Towards a new industrial policy paradigm: an investment

policy for the transition to net zero in Brazil

Winston Fritsch
[Draft for discussion, not to be quoted without the author’s consent]

The challenge to transform productive structures to achieve on average net zero

greenhouse gas (GHG) emissions by 2050 to avoid the disastrous effects of
global warming predicted by the UNFCCC is daunting, especially in high
emission countries. It is also politically difficult, not only because of the
distributive implications of the change, but especially because of the lack of
consensus among economists in designing economic policy measures to induce
the investments required by transition in an efficient and timely manner.

However, the challenge of the transition to low carbon emissions in Brazil much
smaller than in the other industrialized and semi-industrialized high emitters.
Moreover, it also offers a gigantic opportunity to Brazil because of its natural
advantages in clean energy production, nature-based solutions to carbon
sequestration, and the possibilities of reducing its high emissions in agriculture
and cattle raising. Thus, a well-designed investment policy in emissions-
reducing R&D and, especially in impact transition projects can pivot a
development policy allowing the creation of a platform of green energy
surpluses to accelerate economic growth, improve income distribution and at
the same time contribute to the global transition to a carbon neutral world. In
fact, the challenges the world faces today in the transition to net zero may be the
greatest opportunity that the country has had since World War II to contribute
substantially to the solution of a global problem in a manner completely aligned
with national interests. We cannot miss this chance to re-industrialize Brazil in
the first half of the 21st century.

This short paper explores this proposition, suggesting a simple analytical

framework for an efficient investment policy for the transition to carbon
neutrality in Brazil and a small and consistent set of policy principles and
instruments to implement it, leading to a virtual reindustrialization of Brazil in
its unavoidable journey to a carbon neutral economy.
I. The transition to a low carbon economy as an opportunity for
Brazil

The activism of the private financial sector on climate policy during the past
years1 [on this see Fritsch - article in Camargo et al. (eds.) CEBRI, 2022]
has to a large extent resulted from the realization that repricing the assets of the
activities most affected by the need for a transition to low carbon does not only
imply risks, but also points to enormous opportunities created in the sectors that
may lead the investments required for the transition. These opportunities are
already visible in the advances in new emission-free electrical generation
technologies with strongly decreasing investment costs; in the expectation of a
possibly rapid transition to the use of electrolytic (green) hydrogen to replace
coal or hydrocarbons both as an energy source and in industrial processes and
transportation; in nature-based solutions such as large-scale reforestation,
among others. This generates positive attitudes towards the acceleration of an
effective and convergent regulatory environment, as required to materialize
these investment opportunities and the introduction of innovation, creating a
virtuous circle of globalization of solutions. We are, therefore, on the threshold
of a new era in financing the diffusion of the so-called enabling technologies. It
is no coincidence that financial institutions that are signatories to the GFANZ –
the Glasgow Financial Alliance for Net Zero, an association with a membership
over 550 global financial institutions from 90 jurisdictions - responsible for
assets that total more than USD 150 trillion, all committed to emission targets
consistent with the goals set by COP 26. Understanding this moment is
important for Brazil.

Brazil is what we can call a climate outlier. It is, without a doubt, a great
emitter, responsible for 3.4% of global emissions, and today ranks 6th in the
world. However, our energy matrix, unlike the other big villains, is relatively
clean. As can be seen in Figure 1, while the energy sector is responsible for
76% of total emissions in the world, in Brazil it represents only 19% of the
total. No less than 72% of Brazilian greenhouse gas emissions come from "land
use", a euphemism used for the sum of emissions coming mainly from a
shameful large-scale deforestation and, to a lesser extent, but very relevantly,
from methane emissions produced by livestock.

1
Fritsch, W., O financiamento das oportunidades de investimento na transição; in Energia em um mundo em
transição [livro eletrônico] : desafios, oportunidades e perspectivas. -- 1. ed. -- Rio de Janeiro : Centro Brasileiro
de Relações Internacionais - CEBRI, 2022.
Figure 1: Composition of emissions in the world and in Brazil

This historical peculiarity gives us two advantages over other major emitters.
First, the costs of controlling emissions to meet national commitments do not
seem as high as for other major emitters, where the gases result from energy
generation and industrial activities central to the functioning of their economies.
Controlling deforestation, has already been shown to be possible. Between 2004
and around 2014, when it started rising again, deforestation in Brazil fell from
over 25.5 million to less than 5 million hectares, as shown in Figure 2, and the
continued refinement of effective remote monitoring methods makes this
control a matter of political decision and use of the correct incentives.

