Scaling up carbon finance to untie the climate development Gordian Knot in an adverse context

Transcription

1 Scaling up carbon finance to untie the climate development Gordian Knot in an adverse context Jean-Charles Hourcade Baptiste Perissin-Fabert With the collaboration of Michel Aglietta LCS-Rnet, Warsaw November 19th,

2 Lessons from Kyoto s unfinished business A mental map : a world cap and trade system with unique carbon price through all sectors and countries with compensating transfers from the winners to the losers. a map without the indication that significant carbon prices: - hurt emerging economies over the short run (higher share of energy expenditures in households budget and in production costs) - do not prevent them to be locked - in carbon intensive growth pattern (carbon prices alone can t shift urban dynamics and the content of building and transportation infrastructures) fair compensating transfers are difficult to negotiate in a burden sharing approach which: - Focus on the debate of who picks the (very few) remains? - Lose sight of the benefits of cooperation

3 The meaning of Cancun s «paradigm shift» From fair burden sharing to equitable access to development Nationally Appropriate Mitigation Action aligned with development objectives (Bali) The Global Climate Fund as a tool to meet, at least in part, the common but differentiated responsibility principle (CBDR) To be situated in a specific Intellectual context in the aftermath? of the 2008 financial crisis: «Green Growth» as a new form of Marshall Plan 3

4 Climate Finance at risk of distrust? What capital outlay for the Global Climate Fund? A context of depression economics, public debts and rebalancing of the world economic equilibrium can only: exarcerbate the donor fatigue in the Annex 1 countries Reinforce the social resistance to carbon pricing (explicit or implicit) Limitations of current climate finance initiatives: CDM: uncertainty about carbon prices and problems of counterfactual Low leverage ratio on 1 or $ of low carbon Public Finance Mechanisms Fragmentation 4

5 Why those not concerned with climate change should be The world economy between instable growth and depression economics «Saving glut» and «Buridan s Donkey» dilemma for investors Risks of depression vs risks of re-unleashing speculative bubbles Banking systems still fragile and in process of deleveraging Tensions due to a «currency cold war» Any new growth regime implies To redirect savings towards infrastructure and industry instead of speculation a more inward-oriente industrialisation A more resilient financial and monetary order Low carbon finance is a good candidate to contribute to sustainable economic recovery with. less «ups and downs» 5

6 The agenda Inject liquidity, provided that it is used to fund low-carbon investments (LCI) Awake the Buridan s Donkey: public guarantee to lower the risks of LCIs and enhance the solvency of low-carbon entrepreneurs Make the Banking System interested in funding LCIs: banks can better face their prudential constraints and improve their riskweighted assets (RWA) Make institutional investors interested in carbon-based financial products to attract savings (instead of real estates and others ) Trigger a wave of LCI in infrastructure Revitalizing the industrial fabric in OECD countries More inward-oriented growth in emerging economies 6

7 Sketching a possible mechanism 1. Its anchor : an agreement, under UNFCCC on a Social Value of Avoided Carbon Emissions (SVC) 7

8 The SVC, a notional value not a carbon price 1. A signal of the political will to do sth against climate change 2. It increases over time -> counterbalance the role of discount rate against investing in long lived capital stocks 3. Surrogate of a «gobal price signal» to avoid the fragmentation of climate finance 4. Politically negotiable : - The Indian peasant will not be obliged to pay it to irrigate its fields - The SVC differs theoretically across countries but is conditional upon the content of their development policies (Shukla) - Countries may thus accept similar SVC for different reasons, including various views of the co-benefits of climate mitigation 8

9 Sketching a possible mechanism 1. Its anchor : an agreement, under UNFCCC on a Social Value of Avoided Carbon Emissions (SVC) 2. Voluntary commitments by governements, over every five years to back a quantity of carbon assets, 3. Central banks open drawing rights on these carbon assets and accept as repayment carbon certificates (CC) to fund LCIs 9

10 Gvt s commitments and issuance of carbon-based liquidity by Central Banks Central Bank balance sheet Out of balance sheet New credit lines for commercial banks, refundable with of CO 2

11 Sketching a possible mechanism 1. Its anchor : an agreement, under UNFCCC on a Social Value of Avoided Carbon Emissions (SVC) 2. Voluntary commitments by governements, over every five years to back a quantity of carbon assets, 3. Central banks open drawing rights on these carbon assets and accept as repayment carbon certificates (CC) to fund LCIs 4. After certification of project completion: asset swap. CCs are turned into carbon assets that appear on the balance sheet of central banks (like gold), banks or entreprises 11

12 Balance sheets after carbon asset swap Project data: Debt = 100; Equity = 10; SVC = 2; CO 2 = 5; Project returns = R LC Carbon asset Remaining drawing rigths

13 Sketching a possible mechanism 1. Its anchor : an agreement, under UNFCCC on a Social Value of Avoided Carbon Emissions (SVC) 2. Voluntary commitments by governements, over every five years to back a quantity of carbon assets, 3. Central banks open drawing rights on these carbon assets and accept as repayment carbon certificates (CC) to fund LCIs 4. After certification of project completion: asset swap. CCs are turned into carbon assets that appear on the balance sheet of central banks (like gold), banks or entreprises 5. An Independent Supervisory Body 1. Negotiates with governments which NAMAs these LCI should contribute to 2. Secures the «statistical additionality» of the investments 13

