Why fi­nance can save the planet

Financial Mirror (Cyprus) - - FRONT PAGE -

Ac­tion is ur­gently needed to con­tain global warm­ing and pre­vent a dis­as­ter for hu­man­ity; yet the global com­mu­nity is des­per­ately short of tools. There is not much sup­port for the most de­sir­able so­lu­tions ad­vo­cated by econ­o­mists, such as a global cap on green­house-gas emis­sions, cou­pled with a trad­ing sys­tem, or the en­force­ment of a world­wide car­bon price through a global tax on CO2 emis­sions.

In­stead, ne­go­ti­a­tions for the United Na­tions Cli­mate Change Con­fer­ence in Paris in De­cem­ber are be­ing con­ducted on the ba­sis of vol­un­tary, uni­lat­eral pledges called In­tended Na­tion­ally De­ter­mined Con­tri­bu­tions. Although the in­clu­sion of vol­un­tary tar­gets has the merit of cre­at­ing global mo­men­tum, this ap­proach is un­likely to re­sult in com­mit­ments that are both bind­ing and com­men­su­rate to the chal­lenge.

That is why cli­mate ad­vo­cates are in­creas­ingly look­ing for other means of trig­ger­ing their list.

For starters, fi­nance pro­vides an ac­cu­rate yard­stick to gauge if deeds are con­sis­tent with words. In 2011, “Un­burn­able Car­bon,” a path-break­ing re­port by the non­govern­men­tal Car­bon Tracker Ini­tia­tive, showed that the proven fos­sil-fuel re­serves owned by gov­ern­ments and pri­vate com­pa­nies ex­ceed by a fac­tor of five the quan­tity of car­bon that can be burned in the next 50 years if global warm­ing is to be kept be­low two de­grees Cel­sius.

Re­serves held just by the 200 top pub­licly listed fuel com­pa­nies – thus ex­clud­ing sta­te­owned pro­duc­ers such as Saudi Ara­bia’s Aramco – ex­ceed this car­bon bud­get by onethird. And that means that these com­pa­nies’ stock-mar­ket val­u­a­tion is in­con­sis­tent with con­tain­ing global warn­ing.

This re­al­i­sa­tion prompted a cam­paign to con­vince in­vestors to divest from car­bon­rich as­sets. In­di­vid­u­als and in­sti­tu­tions rep­re­sent­ing a $2.6 trln port­fo­lio have al­ready joined the di­vest­ment move­ment. Fur­ther­more, Bank of Eng­land Gover­nor Mark Car­ney has high­lighted the threat rep­re­sented by po­ten­tially stranded car­bon as­sets. In­vestors are be­ing warned that, from the stand­point of fi­nan­cial sta­bil­ity, “brown” se­cu­ri­ties bear spe­cific risk.

The amount of di­vest­ment may look big – and it is, par­tic­u­larly given that the cam­paign started re­cently. Yet $2.6 trln amounts to less than 5% of global pri­vate non-fi­nan­cial se­cu­ri­ties. The trend is real, but it is still too lit­tle to trig­ger sig­nif­i­cant changes in fos­sil-fuel com­pa­nies’ val­u­a­tion and be­hav­iour.

A sec­ond rea­son why fi­nance mat­ters is that the tran­si­tion to a low-car­bon econ­omy re­quires huge in­vest­ments. Ac­cord­ing to the In­ter­na­tional Energy Agency, global in­vest­ment in energy sup­ply cur­rently

ac­tion. Fi­nance


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of amounts to $1.6 trln an­nu­ally, and 70% of it is still based on oil, coal, or gas. Green in­vest­ment amounts to only 15% of the to­tal, and in­vest­ment in energy ef­fi­ciency – in build­ings, trans­port, and in­dus­try – to­tals a mea­ger $130 bln. Con­tain­ing the in­crease in av­er­age sur­face tem­per­a­ture to two de­grees re­quires de­vel­op­ing clean tech­nolo­gies, and even more im­por­tant, a four-fold in­crease in in­vest­ment in energy ef­fi­ciency over the next ten years.

Yet such in­vest­ment will not be fi­nanced easily: its re­turn de­pends on a still-elu­sive car­bon price and will of­ten ma­te­ri­al­ize only in the long run, while im­prov­ing energy ef­fi­ciency i mplies re­plac­ing hun­dreds of mil­lions of out­dated ve­hi­cles and re­fit­ting hun­dreds of mil­lions of energy-vo­ra­cious build­ings. Ad­e­quate fi­nanc­ing in­stru­ments are re­quired for the right pur­pose at the right place and at the right scale.

De­vel­op­ment banks and green banks have a huge role to play. For ex­am­ple, ded­i­cated long-term loans, cou­pled with a tax break or a sub­sidy, would help house­holds de­cide to mod­ern­ize their homes.

But the real hope among cli­mate spe­cial­ists is that in­no­va­tive fi­nance could help pro­vide the plan­ning clar­ity that is cur­rently miss­ing. To elicit the in­vest­ments that are nec­es­sary to mit­i­gate cli­mate change and green the econ­omy, the elim­i­na­tion of fos­sil-fuel sub­si­dies and a cred­i­ble, fast-ris­ing path for the price of car­bon are vi­tal. But, be­cause high fuel prices are un­pop­u­lar with con­sumers and raise com­pet­i­tive­ness con­cerns among busi­nesses, gov­ern­ments are re­luc­tant to take ac­tion to­day – and may re­nege on their com­mit­ments to act to­mor­row.

To over­come such trep­i­da­tion, ad­vo­cates for cli­mate ac­tion are turn­ing to in­cen­tives. Some have rec­om­mended that gov­ern­ments is­sue CO2 per­for­mance bonds, whose yield would be re­duced if com­pa­nies ex­ceed their car­bon tar­get. Another idea, put for­ward in a re­cent pa­per by Michel Agli­etta and his col­leagues, is to map out a path for an in­dica­tive price of car­bon called its “so­cial value” and pro­vide green pro­ject de­vel­op­ers a gov­ern­ment-guar­an­teed car­bon cer­tifi­cate rep­re­sent­ing the value of the cor­re­spond­ing emis­sions re­duc­tion. Cen­tral banks, they sug­gest, would then re­fi­nance loans to such de­vel­op­ers, up to the value of the car­bon cer­tifi­cate.

This would amount to a cal­cu­lated bet. If the price of car­bon in, say, ten years, ac­tu­ally cor­re­sponds to the an­nounced so­cial value, the pro­ject will be prof­itable and the devel­oper will re­pay the loan. But if the gov­ern­ment re­neges on its com­mit­ment, the devel­oper will de­fault, leav­ing the cen­tral bank with a claim on the gov­ern­ment. Fail­ure to in­crease the price of car­bon would re­sult ei­ther in higher public debt or, in the case of mon­eti­sa­tion, in­fla­tion.

The idea is to force gov­ern­ments to have skin in the game, by bal­anc­ing the risk of in­ac­tion on the car­bon tax with the risk of in­sol­vency or in­fla­tion. There would be no pro­cras­ti­na­tion. Ac­tion against global warm­ing would take place with­out de­lay. But a decade or so later, gov­ern­ments – and so­ci­eties more broadly – would need to choose be­tween tax­a­tion, debt, and in­fla­tion.

Un­der­tak­ing mas­sive in­vest­ment now and de­cid­ing only later how to fi­nance it looks ir­re­spon­si­ble – and so it is. But not act­ing at all would be even more ir­re­spon­si­ble.

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