Figure 2: Amazon deforestation evolution

Note: The vertical line in 2004 marks the year the PPCDAm, federal government action plan to combat
deforestation in the Legal Amazon region was launched
Source: CPI/PUC-Rio with data from PRODES/INPE, 2021

Secondly, almost a third of our emissions comes from the land – a large part of
which is methane emitted by our large livestock numbers. This can be addressed
by investments in innovations in low carbon agriculture and plant-based protein
products, expanding the agricultural frontier towards the vast areas presently
occupied by low productivity cattle ranches while progressively reducing and
confining their livestock [quote CPI policy paper on that].

However, more relevant for our present discussion is the availability and quality
of certain natural “climate” resources such as wind and sunshine, which creates
a unique opportunity to exploit competitive advantages in two of the most
important areas for the crucial first decade of the transition. In fact, clean wind
and solar power generation could, for their potential magnitude, create gigantic
surpluses of electricity at falling prices, as shown in Figure 3. This would
stimulate the efficient production of various electro-intensive articles, and
especially "green" hydrogen, which could also be used as a "clean" reducing
agent in industrial processes such as metallurgy - where Brazil has been losing
competitiveness for years - or in the ammonia chain, the basis, among other
things, to produce efficient, low carbon substitutes for today’s almost totally
imported fossil fuel-based nitrogen fertilizers. In fact, a large supply of cheap
green hydrogen could start a new era in our industrialization launching a group
of new low carbon, energy efficient and, thus, internationally competitive and
export oriented sectors.

Figure 3

Source:
Ren

Finally, as an industrial country with a large oil sector, Brazil has to address the
problems, in the so-called “hard to abate” and high emitting sectors such as oil
refining, cement, construction and others, which will require massive
decarbonization investments in the long run. Moreover, these sectors will need
in the short- run to offset emissions through investments made in carbon
sequestration from the atmosphere through nature-based solution, such as forest
restoration and conservation. And investment in permanent and quality large-
scale forest restoration generates, besides carbon sequestration, great additional
economic benefits, such as local quality employment with low formal training
requirements and restoration of the water balance, as well as greater
biodiversity.

Thus, the transition to net zero can, if supported by adequate policies, be the
dawn of a large, diversified reset of Brazil’s industrial base. According to the
GFANZ, based on research supported by Mckenzie, Brazil will need around $
700 billion in transition investments over the next decade, something around 2%
of global needs and, on average, almost 5% of Brazil’s current GDP 2 [On this,
see https://www.gfanzero.com/netzerofinancing]. This is a challenge that can be
met but will require the deployment of an efficient industrial policy for climate
transition, within a stable economic environment and supported by a set of well-
designed long-run economic incentives and sector regulations as proposed
below.

II. Technology, institutions, and finance: a simple analytical

framework for an efficient industrial policy for climate transition

The conceptual problem to be addressed in designing an industrial policy for the

transition requires dealing with two issues - market failure and the time
dimension of investment decisions, which brings uncertainty into the play –
both theoretical quagmires in Economics as it falsifies strong simplifying
hypothesis of the classical paradigm, namely, the existence of markets for all
relevant goods and its “perfect” functioning where, among other attributes,
agents have perfect foresight. What can be today called Transition Economic
Policy will have to squarely address these (and other) issues if it is to be of any
use.

First, it has to say how to induce more efficient production of goods with a
lower content of a non-priced by-product (GHGs or “carbon” for short). This is
a negative market failure which, as discussed in textbook economics, turns the
traditional model of efficient resource allocation in competitive markets useless.
Sure, a Pigouvian3 [quote Pigou] solution exists to rescue the orthodox
framework but all those conversant with textbook economics know that the
2
On this, see https://www.gfanzero.com/netzerofinancing.
3
Pigou, A.C.; The Economics of Welfare, London: Macmillan, 1920.
discussion of the problem is usually sent to the long footnote of Welfare
Economics, and that to deal with the problem one has to enter the realm of
government intervention and regulation, leaving the wonderland of perfectly
functioning and efficient free markets. In our case, the world of carbon pricing –
carbon taxes, carbon permits (cap and trade schemes) or carbon credits. And
policy prescriptions assume some form of welfare function and, in the end, the
traditional academic debate on optimum policy intervention stalls over
discussions on discount rates reflecting intergenerational choices 4 [quote Gary
Becker et al].

