LOAN GUARANTEES

A loan guarantee is a public or philanthropic promise to repay an agreed share of a bank loan if the borrower fails to repay. The bank supplies the project money. Because the guarantee reduces its possible loss, the bank may offer a lower interest rate, longer term or require fewer assets as security. Public bodies can back CDR facilities and shared transport or storage. They normally pay only after failure, but must budget for administration and expected losses. Unlike a concessional loan, the guarantor does not lend the principal. Unlike a grant, the borrower still owes the debt.

Guarantees differ in which projects qualify, how much of each loan is protected, how long cover lasts, what borrowers pay and what triggers a claim. Banks should retain some risk so they examine borrowers carefully. Expected public cost is normally lower than the amount guaranteed because borrowers repay and money can be recovered from failed projects. A €100 million portfolio with an estimated 5 per cent loss would require €5 million set aside, although claims may differ. Programmes also need a limit on total guarantees, checks that projects can repay and deliver credible removals, recovery rights and public reporting.

Loan guarantees leverage relatively small public commitments to unlock much larger private financing. By de-risking lending, they can accelerate deployment of capital-intensive CDR projects that might otherwise struggle to get bank loans (similar schemes jump-started renewable energy projects in the past). This tool can particularly help first-of-a-kind or infrastructure-heavy removal projects (like DAC hubs or BECCS plants) reach financial close. It also signals government confidence in CDR, drawing in more investors.

If not designed carefully, loan guarantees can expose taxpayers to losses if projects fail (e.g. technology underperforms or carbon prices stay low). There’s moral hazard whereby banks might lend to shaky projects knowing the government will cover defaults. To mitigate this, strong project vetting and risk-sharing (requiring some equity or partial guarantee) are needed. Additionally, if guarantees favour certain CDR methods, they could inadvertently pick winners and stifle alternative innovations.

The guarantor should compare terms on guaranteed loans with banks’ offers without a guarantee, alongside private lending enabled, construction, removals, fees, expected losses, claims and recovered money. This evidence should reduce coverage where banks would lend anyway, raise fees or tighten checks when losses rise, and suspend projects that repeatedly miss financial or CDR requirements.

Guarantors should ask banks which risks block lending and what coverage would change their terms. Developers supply construction and revenue evidence. Credit specialists estimate failure and recovery; technical, lifecycle and storage experts test CDR performance. Treasuries set maximum public losses, while regulators, communities and civil society shape safeguards and disclosure.

International development banks, EU institutions, national governments, state finance authorities and municipal green banks can guarantee lending where law allows them to promise payment if a borrower fails. Larger institutions can support major plants and cross-border infrastructure; subnational bodies can back smaller facilities, equipment and local projects. Foundations can provide guarantees that absorb first losses using charitable investment capital. Programmes may share risk, but the institution signing the guarantee must assess and charge for its risk, approve projects, monitor loans and pay valid claims. Cities usually need an authorised green bank or dedicated reserve.