Building a case for catalytic climate finance

In recent years, innovators have aspired to curb climate change with new technologies — among them, green concrete, green hydrogen, and green aviation fuel. But many of these groundbreaking ideas have so far failed to take off because they can’t attract enough funding in critical early stages.

“There are a lot of key green technologies that have been developed and will be developed in the future. But the funding needed to scale them can be quite substantial,” said Florian Berg, a principal research scientist with the MIT Sloan School of Management’s Sustainability Initiative. 

Many climate solutions falter in the “missing middle” between proving that a technology will work and making it affordable enough to compete in the market. Scaling climate technologies is expensive, and the private capital needed to bring costs down typically doesn’t materialize until the technologies are already cost-competitive. 

Solar power, for example, used to be prohibitively expensive, but it’s now the fastest-growing source of electricity, thanks to policy alignment and financial mechanisms that accelerated cost declines. In 2014, 1% of global electricity generation came from solar. Today, solar accounts for more than 8.8% of the electricity generated.

What’s needed: catalytic capital for climate technologies

The new Catalytic Climate Finance Project, co-founded by Berg and Sustainability Initiative director Jason Jay, aims to replicate the solar industry’s success by supporting the development of other green technologies. Formed around the premise that climate-focused capital should be catalytic — that is, it should accelerate action — the CCFP intends to build a financial architecture to shape how climate capital is deployed.

By providing climate startups with strategic funding from philanthropists and private companies for early-stage and scale-up costs, catalytic climate finance can make climate technologies less risky and more attractive to private investors. 

“Once we scale certain technologies, they become cost-competitive and can outcompete brown commodities and technologies and draw in a lot of additional traditional capital,” Berg said.

How the Catalytic Climate Finance Project works

A multidisciplinary team intends to produce actionable research, tools, and market design guidance for four core audiences: investors, policymakers, regulators, and industry leaders. 

Specifically, the CCFP team will:

• Build bridges with engineering to identify promising early-stage technologies.
• Study how to scale those technologies.
• Design the financing and market structures to enable that scaling and overcome the “missing middle.”
• Engage with investors, policymakers, and key stakeholders to translate the research into real-world deployment for maximum impact.

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Engineering “positive tipping points”

With climate scientists increasingly warning of “negative tipping points,” where climate warming begets more warming, the CCFP’s goal is to engineer a different kind of reaction. 

“We want to go for technologies and commodities that are broadly used. By scaling those technologies, we hope to create positive tipping points,” Berg said, referencing the work of Timothy Lenton at the University of Exeter. “Once they’re scaled and they start getting adopted, they would hopefully slow down those negative tipping points.”

Learn More: MIT Catalytic Climate Finance Project

Florian Berg is a lecturer at the MIT Sloan School of Management, a principal research scientist at the MIT Sloan Sustainability Initiative, and a co-founder of the initiative’s Aggregate Confusion Project and Catalytic Climate Finance Project. Recent publications include “The Market for Voluntary Carbon Offsets” and “On the Importance of Assurance in Carbon Accounting.”