The Case for More Pull Financing

Prizes

One-off payments for the solution to specified problems

A challenge is defined, along with the characteristics of an acceptable solution and the size of the prize. Anyone may claim the prize on successful resolution.

We know how to tell if a problem has been solved, but no technology to solve is yet publicly disclosed; incentives for completing a solution or disclosing characteristics is required. Prizes are credible: that is, the offering agency can commit to paying out, and claimants have recourse in the case of renegotiation.

Longitude prize (1714, 2014)

X-prize on cooling

DOE’s L-Prize (2011) to spur development of LED light replacements for 60W incandescent lamps

X-Prize $100 million carbon capture

Advance Market or Purchase Commitments

Commitments to purchase, or to subsidize purchase, a certain volume of a product at a fixed price if the product meets predefined characteristics

AMCs create a credible market of sufficient size to induce private innovators to enter. The credible conditional commitment to buy makes it rational for any actor which believes it can meet the conditions for a cost less than the promised (price x quantity) floor to exert effort and enter the market.

AMCs make sense when the technological capacity to develop a solution and producing it at scale exists, but the market returns for doing so are either insufficient or too costly to realise to induce private action at sufficient speed.

Pneumococcal vaccine

Aspects of operation warp speed

Buyers clubs

An organization which aggregates buyers to maximise their purchasing power.

While typically used to negotiate lower prices, Buyers Clubs can also work to incentivize investments in production capacity by suppliers (thus driving down production costs and not just squeezing margins) or market entry by signalling easy-to-access and large buyers.

A buyer’s club can be effective if the market for a product is atomized but collectively large, if private providers are uncertain of the size and reliability of the market, and if producers can install production capacity (and drive down cost) with more reliable demand.

Clean cooling in Brazil—a buyer’s club of institutional purchasers (mainly hospitals) helped secure substantially lower prices via increased local production.

Public procurement rules

Rules and procedures for public sector purchasing of goods, works, and services

Public procurement rules work by setting out a transparent and competitive process for the public sector to obtain goods and services. Public sector procurements tend to be large, and reliable and thus highly desirable contracts to bid for. By including specific requirements for bidding success, you can incentivize efforts to innovate to invest in capacity to meet the requirements.

When public procurements is sufficiently large to be market moving. If a public entity is the major purchaser of a product or service, its standards act as a pull mechanism to change private provider behaviour. The behaviour or innovation desired must also be achievable at a cost below the value of the public contract.

Safeguarding requirements imposed by DFID/FCDO on all aid contractors impelled them to take specific actions to improve processes and outcomes on safeguarding—incentivised costly action to address organizational weakness (analogous to developing missing technology).

Payment-by-results with open access.

Per unit rewards for the delivery and verification of agreed-on results

A desired target/result is defined and payments are agreed when these targets are met. With open access, no exclusive contract need be signed with a provider; instead, any provider that verifiably meets requirements can access payments.

With sufficiently high per-unit payments, such contracts can crowd in suppliers. Its main application will be to induce market entry to increase production scale and market depth.

No precise implementations, but the structure is reminiscent of Net Metering, which credits back to you the energy produced by your solar panelst that you don’t use.

Quantity-linked open subsidy or payment

Subsidies or payments that are linked to the amount of a specific product that is produced or consumed

This is essentially payment-by-results with both open access and a minimum marketing volume to trigger payment. By making subsidy conditional on minimum take-up, it incentivizes investments in usability, novel payment mechanisms and so on.

When the key problem is end-user take-up and use. By incentivizing a minimum scale of take-up, this approach may be suitable when there are threshold effects in the social returns to a specific technology or practice, which are not yet met.

No examples yet

Pigouvian Taxes

Taxes imposed on activities that generate negative externalities to discourage those activities and promote socially beneficial outcomes.

Pigouvian taxes increase the cost of activities that have negative effects on society, making them less desirable and encouraging alternativies that are more socially beneficial

Pigouvian taxes are useful when negative externalities exist and market prices do not reflect the full social costs of an activity; we need to be able to accurately price the externality, and the tax needs to be politically viable and enforcable.

Carbon taxes are Pigouvian taxes. Their structure rewards the development of low-carbon alternatives to any carbon intensive technologies or processes, and rewards earlier adoption.

Contract-for-differences

The CfD aims to support low-carbon electricity generation by providing long-term contracts to renewable energy projects, such as wind and solar.

The scheme pays the difference between the market price and a pre-agreed "strike price". The strike price is set higher than the market price, reducing investors' exposure to market volatility and making the projects more financially viable.

In the UK, the scheme is used to incentivize low-carbon electricity generation, reduce greenhouse gas emissions, and increase the share of low-carbon electricity in the energy mix. It has characteristics in common with a Pigouvian tax, but operates as a subsidy, and more in a more specific domain. It is attractive when domain specific applications are feasible and can be accurately priced, and where volatility and market returns constrain rollout of a new technology.

The Contracts for Difference scheme is the UK government mechanism for supporting low-carbon electricity generation

Prospective or phased-in regulation

Rules or laws that govern certain aspects of behavior or activities, backed by enforcement capacity, credibly signalled for the future.

Prospective regulation works by setting standards, specifications or guidelines which will need to be adhered to in the future, and imposing costs of non-adherence. It can bring forward technological take-up or behaviour change by creating a market for alternatives by a specific date.

Where there is political or organizational will to mandate and enforce change, and private capacity to respond (and a willingness to allow private costs to be incurred). Most pull financing is a carrot. Regulation and enforcement is the stick, and stimulates a market to meet the required regulatory change.

EU legislation requiring all new vehicles be electric by 2035