Sweden's Green Leap through Public-Private Partnerships

Jun. 18, 2024

Sweden, known for its progressive environmental policies, is at a crucial juncture to meet the Paris Agreement's net-zero targets. At a recent seminar, stakeholders from academia, government, and business discussed policy innovations to drive the country and the world towards a sustainable future.

Industrial Strategy at the Forefront

Mikael Damberg, Sweden's former Minister of Finance, set the tone with a keynote address that underscored the intersection of environmental imperatives and industrial policy. He recounted Sweden's transformation from poverty to prosperity through its high-quality, innovative, and sustainable industrial output and stressed that the green transition is not only about saving the planet but also about securing good jobs and maintaining global competitiveness.

"What transformed Sweden from one of the poorest to one of the richest countries in the world it is the basics of what we trade high quality innovative and sustainable products and services. That is what we have to offer the world when the world must transform," Damberg said.

"The transition to a green economy necessitates substantial capital investment," he added, highlighting the need for robust funding in renewable energy, energy-efficient manufacturing, and sustainable transportation systems. He called for bold leadership and ambitious policies to bridge the gap between industrial ambitions and governmental action across Europe.

Harnessing Public-Private Partnerships

The conference explored the role of public-private partnerships (PPPs) in financing the green transition. Liisa Raasakka, Head of the European Investment Bank (EIB) Group for Sweden, noted that the EIB has directed 75% of its Swedish lending towards climate investments. She emphasized the importance of structured approaches to manage the heightened risks associated with these investments, advocating for transparency and well-informed decision-making.

Karolina Ekholm, Director General of Riksgälden (the Swedish National Debt Office), detailed the credit guarantees provided for major industrial projects like those of H2 Green Steel and Northvolt. She explained that government credit guarantees are often mistakenly seen as subsidies.

“They were set up so that they would meet EU state aid rules,” Ekholm said. EU state aid rules are regulations governing the use of public funds to avoid unfair competition.

The credit guarantees work by covering 80% of loans provided to companies like H2 Green Steel. This means that if H2 Green Steel cannot repay the loan, the government will cover 80% of the outstanding amount. Importantly, she said, the government does not directly give money to H2 Green Steel; instead, it guarantees loans from entities such as the European Investment Bank (EIB) or commercial banks.

H2 Green Steel must pay for this guarantee. The cost is determined to be similar to what a commercial guarantor would charge, covering the government's expenses and expected credit losses, plus an additional fee. This ensures the guarantee operates on market-based principles. Therefore, in expectation, the government (and thus taxpayers) should make a profit from these guarantees, provided the companies do not default, Ekholm said.

The Institutional Investor Perspective

Niklas Ekvall, CEO of AP4, provided insights into the perspective of institutional investors. AP4, which manages public pension funds, has significantly reduced its carbon footprint and directed substantial investments towards sustainable technologies and infrastructure. He highlighted the necessity of aligning public and private efforts to address market inefficiencies and externalities, making the green transition economically and socially sustainable.

“We have quite substantial investments that are dependent on long term agreements with the public,” Ekvall said. “Every infrastructure investment, in one way or another, is on a long-term relationship with the public. You can call them PPP, you can call them regulation, you can call them other things, but they depend on a good relationship with the public where we share risks along the way.”

Navigating Technological and Policy Risks

The conference did not shy away from addressing the complexities and risks of technological choices and policy innovation. Christian Sandström, a Senior Associate Professor at Jönköping University, cautioned against over-optimism. He pointed to past policy missteps, such as the failed ethanol car initiative of the early 2000s, as cautionary tales. Sandström emphasized the need for technological neutrality and learning from past mistakes.

Gustav Martinsson, a researcher at the Swedish House of Finance, recently published a study on the impact of carbon pricing on emissions. He discussed the dual market failures of carbon emissions and knowledge externalities, advocating for a balanced approach that combines carbon pricing with subsidies to foster innovation in green technologies.

"(Subsidies) is a bad word for some people, but when it's warranted, it's warranted. We see examples of this with credit guarantees and the EU Green Deal,” Martinsson said. While his research found that measures like carbon pricing have helped lower emissions, he added, “we see it’s not enough.”