The Missing Tool in the Climate Fight

(Photo by iStock/hrui)

Snatched from the jaws of defeat, the Inflation Reduction Act (IRA) will hasten the transition of key markets—for energy, vehicles, cement, and more—toward “greener” technologies. However, the IRA is just one early part of a massive, decades-long push to shift markets from high-carbon to low- and zero-carbon technologies. And while governments and private organizations have initiated transitions through a first wave of limited interventions, these market shifts are happening too slowly to reduce emissions at a pace that would limit warming to 1.5 degrees Celsius.

With the climate clock ticking, the time has come to launch a more expansive second wave of green market shaping. To understand what is possible, we can look to the field of global health. Since 2000, global health organizations have pioneered a diverse set of privately driven market-shaping interventions—to organize and de-risk demand while orchestrating forward progress across all sides of the market—that have dramatically accelerated access to improved healthcare products across the developing world.

While the stakes of the green transition are enormously high, we have thus far deployed a much thinner arsenal of market-shaping tactics. We have too narrowly relied on major government policies and “push” funding—such as grants, loans, and equity investment—while under-exploiting the kind of creative finance interventions and aggressive “quarterbacking” that have propelled market-shaping efforts in global health. Seizing this huge untapped opportunity must become the cornerstone of an ambitious second wave of market shaping.

Lessons From Global Health

Twenty years ago, providing life-saving antiretroviral (ARV) treatment to tens of millions of HIV+ people seemed like a fantasy. ARV drug prices—$1,000 per patient per year at the time—were a particularly daunting barrier. Today, nearly 30 million people are on treatment and drug prices have plummeted to less than $75 per patient annually, while countless other roadblocks have been removed. How did this happen?

The ARV drug market was trapped in a chicken-and-egg dynamic. Demand was low because prices were high, and vice versa: generic suppliers couldn’t manufacture the drugs at large volumes—thereby climbing the learning curve and achieving economies of scale to lower costs—if demand from developing countries remained low. The Clinton Health Access Initiative (CHAI) helped break the impasse, forming a buyers club of thirteen governments and forecasting the volume of drugs the club could buy as prices fell. Equipped with that credible aggregated picture of prospective demand, CHAI worked with generic manufacturers to project cost levels at next year’s implied production volumes and offer corresponding prices immediately. The resulting landmark deal triggered a virtuous cycle of growing demand, increasing production, and falling costs and prices.

This was just the beginning of market-shaping efforts carried out by CHAI and other leading organizations. Together, these stewards steered the market through several technology shifts while constantly resolving barriers to wider access as they emerged. At several points, overcoming particularly thorny barriers required major innovative-finance interventions, such as a large catalytic financing initiative from UNITAID for pediatric formulations of ARVs that organized and guaranteed early demand for this smaller-volume category of emerging products. And where other partners were involved, CHAI still played a critical “quarterback” role: carrying out shuttle diplomacy and coordinating activities across all sides of the market. This kind of relentless organizing, informing, influencing, and dot-connecting sped up market shifts by parallel processing key steps that would otherwise have happened slowly and piecemeal.

Over time, market shaping became a distinct discipline, as privately-catalyzed efforts to build a shared vision for the ideal future state of a market become a coordinated effort to build, assemble and deploy soft power and financial heft to steer the market toward that state. The global health community saw just how powerful “quarterbacking” can be and how orchestrating the execution of many small steps adds up to big progress. In subsequent years, market-shaping approaches were extended to everything from anti-malaria bed nets to long-acting contraceptives. Health organizations learned how to tailor the design of innovative-finance mechanisms—from volume guarantees to pooled-procurement initiatives to advance market commitments (AMCs) for specified target product profiles—to the nuances of specific situations.

Not all market-shaping initiatives in global health were successful, of course. In some cases, innovative-finance interventions helped de-risk initial demand for an emerging technology, but failed to produce a sustained virtuous cycle of market growth. Most commonly, this was because CHAI and its partners focused too much on the financial intervention itself and not enough on the painstaking work of “quarterbacking” and collaboration among key actors to build alignment and prepare to bridge from the catalytic program to a mature, self-sustaining market. Again and again, we found that markets get stuck or develop deeply unhealthy dynamics in the absence of hands-on stewardship. 

Indeed, the most important lesson from global health market shaping has been the power of transforming vicious market cycles into virtuous ones. With climate technologies like solar and lithium-ion batteries we see snowballing progress when deployment-driven learning fuels a recursive cycle of cost reductions, demand growth, and further production scale-up—what has been called a “green vortex.” To extend such virtuous cycles to all climate solutions, we can learn from the way the global health community has institutionalized market shaping as a core strategy, codifying toolkits and frameworks, and making it an expectation that big organizations have tailored market-shaping strategies. Donors have even created platforms dedicated to big-ticket market-shaping interventions like UNITAID and MedAccess.

Unlocking the Power of Market Shaping for Decarbonization

We’ve gained momentum in global decarbonization. But there is still a long way to go, and our green market-shaping efforts tend to turn too quickly (or too narrowly) to big policy interventions like the IRA or the German feed-in tariffs that have transformed the economics of solar power. The policy-setting, financial, and regulatory powers of governments will be absolutely critical. But given the magnitude of the climate challenge, we cannot pin our hopes on a continuous wave of bold IRA-like legislation at the national level. And global health experience shows how private market-shaping activity can multiply government funding or incentives.