Moreover, the Pigouvian solution in also incomplete. Pricing the carbon

externality can indeed induce static efficient technical choice among available
technologies. However, it still sweeps two key questions under the carpet: first,
the “second externality” - the positive externality created by generating
innovation, a public good - and second, the investment dimension involved in
the process of technical change – the invention, innovation and diffusion triad,
illustrated below – central to the solution of the Transition problem and which
raises the vexing Keynes-Knight problem of intertemporal decisions under
uncertainty5 [quote both].

In conclusion, directing investment to foster technical change to accelerate the

transition to net zero is not only a theoretically complex but also an urgent
problem, as it must be induced to happen in a short time frame as compared to
the historical processes of technological paradigm changes: we need to induce a
new industrial revolution, especially in the energy and “hard to abate” sectors,
in not much longer than a couple of decades.

A simple analytical framework

Let’s start with the key dimension of the transition problem from the
economist’s standpoint, i.e., how to induce investment in the amount and
direction needed to change the way we produce in a market economy 6. [Nota:
Focusing on the production side does not mean that changing consumer patterns
are not important to climate transition. Preaching for the selfish prosperous
4
Becker, Gary S., Kevin M. Murphy, and Robert H. Topel. "On the economics of climate policy." The BE
Journal of Economic Analysis & Policy 10.2 (2011).
5
Keynes, J.M. (1937). The General Theory of Employment. In The Collected Writings of John Maynard
Keynes. Vol. 14, Macmillan, Cambridge University Press for the Royal Economic Society, 1973, 109-23; and
Knight, F.H. (1921). Risk, Uncertainty and Profit. University of Chicago Press.
6
Focusing on the production side does not mean that changing consumer patterns are not important to climate
transition. Preaching for the selfish prosperous consumer certainly helps. However, it not only raises the basic
philosophical question of how best to live, as putting the emphasis on the question of how we live risks shifting
the burden of change away from governments and corporations, and individual action cannot do much, given
our current production structures. For an interesting discussion of this topic see K.S. Robinson, Entering a low-
burn headspace, in Bloomberg Green, 20 October 2022
consumer certainly helps. However, it not only raises the basic philosophical
question of how best to live, as putting the emphasis on the question of how we
live risks shifting the burden of change away from governments and
corporations, and individual action cannot do much, given our current
production structures. For an interesting discussion of this topic see K.S.
Robinson, Entering a low-burn headspace, in Bloomberg Green, 20 October
2022]. Our discussion of the solution will be focused on the firm (or, in the
economist’s jargon, the theory of production), using the old fashioned but
analytically rich and well understood Marshallian/Schumpeterian more intuitive
traditions, rather than the arid modern general equilibrium approach to the
behaviour of perfect markets.

Let’s start by stressing the different investment dynamics of each component of

the classic triad of invention, innovation and diffusion depicted in Figure 4,
below, and show how they reflect the fact that agents – especially firms and
investors - act, in each of them, under different market structures, where barriers
to entry and risk/return ratios play a major role in investment decisions.

Figure 4: The sequential Triad of Technical Change

Invention demands a scientific paradigm change. It is the work of above

average teams with out of the box insight. But it does not come as manna from
Heaven: it is highly dependent on institutions such as the existence of a solid
scientific network, built upon universities, libraries, or large databases and more
modern forms of diffusion of scientific information. However, because of the
(positive) externality existing in the invention process, we face another market
failure because of the public goods character of inventions, only imperfectly
addressed by the traditional instruments of the patent system and intellectual
property rights. Thus, the high risk and low private return does do not easily
attract the large capital needed for investment in innovation whose bulk is
provided by government money and philanthropic donations.

Innovation goes a step ahead as it offers greater property rights protection.

Moreover, the required investment to develop commercial propositions out of
testing and experimentation of already existing, accepted innovative concepts
typically focuses on scaling up pilot models, which face less informational entry
barriers, lower risk and thus higher potential return. So, innovation is able to
attract some pools of private capital, traditionally inside innovating real sector
firms in a Coasean7 [quote Coase] process, but also increasingly, in the private
financial markets, as information and other barriers to entry in the innovation
market shrinks – especially in IT and a few other high-tech markets - through
specialist institutions in high risk equity markets such as angel or seed capital
firms.

