As technologies mature beyond R&D, support mechanisms could become less generous as costs fall. Overcoming the “valley of death” stage requires credible mechanisms to encourage the deployment of maturing technologies. Creating market certainty for private companies at this stage is particularly important. Investors require “long, loud and legal” policy frameworks to unlock capital for green growth (Hamilton, 2009). This implies policies that are long-term to provide sufficient investment certainty, ‘loud’ enough for a measurable impact on investment decisions (i.e. frameworks should make a real difference), and legally sound, building confidence and ensuring that investments are protected. Meeting these requirements contributes to investment risk reduction for entrepreneurs, which helps unlock private sector investment in R&D and innovation. Public funding can be used as leverage for attracting private funding for further technology development and deployment (Nassiry and Wheeler, 2012).
The OECD has developed a five-point Green Investment Policy Framework, a non-prescriptive tool to help governments mobilize private investment in low-carbon, climate-resilient infrastructure by establishing “investment grade policies” (Corfee-Morlot et al., 2013). Although the tool is not solely focused on R&D and innovation, it describes the wider range of public measures, which can enhance certainty for private investments during the different R&D and innovation stages. The five points of the tool are:
Advanced market commitments (AMCs) are one type of collaboration that develops innovative solutions (Edwards et al., 2011; Müller et al., 2012; and Edwards, 2010). Through AMCs private companies are guaranteed a price and market as an incentive to invest in technology R&D. Case 4 shows an example of how the Pneumococcal Advanced Market Commitment has proven to be a successful model for supporting pharmaceutical R&D investments.
AMCs can be used to spur green growth and action on climate change, as described in the example below for methane abatement (see Case 5), whereby a pre-commercial technology is supported by generating additional upfront revenues.
The pneumococcal Advanced Market Commitment (AMC) incentivizes vaccine makers to produce suitable and affordable vaccines for developing countries. The AMC works by donors committing funds to guarantee the price of vaccines once they have been developed. These financial commitments provide vaccine manufacturers with the incentive they need to invest in vaccine R&D, to expand manufacturing capacity, and a confidence in the market. In exchange, companies sign a legally-binding commitment to provide the vaccines at an affordable price to developing countries in the long-term. Once the market has reached critical mass and becomes self-sustaining, AMCs can be withdrawn.
Source: (GAVI Alliance, 2013)
The project ‘Using Pay-for-Performance Mechanisms to Finance Methane Abatement’ explored how public funds may be used to encourage reductions of methane emissions by making payments to project implementers based on independently verified emission reductions measured in terms of CO2 equivalent. The project was carried out by an international group of experts, the Methane Finance Study Group, facilitated by the World Bank.
The suggested approach builds on accounting procedures developed for carbon offset standards such as the Clean Development Mechanism (CDM), the Verified Carbon Standard and the Climate Action Reserve. The level of funding that each project will receive is determined through a competitive auction, guaranteeing the lowest possible cost to the funder. The report discusses various implementation options for the payment program, such as multi-donor funding, bilateral programs or a specialization of the Green Climate Fund’s private sector facility.
As part of the project, using the pay-for-performance concept, immediate opportunities could be found to some of the 1,200 new methane mitigation projects that were initiated but not implemented, under carbon offset standards in developing countries. This representing at least 850 Mt of CO2e in emission reductions over the period 2013–2020. These opportunities could be utilized in the form of a pilot program, as suggested by the project.
Source: (Methane Finance Study Group, 2013)