The Verde Solution

IN last week’s column, we discussed the energy transition issue at length, drawing on Datuk Dr. Kenneth Pereira’s latest book, The Energy Transition Conundrum.

This week’s column focuses on the author’s solution, based on a “whole of society” concept.

Costly exercise

Malaysia needs between US$852bil and US$1.1 trillion for climate adaptation by 2050, according to the World Bank’s Country Climate and Development Report.

Even the Securities Commission chairman was recently quoted as saying, “climate adaptation is no longer an environmental consideration but a national economic and development imperative.”

He added that this has created a structural imbalance in our financial architecture, which has yet to recognise adaptation and resilience needs.

Globally, the funding gap is between 12 to 14 times, as only some US$26bil was raised in 2023, while annual climate adaptation needs are somewhere between US$310bil and US$365bil.

Indeed, as the author put it, “a great deal of funding will be required to implement the grand plans of energy transition, and our insatiable thirst for energy will likely need to be matched with a major mobilisation of capital.”

Carbon tax?

In the book, Pereira elaborated in detail on the current incentives related to climate change funding. According to the author, one early solution to the climate crisis is to introduce carbon pricing in the form of a carbon tax or Emissions Trading Schemes.

Governments use these two methods to regulate heavy emitters, such as steel, cement, aluminum smelters, and power-intensive industries.

According to the author, although they generate funding for climate action, they are merely an economic transfer, as funds flow from emitters to the government.

The real issue is what happens to the funds collected and the transparency around it.

They should be tagged as energy-transition capital and ring-fenced in a Climate Transition Fund. These capital funds should not be a part of the government’s consolidated funds.

The Verde Solution

The author discusses his recommended solution in detail and calls it the Verde Solution, which proposes a simple yet workable way to mobilise funds at scale, primarily for energy transition, by creating a National Energy Transition Infrastructure Fund (NETIF), capitalised continuously by consumers and corporations via micro-loans.

It is a permanent, ring-fenced energy transition savings engine, with continuous, small, frequent contributions that aggregate into large sums of low-cost, patient capital used exclusively to build energy transition infrastructure.

How it works

The Verde Solution requires certain prerequisites before it can be implemented.

According to Pereira, this includes a widely used domestic electronic payment ecosystem and a blockchain-based financial technology (fintech) platform that forms the backbone for managing micro-loan collection, disbursements, and accounting.

Outside the system itself, there must also be a political will to include the “whole of society” approach to address climate change issues and develop actionable energy security plans, and an acceptance by consumers and businesses that every purchase, or activity when value is added, a carbon footprint is generated.

For consumers, payment for purchases settled electronically (e-wallet, debit/credit cards) is subject to a 0.25% contribution for every dollar spent, which is treated as a micro-loan from the consumer to the government via the NETIF.

Each micro-loan extended to the NETIF for a defined period earns interest or profit of 2.25% per annum, and the principal is settled with the lender at the end of the defined micro-loan tenure.

This must be mandatory, not opt-in.

As with Sales and Service Tax or Goods and Services Tax, the government could also exempt certain sectors, goods, or services from the scheme.

The blockchain-based fintech software platform is a key tool and includes features that allow tracking of lenders, amounts, contribution timing and tenure, and fund deployment.

For corporates, the author has recommended a 0.5% contribution rate based on the value of cost of goods sold (COGS).

Hence, for a corporation with RM100mil in COGS, the annual “loan” extended to the NETIF will amount to RM500,000, which will be a loan to the fund, earning 2.25% per annum for the corporation.

However, to differentiate between less climate-friendly industries and those deemed heavy CO2 emitters, a Climate Impact Load Factor (CILF) can be imposed.

Hence, for those in the energy or steel industry, a CLIF of five times could be applied, while for those in the retail sector, the CLIF could be as low as one time.

NETIF contributions are treated as a corporate investment, not a tax, which directly impacts the company’s bottom line.

In other words, the Verde Solution is a market-anchored allocation of climate change responsibilities to financial contributions and an accounting mechanism that corporates and investors understand and accept.

The Verde Solution can be a game changer for energy transition incentives. In a conservative simulation of the Malaysian environment, over an initial five years, the NETIF could accumulate RM28bil in total; thereafter, the fund would be self-sufficient, as new contributions would be more than enough to meet the maturity of the original contributions.

An important paradigm shift is that every ringgit contributed to the NETIF is practically a recoverable loan and not a tax.

Consumers and businesses are part of the new energy transition incentive; not only will they get back their capital at the end of the loan tenure, but they will also earn modest income.

The demand angle

The Verde Solution is progressive in its application. In simple terms, the more one purchases, the more one contributes to the NETIF through microloans.

NETIF funds provide households with immediate access to scale-up programmes for high-efficiency cooling, rooftop solar with battery storage, and last-mile grid infrastructure to make mass use of electric vehicles (EVs) a reality.

For corporations, the fund could support energy management systems, mass rail transit, motor replacements, waste-to-energy projects, process electrification, and projects that would otherwise be too costly for conventional finance, as NETIF is essentially a large pool of low-cost equity funding with borrowing costs between 4% and 5%.

This will ensure that the Verde Solution has enough net interest margin spread to sustain itself over the longer term.

The Verde Solution encourages a mindset shift, driven by honest messaging from all stakeholders, that leverages large-scale, cheap, and patient financing made available through a whole-of-society approach.

Only in this manner can a nation build clean, dependable, and secure systems that are affordable, transparent, and resilient for today and generations to come.

The Energy Transition Conundrum by Pereira is a must-read for all stakeholders, as a concerted effort is needed to address climate issues with a solution that is not seen as another burdensome tax on consumers and businesses.