Finally, when scientists and engineers have done their jobs of invention and
innovation, the remaining trick is fundamentally one of entrepreneurial talent
and financial engineering: the process of diffusion through the adoption of the
innovation throughout the productive system at scale. Although the theory still
struggles with the Keynes-Knight problem of addressing uncertainty in the
financial investment decision, this is a problem with a higher degree of
consensus among practical economists and financiers operating in capital
markets and its modelling has been popularized by the so-called Capital
Availability Curve of the firm, shown in the Graph below.

Graph 1: The firm’s capital availability curve

The stylized story of a successful firm, told in the graphic, begins when the
innovative entrepreneur funds the “test-of-concept” of a business opportunity
with equity or using a limited supply of “seed capital”. Then, in successful
cases, in which the “valley of death”, shown in the Graph, is overcome when
enough net cash generation occurs within the planned horizon to meet the
investment requirements of the business plan, the second phase of high potential
growth is entered, allowing the firm to attract institutionalized sources of

7
R. H. Coase, The Nature of the Firm, Wiley, 1937. Available in:
https://onlinelibrary.wiley.com/doi/full/10.1111/j.1468-0335.1937.tb00002.x
capital, such as venture capital and private equity funds. Finally, in the final
phase, comes the award that consolidates the success and guarantees adequate
capitalization in the long-term perpetuating the company - the IPO - with the
sale of shares in liquid and deep public markets.

The policy road map for Transition Impact Investments

We can now join the discussion of the technological change triad made above to
the useful framework of the capital availability curve – usually applied only to
the Diffusion phase - to produce an intuitive framework to discuss policy
intervention over the whole Transition process. For that we must extend the
discussion of the risk/return and capital availability issues to the previous
phases of Invention and Innovation.

Graph 2, below, illustrates what we can call the capital availability curve for
Transition Investments. It shows that agents and sources vary according to the
radically changing risk/return profiles of investment in each phase, but that
investment decisions still reflect optimal decisions of agents with different
objective functions in terms of risk and return, and their capital availability

Graph 2: Transition Investment Risk and Capital Availability

Investments in Invention starts with a gigantic financial risk and are, thus,
sponsored especially by government and donor money. This risk slowly falls
over time with the spread of the results of breakthroughs in science and
technology research.

The transition to Innovation happens when this falling perceived risk trend
triggers the interest of Coasian firms in the real and/or financial sectors in
equity allocation to Innovation projects. From that moment, although still facing
a relatively high financial risk, these innovating agents pull the process of
private, or blended – private and public – investment in Innovation forward
because of asymmetric information or some peculiar resource, leading to a
lower risk aversion.

The length of the innovation period depends on barriers to entry on

experimentation. For example, low altitude space rockets, electric cars or new
large scale low emission industrial processes require large pools of private or
blended capital to test the concept, while several algorithm-dependent
innovations triggered by fast, large scale processing do not, and go almost
straight to the diffusion phase.

III. The logic of a Transition Investment Policy and its basic

toolbox
The model presented above gives us a useful framework on which to base a
common language when discussing climate transition policy issues. Moreover,
it also suggests a paradigm for Transition Policy intervention on which to align
a set of instruments which considers both (i) the public good nature of invention
and, to some extent, of innovation, and (ii) the strong gradient of equity risk
between innovation and diffusion, as illustrated in the figure below.

Figure 2: Climate policy as a Public-Private Partnetship

The main takeaway is that public intervention through a varied toolbox of

policy instruments is key, especially in the higher investment risk end of the
technical change spectrum. Direct government financing – including incentives
to private philanthropy – have traditionally paid a clearly fundamental role in
R&D policy, especially in the invention phase. Even at the early stages of the
innovation phase different forms of blended public-private finance with a high
component of of public or donor money should come into play for innovation in
decarbonization technologies in its various forms. In recent years, governments
in the US and the EU have indeed provided large amounts of gap finance to
climatech start-ups in seed stage and these amounts have recently skyrocketed:
according to Pitchbook8 [quote] equity investment managers closed as many
climate-focused funds in 2021 as in the previous 5 years.

