Financing Sustainable Cities
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building, thus transforming all buildings thus supplied into power stations in their own right. However, developing such a technology requires availability of research and development funding, financing of part of the initial start-up costs of the enterprise that produces such products, and bridging finance for transcending the cash flow problems inherent in upscaling production of such environmentally beneficial products. Because of the positive externalities associated with development of environmentally beneficial technologies, it is economically efficient for the public sector to take an active role in ensuring that the costs associated with their development are financed. On the other hand, the statement should not be equated with a mandate for the environmental equivalent of stock-picking (i.e., a public sector agency attempting to select environmental projects with the highest rate of return from an entire universe of such projects), as this approach has proven to be ineffective. The principle that is critical to the public sector’s efficiently subsidizing such projects is that of structuring publicly provided assistance in a way that works through—instead of disabling—market-based mechanisms. Under such a system (Figure 7.9), the government provides (partial) guarantees to banks for reducing the risks associated with funding such projects. This helps reduce the cost of providing such loans by banks and other financial institutions, and likewise reduces the level of risk as perceived by potential equity investors, thereby “crowding in” private capital. On the demand side, reductions in the level of government tax levied on products that use the environmentally beneficial technologies thus developed encourage consumers to buy such products. Bolstering demand in this manner also helps to secure financing for such initiatives.
Figure 7.9
Public Assistance to Environmentally Beneficial Projects Provided through Market-Based Mechanisms
Company Green Projects Low cost loans Economic assessment Supervision
Banks Green funds
Loan payment guarantee Below average returns
Savings
Green assessment
Government Legislation Compensating tax deduction
Consumer Private capital Source:: D. Oh. 2011. Green Financing in [the Republic of] Korea. PhD Research Paper, Korea Corporate Governance Service.