Moreover, today’s green market shaping relies on a limited and traditional set of financing approaches: while there is a wide range of “push” funding—equity investment, government loans, grants—to invest in research and production, there has been relatively little innovative finance taking the form of “pull” funding that creates or de-risks demand. Suppliers and their investors respond most powerfully to demand signals, and smartly-designed pull funding can kickstart “green vortex” cycles by making a market look attractive enough for companies to invest their own resources aggressively. But setting aside R&D prizes, examples of privately-funded pull mechanisms are scarce.

Frontier, a billion-dollar advance market commitment for durable carbon removal announced last year, is the rare exception that proves the rule and the first green market shaping example to explicitly pattern itself after a global health precedent. Rather than fund or directly subsidize the development of new products, Frontier acts as a “buyer of first resort,” creating a large source of predictable demand that crowds in private investment and attracts entrepreneurs who now have clarity on how to gain a market foothold.

A handful of other new initiatives have recently begun to hint at what a second wave of green market shaping could look like. These new players—including Breakthrough Catalyst, Rewiring America, and First Movers Coalition, in addition to Frontier—are trying to prove out new playbooks in catalyzing ambitious market shifts in various sectors. The Department of Energy also recently issued an RFI seeking input on demand de-risking opportunities for clean energy technology and expressing openness to public-private collaboration. But these scattered bright spots only throw into sharp relief what we do not yet have. Market shaping for decarbonization is still orders of magnitude broader (in terms of sectors, technologies, and geography) and larger (in terms of market size) than in global health, yet its current market-shaping toolkit and ecosystem is much narrower. Two gaps loom particularly large as we build an ambitious second wave: the scarcity of CHAI-style market-shaping “quarterbacks,” and our failure to employ the full array of innovative-finance tools we have at our disposal. 

Consider the case of clean cooling technology. One of the greatest threats to reaching global climate goals will be the growing demand for cooling as people seek relief from a warming world. India and China alone, with fast-growing middle classes and intense heat, will reach two billion room air conditioners by 2050. Thanks to a recent visionary push by the Clean Cooling Collaborative (CCC) and Rocky Mountain Institute, greener air conditioners that generate five times fewer greenhouse gas emissions have already been developed. But they are stuck in the same higher-price, low-demand trap we saw in the early days of the ARV market.

A second wave of market shaping can break this trap and turbocharge the shift toward more efficient next-generation models. An ambitious strategy for this wave would strengthen efficiency standards to raise the market “floor,” while pooling demand from anchor buyers and deploying volume guarantees or a targeted AMC to further de-risk demand for first-mover suppliers. In exchange, the organization(s) quarterbacking the market shift would require these suppliers to commit to accelerated product launches and lower initial prices. As the virtuous cycle takes root, additional financial and policy innovation—such as on-bill financing—could translate the lower lifetime costs of next-generation products into reduced upfront costs for consumers as compared to “dirtier” models. If successful, this accelerated transition to cleaner cooling could avert as much as 100 gigatons of CO2 emissions over the coming decades, or nearly three entire years of global emissions at today’s levels. Few greater opportunities exist. 

The green transition amounts to a set of epochal market shifts across virtually every sector in the global economy. This means countless opportunities to pursue green market shaping more comprehensively, from scaling smaller or regional markets (e.g., seeds for reforestation or kelp production in Alaska) to accelerating shifts in big global markets (e.g., green steel or sustainable aviation fuels). As a market-shaping challenge—and opportunity—decarbonization is the biggest one humanity has ever faced.

While continuing to use the policy and push-funding levers core to the first wave, a second wave of green market shaping would more systematically apply all of the world’s accumulated learning and urgently tackle the gaps in our current market-shaping ecosystem. We would fund careful analysis to identify tailored matches between the landscape of current market traps and the full suite of potential interventions, enabling us to prioritize among the many opportunities. Private funders and public-private partnerships would selectively deploy a wide range of existing innovative-financing mechanisms and experiment with new ones. And to ensure those financial interventions yield their full potential, a legion of new quarterbacks would tackle the complex coordination and relentless obstacle-clearing that need to happen across all sides of the market. Organizations like MedAccess and CHAI and UNITAID would not be peculiar to global health; they would be dwarfed by their siblings in climate.

No one is better positioned than forward-thinking private foundations to catalyze this second wave. The Gates Foundation famously changed the game in global health by funding and helping establish some of the most important organizations in the health commodity market-shaping landscape. But while no foundations have yet staked out a similarly central role in green market shaping, the roadmap is clear. Any funder so inclined would build a thicker intellectual foundation for the second wave, develop criteria for prioritizing and choosing among interventions, and identify the most compelling potential proof points—along the lines of the clean cooling opportunity outlined above—for a reimagined approach. They would then cultivate and assemble a wider funder collaborative to pursue these proof points, standing up and funding both innovative-finance interventions and complementary quarterback activity.

Pursuing all this work while narrating their aims and progress very publicly, the early funders who seed the second wave can spark a critical new dialogue across the climate community. There is endless opportunity, but there is not a moment to spare.

Read more stories by Dai Ellis & Oliver Sabot.