However, it is in the large scale investments in climate impact projects during

the diffusion stage, where technological risk is low but other risks such as
regulatory and country risk might affect their expected private profitability, that
active large scale public-private investment partnerships should concentrate.

Contrary to firms or projects that only face market risk, most transition projects
operating in regulated environments. Moreover, they also have their capital
expenditure both concentrated in time and taken only after the so called final
investment decision (FID) - involving the capex needed to actually build the
project - a decision which depends on licencing and often on other regulators’
decisions, which can drastically affect the size and timing of future cash flow
forecasts.

In fact, in depicting the “valley of death” for such projects one has to redefine
the second phase of the original Graph 1, above, placing it between the early
phase of the project, where far smaller expenditures are financed by the project
developers – players akin to the start-up founders – and the uncertain time in
which, in regulated projects, happens the FID, generally done by a large
operator only after the conclusion of the several EPC, off-take, financing and
other key project contracts, and long after the beginning of the project.

It is during this potentially long period before the FID that the project
developers – its original entrepreneurs – need to attract investors to bear the
growing expenses in the detailing of the basic project upon which the attraction
of the final investor-operators depends that is located the Death Valley of
regulated projects. Contrary to start-ups, which generate revenues from its first
client and have only to deliver the projected market growth and operational
margins, managing risk almost continuously, the projects we are discussing do
not have a reliably projected IRR until regulators define some key parameters
determining its cash flow. In other words, a poor regulatory environment for
climate impact projects – especially in aspects causing delays in projected
execution - may add substantial additional uncertainties over expected rates of
return which are likely to drive away potential private sponsors.

8
https://pitchbook.com/news/articles/climate-tech-startups-and-investors-fundraising
This will be especially important in new green power generation and green
hydrogen projects where expected technological changes will demand a
regulatory overhaul of the Brazilian electricity system. Special care should be
taken to speed up the still non-existing regulation of new generation sources of
great potential such as offshore wind, as well as to reform grid regulation and
operation principles as required by the changing technology environment of
optimization and control in transmission and distribution networks in the face of
the distributed growth of unstable generation sources.
Besides regulatory risk, care should be taken to avoid that, in a world of
competing locations for impact investments in tradable goods embedding green
hydrogen – be it as pure hydrogen exporting vehicles such as ammonia or as
higher value added products such as green steel, cement, fertilizers etc. using
green hydrogen – a significantly higher Brazil country risk can wipe away our
natural competitive advantage given by the quality of our wind and solar
resources, diverting investments to other, less risky locations.
Country risk is usually broken down in three components: political,
geographical and market risks. Brazil has no structural disadvantage in relation
to the former two, especially as we approach OECD membership and the large
Western economies attribute increasing value to “safeshoring” direct
investments away from potentially growing geopolitical danger. The key issue
is market risk, especially macroeconomic risk, translated into high interest rates
and potential foreign exchange volatility which raises Brazil’s equity risk
premium and cost of long-term debt financing, increasing the weighted cost of
capital for our projects. Naturally, the best way to address this is through
appropriate fiscal and monetary policies, but several ad hoc policy instruments
can be used to address this issue, as well as the other – technological and
regulatory – handicaps affecting the relative profitability of Brazil’s priority
transition impact projects.
First, temporary taxes and fiscal subsidies should play an important role in
supporting these projects. However, they should progressively fall as risk falls
with the diffusion of the new technologies, efficient regulation, and
macroeconomic stability, making them redundant. The recent US IRA “green
deal” framework is a good example of this approach.

Second, carbon pricing instruments in all its forms should also come strongly
into play to incentivise innovation and efficient diffusion, taking into account
sector specific features. Cap and trade schemes on the model of the EU
Emissions Trading Scheme – both at the federal and sub-national levels - and/or
taxes are particularly useful in the diffusion of new technologies in hard to abate
sectors. They should be coupled to carbon credit offsets and subsidised credit
from government banks and philanthropic institutions in nature-based solutions,
agrotech and plant-based food technology, initially geared to existing voluntary
markets, before the proper regulation of Article 6 of the UNFCCC comes into
play.

