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One of the most important policy vehicles for strategic finance and ‘crowding in’ private investors are state investment banks (SIBs). Several national and subnational governments have founded green state investment banks (such as Australia’s Clean Energy Finance Corporation) or mandated existing SIBs to support low-carbon technologies (such as the Brazilian Development Bank) (NRDC et al., 2016; OECD, 2017). In addition, multilateral development banks (such as the World Bank) have pledged to green their portfolios (Steffen and Schmidt, 2017). Geddes et al. (2018) identify five functions through which these SIBs have been able to leverage private capital: the provision of capital, de-risking, awareness-raising among investors, market signalling (where an SIB’s endorsement improves a technology’s reputation) and by providing a crucial early-mover function. These functions are detailed in online appendix A.4.
Together, these five functions can help overcome private investors’ initial aversion towards new technology and project types. The de-risking, signalling, and early-mover functions are particularly important for projects that contain non-incremental technological innovation. As SIBs take a financial position in such projects, they can also incur financial losses when a project fails. They therefore need performance criteria (such as portfolio benchmark return or leveraged private finance target) and a capital base that allows them to invest in higher risk immature technologies. Defining the risk exposure that a SIB can take is an important part of their mandate, and should be aligned with the overall ambition of innovation policy, as discussed next.
7.2.3 Directed portfolios
Innovation policy is most effective when it sets ambitious directions, rather than aiming to simply ‘level the playing field’. Steering towards a low-carbon economy is one broad direction that involves additional choices as to which set of technologies should receive funding and how much. Unless the public sector sets such directions, private actors’ choices will unintentionally create directions, which may be into high-carbon sectors (Wüstenhagen and Menichetti, 2012). Due to the long- lived nature of many assets created today, this carries the risk of locking the economy into a high-carbon path (Unruh, 2000). To avoid doing so, investments into low-carbon innovation must be directed boldly towards several strategically selected sectors within the low- carbon area (Mazzucato, 2017). This portfolio approach preserves multiple pathways, meaning that if one path fails, others are available and some will succeed (Schmidt et al., 2016).
A number of developing countries have highly constrained national budgets that limit their ability to finance a policy portfolio that goes beyond immediate needs, such as national security, health care, education, other infrastructure, and energy access and security.
Nevertheless, several funding mechanisms have the potential to boost countries’ finance for innovative projects, such as the Green Climate Fund. This United Nations Framework Convention on Climate Change (UNFCCC) entity catalyses climate finance from both public and private sources to provide investment support to developing countries. Countries retain ownership of where the fund’s resources are invested, as such investments are made in the context of their national climate strategies and plans. They can also use the UNFCCC’s Technology Mechanism to help develop relevant strategies and technology investment portfolios. Another example, focused more on local business development, is the World Bank’s Climate Innovation Centers (infoDev, 2018). Design lessons for these and similar mechanisms are available from the Global Fund in the area of public health (Sachs and Schmidt-Traub, 2017).
7.2.4 Mission-oriented innovation
One way to structure a complex set of policies is to conceive of innovation policy as targeted towards achieving a concrete ‘mission’. Mission-oriented innovation policy defines an ambitious goal and then sets specific steps and milestones to achieve it (Foray et al., 2012).3
The mission requires public innovation
organizations to set out tasks that mobilize various actors (business, non-profit, public) for bottom-up experimentation across different sectors (Mazzucato, 2017).
Lessons from past mission-oriented innovation policies suggest that cross-sectoral innovation is necessary to reach goals: for example, the US Apollo Mission required not just ‘rocket science’ but also innovation in the textile sector for the astronaut suits, for instance. In addition, the German Energiewende [Energy Transition] policy has required all sectors in Germany to transform themselves, such as the steel sector lowering energy consumption through repurpose, reuse and recycling strategies (European Commission, 2018). Meanwhile, in the USA the SunShot Initiative in PV (see section 7.3) has mobilized 347 organizations through grants in nine subprogrammes, covering actors from manufacturing firms to municipalities seeking innovative solutions to permitting, zoning and financing (DOE, 2018). Box 7.2 describes an international mission-driven initiative for accelerating innovation in advanced materials.
This section has outlined the key elements of an innovation policy framework for accelerating low- carbon innovation. One important takeaway from this discussion is that innovation policy itself can and must be innovative: different technologies and different areas of the innovation chain require different support mechanisms (Huenteler et al., 2016). Accelerating innovation may therefore require entirely new approaches to innovation policy.
3 This differs from invention-oriented innovation policy, which focuses on R&D only, or system-oriented policy that seeks to provide a good system conducive to innovation, but does not set a direction (Edler and Fagerberg, 2017).
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