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Pull financing is a powerful but underused mechanism for incentivising progress on hard-to-tackle social problems for which innovation or the take up of innovation may be part of the solution. Pull financing operates by—in some way—making market entry and participation more generally attractive to innovators, producers, and distributors, as opposed to “push” financing, which finds specific innovators and pays them to exert effort on a problem.
Pull financing is akin to firing the starting gun on a race and waiting to see who wins, after defining where finishing line is; push financing is more like investing in a horse and hoping it wins. Both can be sensible strategies, depending on what you know about the track and what you know about the horse. Pull financing is particularly valuable when funders have better information on the problem to solve (the finishing line), and how much a solution is worth, than on who is best placed to solve it. In poor countries, where markets tend to be smaller and less attractive to private actors, we often need to use one or both of the two to solve important problems, since the private incentives to act are not strong, and without action not enough horses run the race through to the finish.
In a new paper, published today, we argue that pull financing can play an important role in the generation of solutions to specific problems that have both a climate and a development payoff. There are a number of problems for which solutions either do not yet exist, or are too expensive or too small-scale at present. There is a need to incentivise innovation and expansion. Pull financing offers a way of encouraging new effort on both dimensions, while predetermining what we are willing to pay for progress, important when we know relatively little about the cost effectiveness of many existing approaches.
We identify a number of areas where pull financing can make a difference: click through below to read a short summary of each.
New crop varieties
Agricultural productivity is highly susceptible to climate change, and research and development focused on (in particular) African agriculture has suffered from years of underinvestment. The development of new seed varieties suited for changing climatic circumstances and capable of increasing agricultural productivity has extremely large potential development gains. They can partially stabilize yields during climatic extremes, which are becoming more frequent, and increase the resilience of cropping systems to climate-related risks, especially in tandem with the take-up of other technological innovations for agriculture. The net effect could be a substantial increase in productivity. Incentivising more effort in this direction could have very high returns.
The case for pull financing lies in the fact that seed varieties and crops must not only have beneficial resource-use characteristics or productivity characteristics but must also be user friendly (at farming, transport, and marketing levels) and meet minimum standards on other dimensions that may be harder to specify, such as flavour and appearance, and for which a range of plausible effective (and ineffective) combinations are possible—most of which are difficult or impossible to predict. Push financing is adequate for meeting the easily specified and well-known requirements, but those that determine take-up are less so.
We propose a structure whereby funders provide some portion of the R&D costs less than 100 percent to innovators, with at least some of this grant paid only upon the results of lab trials or demonstration field trials. At the same time, it could offer some sufficiently small per-purchase or use payment to incentivise investments in usability and take-up. The first component would be paid to innovators wholesalers directly, upon demonstration of seed characteristics; the second component could be paid on either verified retail sales (requiring an independent third-party verifier) or on wholesale purchases by retailers over a certain number of years (ensuring that retailers continue to purchase the seed, signalling success in marketing). This leaves some demand risk to producers but also an incentive to invest in user-friendly and popular seeds. We estimate that a structure like this could, depending on the number of seeds it focuses on, require around $50-$100 million, though there is essentially no upper bound on how many crops or seeds it could address (and hence on cost).
Crop residue burning
Crop-residue burning, also known as stubble burning, is the practice of intentionally setting fire to the straw stubble that remains after grains, such as rice and wheat, have been harvested. The technique remains widespread, particularly (but not only) in Southeast Asia, in large part because it is an easy way of removing unwanted residue after harvest, clearing the fields for the next planting, and combating weeds and pests, while requiring little labour and almost no expensive technologies. However, the practice has extremely high local and global negative externalities: it emits large amounts of carbon, and has profound impacts on mortality, as well as direct effects on economic, cognitive, and broader health outcomes. However, despite the existence of technologies that can reduce burning, none have wholly taken root to resolve the issue.
There are three potential solutions to crop residue burning: mechanical alternatives to burning, such as the Happy Seeder, monitoring and enforcement of no-burning policies, and the use of bioenzymes to break down crop residue. Each of these approaches has drawbacks, and requires further innovator or producer effort to bring the solution to scale. We suggest that a pull mechanism that specifies an upper limit on payment based on outcomes but no specific method of delivery of outcomes can help accelerate progress. While different technological responses to burning might require a different contract structure, it should be feasible to draw up a contract that delivers a prize for proof of concept (if for a new or adapted or unproven technology) with a scale for different classes of technology, with either a market guarantee or per-user subsidy, again with a scale for different classes of technology (simply subsidising the use of Happy Seeders would cost in the region of $120 million, at a conservative estimate; forthcoming analysis suggests a broader AMC could cost upwards of $500 million). Contracting would be complicated, but possible. Forthcoming work looks at this application more closely, setting out the details of how contracting can be managed, a more detailed estimate of the cost of an effective pull financing mechanism and what precisely it should incentivise.