Last, but by no means least, there is ample room for using large scale blended
finance to de-risk investments with public and multilateral development
financing agencies acting directly over the weighted cost of capital in climate
impact projects as a bridge to private bankability. This could attract a huge
amount of private and especially, foreign private capital, taking advantage of
Brazil’s clear competitive advantage in “environmental assets” an increasingly
attractive asset class in global financial markets.

As mentioned above, investments in renewable energy and, potentially, in green

hydrogen and its various uses – where Brazil’s competitive advantages are
astonishing9 [Nota: according to a Bloomberg study, Brazil can have the lowest
levelized cost of green hydrogen in the world by 2030. Quote.] - supported by
well-designed regulation and financial incentives stemming from an open
blended finance platform, probably governed by the BNDES in partnership with
other multilateral financial institutions, can help both a huge scaling up and
structural transformation of our electricity and industrial sectors in less than a
decade with immense growth and regional distribution effects in the Northeast.

The key instruments mentioned above are summarized in the Box below, for
different levels of technological risk and private-government sector financial
blend.

BOX: Key risk mitigation instruments

 Stage 1: R&D policy for Transition: Invention direct incentives
o Invention through government and or philanthropy-sponsored R&D and/or
education etc. all the way until diffusion phase
 Stage 2: R&D policy for Transition: Innovation support
o Focus on competitively public-private co-funding innovation risk and education
o Selected carbon pricing instruments in certain sectors (hard to abate, green energy
production, DAC/CCUS and NBSs)
o Innovation-focused direct tax incentives
 Stage 3: Transition Policy: increasing private sector incentives
o Transition blended finance instruments overlapping with diffusion phase
o Selected carbon pricing instruments in certain sectors (hard to abate, green energy
production, DAC/CCUS and NBSs) overlapping with diffusion phase
o Temporary tax incentives to transition-oriented investment

9
According to a Bloomberg study, Brazil can have the lowest levelized cost of green hydrogen in the world by
2030.
III. An outline of key Transition Investment Policy principles

The discussion of the rationale for public support to impact investments to

accelerate the transition to net zero in a market economy, using a set of
consistent intervention instruments to address key market failures hindering
efficient resource allocation is now complete. There is need for urgency and
no time for ideological debate on the abstract merits of government
intervention. Europe and the United States, besides China, are  both now
implementing active industrial policies in response to the challenges and
investments opportunities created by the competitive dislocations generated
by the transition to net zero, showing pragmatism in the use of public
resources to mobilize private investment. Focused on simple , transparent
and technology-agnostic principles, a set of instruments for a new
industrial policy is being deployed to attract companies to invest in
profitable impact investments of their choice, in lieu of traditional
protectionist trade-related instruments. The question in not whether to
intervene but what could be the principles - a high level
strategic framework – for intervention in the design of policies to allow
Brazil’s re-industrialization in the country’s inevitable transition to net
zero?
First and foremost, as outlined above, a well-designed combination
of an incentives system – formed, by a combination of temporary tax
breaks, carbon pricing, and blended finance schemes - linked to public-
private partnerships to direct private investment to the goals of the
transition, as defined in a national transition plan. These instruments are
needed to address the risks stemming from some important but hopefully
temporary country-specific handicaps negatively affecting Brazil’s locational
advantages in key priority transition investment areas.
In our views, the main sectors to be a priori candidates for such incentives in
Brazil should be (i) capital intensive large-scale projects both in green energy
and integrated green hydrogen units, as well as industrial downstream uses of
green hydrogen, in steel, fertilizers and other uses, (ii) decarbonization and
carbon capture use and storage (CCUS) and mining projects related to the
derived demand from minerals in the transition to net zero, (iii) high quality
projects of forest protection and reforestation with biodiversity, social, and
hydric co-benefits, and (iv) projects aimed at reducing the substantial volume of
emissions in Brazilian agriculture and cattle raising.  
Second, a supporting investor-friendly regulatory environment and,
especially, a fast-track approach for the approval of priority
projects, especially in renewable energy, natural gas, electricity
transmission infrastructure and green hydrogen, so as to guarantee a
speedy and safe energy transition.
Third, a transition industrial policy must be integrated to an active climate
and foreign trade policy in both multilateral, regional and bilateral levels to
enhance the huge export potential unlocked by an efficient re-industrialization
based on efficient clean energy, protecting national interests from protectionist
threats, and providing a level playing field in international trade and
investment. 
Moreover, given the global dimension of the GHG emissions externality, there
is urgent need for coordination of action with like-minded key actors in the
traditional UN forums, especially after Brazil’s shameful withdrawal from its
traditional leading role in this key arena for climate action in the past few years.
Moreover, a high-profile role in international action coordination should be
extended to the G20 and the key multilateral institutions, such as the BIRD,
IMF and the OECD, represented at the Financial Stability Board, where much
of the peer pressure engaging the financial sector on climate transition action in
the last few years begun and is likely to happen in the future.

