the various standards that the EU will enact, whether financial regulations or standards for vehicles, industry or the European carbon market that will have the biggest impact on reducing GHG emissions.”

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