Weather forecasting
The development of new seeds may be used, in part, to mitigate climatic changes that reduce farmers’ productivity and increase output variability. Short- and medium-term weather uncertainty also imposes substantial costs on farmers, even controlling for the quality and resilience of the crops they plant; new crop varieties may not mitigate climate-related risks and indeed may introduce new vulnerabilities while pursuing other benefits. In theory, forecasts should be complementary to technologies that insure farmers against certain shocks, such as flood-tolerant seeds, because they provide information about the likelihood of those shocks and hence the expected payoff to adoption in a given season. In most developed countries, a range of differentiated commercial weather forecasting and climatic information services are available, while in many developing countries, forecasts are either not accurate or unavailable altogether; there is a need for both better and more granular forecasts, and a mechanism to reach more farmers at lower cost. In practice, benefits have not been fully proven, so some testing and rigorous assessment of benefits is still needed.
Should they be proven, we suggest a pull financing mechanism is viable: forecast performance can be well specified, though verification may be difficult in certain geographies in the absence of technological improvements in weather data collection. Usability is trickier, but a prize structure allows the possibility of awarding the prize to any provider that meets minimum forecast standards, based on a subjective assessment of usability made by an organisation tasked with distributing forecasts to farmers. This structure depends on finding the right partner, with experience working with farmers and being responsive to their needs, but we suggest this would be one of the less costly applications we cover, with even higher estimates of cost per country reaching only around $1 million.
Clean cooking
The primary attraction of clean-cooking technologies is their development impact in the form of local health benefits—though some estimates of the climate impacts are substantial, with the problem concentrated in South Asia and East Africa. More than three million people die prematurely each year from illnesses related to household air pollution associated with cooking according to the World Health Organization. Cleaner indoor cooking technologies can dramatically reduce such morbidity and mortality, by replacing solid-fuel cookstoves (which emit a great deal of carbon and have local air pollution effects) with either alternative energy sources or cookstoves which are cleaner-burning. However, the technologies developed to date have not achieved nearly enough scale in usage to realise the benefits available, due in part to cost and in part to the usability of different alternatives. A pull financing mechanism that pays out on end-user take-up and use could incentivise greater efforts to design, produce, and distribute more usable cookstoves at an affordable cost. Some clean-cooking technologies are also associated with household energy access systems and mini-grid systems. It is possible to incentivise the rollout of each, thus creating local development gains on two fronts.
Pull financing could be structured in multiple ways, primarily aimed at either reducing the cost of existing cookstoves or incentivising marginal improvements to usability to induce higher take-up and use. One approach could focus on improvements to existing machines to make them better suited to consumer needs by rewarding take-up, possibly at the community or neighbourhood level; or the development of cheaper alternatives among those that are currently best suited. Alternatively, a pull mechanism that focuses on aggregating consumers or distributors for bulk purchase, thereby reducing financial risks associated with large-scale procurement and driving down prices, can help scale quality-assured electric cookstoves solutions. A more ambitious—and risky—approach would be an integrated finance mechanism combining procurement subsidies, consumer financing, and access to carbon markets to make electric stoves more attractive.
Cooling systems
The demand for electricity to power stationary mechanical cooling systems is widely expected to more than triple between 2016 and 2050, perpetuated by a vicious cycle between climate change and electricity demand for cooling. As the frequency and severity of heat waves increase, the demand for cooling equipment that accelerates global warming both through electricity demand (which, of course, depends on the source of electricity) and the use of hydrofluorocarbons (HFCs) in turn increases. The development of cleaner cooling systems that are more energy efficient represents one way of weakening or breaking this cycle; the same is true of heating systems, given the high burden of deaths from cold in many places. Alongside these climate gains are locally captured welfare benefits, including to health and productivity.
Greener, more efficient cooling systems already exist and can be produced in at least some low- or lower-middle-income countries, but currently cost substantially more than conventional cooling, though running costs are lower. Forthcoming analysis suggests that this price difference is primarily driven by the scale of production rather than the process; that is, with sufficient demand to incentivise an increase in installed production capacity, cost of production and prices can be driven down. A pull financing mechanism sufficiently large to create this incentive might cost in the region of $190-400 million. This makes cooling one of the more attractive, lower-risk pull financing applications available.
Selecting interventions and building a portfolio
The applications we outline above are a subset of the potential areas in which pull financing can be usefully applied. In our paper, we discuss two further possible applications, which require further development (stimulating the uptake of electric vehicles in Africa, and developing green, all-weather road sealants). We also set out the need for a structured, wide-ranging process for surfacing new ideas and new applications, where new technology or a process to scale existing, costly solutions at lower cost could generate large welfare gains, but requires some form of market intervention to increase the attractiveness of investment and innovator effort.
Discovering and assessing new applications will also help the development of a portfolio of pull financing mechanisms, which we argue should form an important part of the innovation funding landscape in the future. The skills, contracting structures, and funding arrangements that are required to effectively design and implement pull financing arrangements are, even when applied to very disparate topics or technologies, very different to those required for push financing. An institution devoted to developing and managing pull mechanisms can cultivate this expertise, and work towards the resolution of important, but difficult, problems for social welfare.
Disclaimer
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.
