Fi­nanc­ing cli­mate safety

Financial Mirror (Cyprus) - - FRONT PAGE -

The pur­pose of the global fi­nan­cial sys­tem is to al­lo­cate the world’s sav­ings to their most pro­duc­tive uses. When the sys­tem works prop­erly, th­ese sav­ings are chan­neled into in­vest­ments that raise liv­ing stan­dards; when it mal­func­tions, as in re­cent years, sav­ings are chan­neled into real-es­tate bub­bles and en­vi­ron­men­tally harm­ful projects, in­clud­ing those that ex­ac­er­bate hu­man-in­duced cli­mate change.

The year 2015 will be a turn­ing point in the ef­fort to cre­ate a global fi­nan­cial sys­tem that con­trib­utes to cli­mate safety rather than cli­mate ruin. In July, the world’s gov­ern­ments will meet in Ad­dis Ababa to ham­mer out a new frame­work for global fi­nance.

The meet­ing’s goal will be to fa­cil­i­tate a fi­nan­cial sys­tem that sup­ports sus­tain­able de­vel­op­ment, mean­ing eco­nomic growth that is so­cially in­clu­sive and en­vi­ron­men­tally sound. Five months later, in Paris, the world’s gov­ern­ments will sign a new global agree­ment to con­trol hu­man-in­duced cli­mate change and chan­nel funds to­ward cli­mate-safe en­ergy, build­ing on the progress achieved ear­lier in De­cem­ber in ne­go­ti­a­tions in Lima, Peru. There, too, fi­nance will loom large.

The ba­sics are clear. Cli­mate safety re­quires that all coun­tries shift their en­ergy sys­tems away from coal, oil, and gas, to­ward wind, so­lar, geo­ther­mal, and other low­car­bon sources. We should also test the fea­si­bil­ity of large-scale car­bon cap­ture and se­ques­tra­tion (CCS), which might en­able the safe, long-term use of at least some fos­sil fu­els. In­stead, the global fi­nan­cial sys­tem has con­tin­ued to pump hun­dreds of bil­lions of dol­lars per year into ex­plor­ing and de­vel­op­ing new fos­sil-fuel re­serves, while di­rect­ing very lit­tle to­ward CCS.

Many in­vest­ments in new fos­sil-fuel re­serves will lose money – lots of it – owing to the re­cent fall in world oil prices. And many of the fos­sil-fuel re­serves that com­pa­nies are cur­rently de­vel­op­ing will even­tu­ally be “stranded” (left in the ground) as part of new global cli­mate poli­cies. The sim­ple fact is that the world has far more fos­sil-fuel re­sources than can be safely burned, given the re­al­i­ties of hu­man-in­duced cli­mate change.

Though mar­ket sig­nals are not yet very clear, this year’s more suc­cess­ful in­vestors were those who sold their fos­sil-fuel hold­ings, thereby avoid­ing the oil-price crash. Per­haps they were just lucky this year, but their di­vest­ment decision makes longterm sense, be­cause it cor­rectly an­tic­i­pates the fu­ture pol­icy shift away from fos­sil fu­els and to­ward low-car­bon en­ergy.

Sev­eral ma­jor pen­sion funds and foun­da­tions in the United States and Europe have re­cently made the move. They have wisely heeded the words of the for­mer CEO of oil gi­ant BP, Lord Browne, who re­cently noted that cli­mate change poses an “ex­is­ten­tial threat” to the oil in­dus­try.

More gov­ern­ments around the world are now in­tro­duc­ing car­bon pric­ing to re­flect the high so­cial costs in­her­ent in the con­tin­ued use of fos­sil fu­els. Ev­ery ton of car­bon diox­ide that is emit­ted into the at­mos­phere by burn­ing coal, oil, or gas adds to long-term global warm­ing, and there­fore to the longterm costs that so­ci­ety will in­cur through droughts, floods, heat waves, ex­treme storms, and ris­ing sea lev­els. While th­ese fu­ture costs can­not be pre­dicted with pre­ci­sion, re­cent es­ti­mates put the cur­rent so­cial cost of each added ton of at­mo­spheric CO2 at $10-100, with the US gov­ern­ment us­ing a mid­dle-range es­ti­mate of about $40 per ton to guide en­ergy reg­u­la­tion.

Some coun­tries, like Norway and Swe­den, long ago in­tro­duced a tax on CO2 emis­sions to re­flect a so­cial cost of $100 per ton, or even higher. Many pri­vate com­pa­nies, in­clud­ing ma­jor oil firms, have also re­cently in­tro­duced an in­ter­nal ac­count­ing cost of car­bon emis­sions to guide their de­ci­sions re­gard­ing fos­sil-fuel in­vest­ments. Do­ing so en­ables com­pa­nies to an­tic­i­pate the fi­nan­cial con­se­quences of fu­ture gov­ern­ment reg­u­la­tions and tax­a­tion.

As more coun­tries and com­pa­nies in­tro­duce car­bon pric­ing, the in­ter­nal ac­count­ing cost of car­bon emis­sions will rise, in­vest­ments in fos­sil fu­els will be­come less at­trac­tive, and in­vest­ments in low­car­bon en­ergy sys­tems will be­come more ap­peal­ing. The mar­ket sig­nals of CO2 tax­a­tion (or the cost of CO2 emis­sion per­mits) will help in­vestors and money man­agers steer clear of new fos­sil-fuel in­vest­ments. Car­bon taxes also of­fer gov­ern­ments a cru­cial source of rev­enue for fu­ture in­vest­ment in low-car­bon en­ergy.

With in­ter­na­tional oil prices drop­ping – by a whop­ping $40 per bar­rel since the sum­mer – this is an ideal mo­ment for gov­ern­ments to in­tro­duce car­bon pric­ing. Rather than let the con­sumer price of oil fall by that amount, gov­ern­ments should put a car­bon tax in place.

Con­sumers would still come out ahead. Be­cause each bar­rel of oil emits roughly 0.3 tons of CO2, a car­bon tax of, say, $40 per ton or­gan­i­sa­tions like the new Green Cli­mate Fund and the re­gional de­vel­op­ment banks, they would trans­fer around $36 bln per year. By us­ing part of that money to mo­bilise pri­vate-sec­tor fi­nanc­ing, the full $100 bln of cli­mate fi­nanc­ing could be reached.

Both Big Oil and Big Fi­nance have made ma­jor mis­takes in re­cent years, chan­nel­ing funds into so­cially de­struc­tive in­vest­ments. In 2015, th­ese two pow­er­ful in­dus­tries, and the world as a whole, can start to put things right. We have within our reach the mak­ings of a new global fi­nan­cial sys­tem that di­rects sav­ings where they are ur­gently needed: sus­tain­able de­vel­op­ment and cli­mate safety, for our­selves and for fu­ture gen­er­a­tions.

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