Fourth, as energy transition immensely increases the demand for raw

materials and minerals - since 2010, the average amount of minerals needed to
generate electricity has increased by 50% and a standard electric car requires six
times more minerals than a conventional vehicle - an integrated policy for
transition raw materials inputs is key, as well as efforts to
incentivise massive recycling rates. 
Finally, as part of the national transition plan the public sector must play
a role model using its procurement policies to create a market for goods
and services from firms with clear commitments to the objective of low-
GHG emissions.

IV. The road ahead: suggestions for an agenda for Investment

Transition Policy Studies

This note is a framework paper for a policy-oriented research program on

industrial policies for the transition to net zero. It focused on three key issues
regarding the design of Investment Transition Policies:

 The scientific and economic justification for government

intervention.
 A policy framework for intervention, stressing the wide spectrum of
risks and returns of climate impact investments.
  A detailed discussion of intervention focused on transition impact
investments with lower technological risk, specifically detailing three
key instruments to be used to accelerate an efficient transition, namely
temporary tax breaks, carbon pricing, and blended finance schemes.
 A discussion of important ancillary policies to complement and support
the industrial policy suggested herein - such as regulation and
macroeconomic stability, international relations, avoidance of potential
supply constraints in key natural resources, and government procurement
policies.

Our proposal is to use our basic policy framework for intervention to draft a set
of consistent studies detailing an Investment Transition Policy based on
temporary tax breaks, carbon pricing, and blended finance schemes as
incentives to impact investments. Each of these studies should be broken in two
parts - one, of a more analytical nature, discussing the economically optimum
design of each of the three instruments, the other discussing the institutional
aspects of their implementation. These papers should be wrapped by a synthesis
paper detailing the joint use of the policy instruments package in the context of
the Brazilian policy framework. Naturally, these general policy instruments
studies could be complemented and detailed by sector studies, especially in key
sectors such as energy, agriculture, and forests and some hard to abate emitters.

This central set of papers should be complemented by three other special papers
on ancillary policies which must support the success of the Investment
Transition Policy, namely:

 The need for long-term stability of the policy framework

The efficiency, transparency and stability of the policy framework is key

in at least three dimensions. First, there is need for intra-governmental
coordination, especially in regulatory questions affecting priority impact
projects. Second, macroeconomic stability should also be an important
underpinning of climate transition policy as, indeed, the many sector-
specific policies, which should be implemented by well-coordinated
authorities within the Executive, where the objectives set by our NDC
should be overwhelming. Last but not least, as private firms and financial
markets play a crucial role the investment process, a central element for
the stability of the transition will be the adequate information provided by
the agents about its GHG footprint indicators and transition policy
objectives. This requires mandatory reporting standards and transmission
of reliable information to financial regulation authorities to avoid
“greenwashing” or, worse, systemic financial risk. Self-regulation helps
 but can give rise to hidden non-conformity as recent experience
demonstrates.

 The international dimension: international trade and investment

issues

The global dimension of the transition challenge makes almost mandatory

to discuss the international trade and investment policy issues in both
multilateral, regional and bilateral levels. Of special interest here would
be the implementation of Article 6 for carbon credit markets and the
evolving multilateral framework as the UNFCC effectiveness comes
under increasing criticism and the geopolitics of energy transition.

 Climate Justice

Finally, there is the overwhelming political objective of an equitable,

“just” transition, especially in the design of policies, such as the ones
discussed here, having a substantial transitory impact on the costs of
production of energy and other generalised inputs, and other short-term
distributive consequences.

Finally, a caveat is in place that the analytical framework presented above only
covers the risk spectrum of investments from innovation to diffusion. It must,
thus, be complemented by wider supporting policies geared to the formation of
human resources and research infrastructure, the discussion of which lies
outside the scope of this note.