14 Risk-adjusted costs of LCIs, a matter of total costs and not of only incremental costs Projects BAU Low carbon Up-front costs (planning and building phases) Excess up-front costs 10 Operating costs Non carbon-related risks premium (technologyl, country, currency etc.) CC allocated with no need for counterfactuals Carbon-related risk premium Risk-adjusted costs <126 14

15 Adressing potential risks of the system No monetary laxity No carbon bubble Macroeconomic risks Quality of LCIs? Environmental risk -> statistical additionality CC pre-determined share of a fixed EV of abatements per type of investment New debt creation? Inflation Social Cost of Carbon Arbitrary Issuance? Regulatory risk To be weighed against the benefits of redirecting part of (misused) savings toward a «green growth» recovery 15

16 Meeting the Common but Differentiated Responsibility Principle? 1. Carbon assets created under agreed upon rules 2. The geographical direction of the CCs and LCIs is not predetermined under a limit defined in «5» 3. A capital inflow in non Annex 1 countries has to be secured by a rule such as the distance between emissions and a normative emissions trajectory compatible with the 2 objective 4. The taxpayers of Annex 1 countries thus bear the risks in last resort 5. drawing rights on the system invert correlated to the distance between the announced pledges and this normative trajectory 6. A share of the carbon asset should be devoted to provisioning the Green Climate Fund 16

17 A Climate-Friendly Financial Architecture Low-Carbon Investments III I Deal on the «Social Cost of Carbon» = notional value Control Body (UNFCCC?) Monitoring Reporting Payback Loans Recognition of CC as a legal reserve asset lending capacity of banks $ Assets Legal reserves - CC deposits - Cash Loans - «LCPs» loans Government Carbon Assets Central Bank Carbon certificates Commercial and Development Banks Liabilities LCP-targeted financial products (Green Bonds)? II Issuance of Carbon Certificates Face value = SCC Returns $ Private Savings (LCP-targeted assets) Savings Households Pension Funds Lenders and depositors The leverage on private savings is one of the two keys of the virtuous circle 17

18 To sum up 1. A deal on the «Social Cost of Carbon» 2. Money creation backed on real wealth (Avoided climate risks, Infrastructure investments) 3. No risk of speculative bubble on carbon 4. Normative targets with when flexibility and back pulling force 5. A concrete way to secure «equitable access to development» by supporting NAMAs full incremental costs by a real inflow 6. A respected CBDR that can be progressively extented to the most advanced emerging economies 7. Can support any carbon trading mechanism and bottom-up initiatives (sectorial arrangements in the industry, cities inititiatives.) and stabilize the business context 8. Can be palatable for non climate concerned decision-makers 18

19 Are we right in proposing to turn the financing question upside-down? Can we afford climate policies <-> No debt bailout and economic recovery w/o climate policy stupid if you think that climate finance is doomed to remain a marginal department of global finance dangerous if you think that linking two sensitive issues is a diplomatic non-starter not stupid if you have in mind: the incremental G$ of upfront investments estimated by the WB for 2030 and the larger amount of redirected investements The paradox of debt crisis in a context of huge amounts of world savings unavoidable if you have in mind that ignoring the short term constraints on economies leads to a diplomatic dead-end 19

20 The work to be done, mistakes to be avoided 1. Remaining issues to be adressed: macroeconomy, CC allocation, legal design 2. Keeping the big picture in mind to create a common understanding : - between various fields of expertise (industry, finance, project developpers, local decision-makers, environmentalists - Between concerned and non concerned people; e.g. link with the reflections about the future of the IMF (Jaeger et al.) 3. Not dreaming about a fully-fledged architecture in 2015 (the KP mistake) but precising pragmatic 1st steps and paying attention to the inadvertent irreversibilities in the diplomatic momentum 20

21 Elements for a brainstorming Hourcade J.C., Perrissin Fabert B. Rozenberg J. Venturing into uncharted financial waters: an essay, on climate-friendly finance, International Environmental Agreements (2012) 12: , DOI /s y Aglietta M., Hourcade J.C. Can Indebted Europe Afford Climate Policy? Can It Bail Out Its Debt, Intereconomics, 2012/3 Hourcade J.C., Shukla P. Triggering the low carbon transition in the aftermath of the global financial crisis, Climate Policy Volume 13, Supplement 01, 2013 Special issue of International Environmental Agreements, forthcoming

22 i)connect explicitly the 'social value' with the 'Equitable Access to Sustainable Development' ii) The unique international carbon price do not exist; but the social value of carbon does reflects the 'true' value of carbon in a country in the context of 'equitable access to sustainable development' iii) NAMAs connection will help to ensure that the domestic benefits are paid not out of carbon finance. iv) NAMAs connection is politically important (for acceptability of the mechanism) and it is helps to overcome the resistance within the countries (esp. developing countries) overcome 'decision myopia' due to high uncertainty of prices (and low realization in the short-run) ii) Linking of private and public finance iii) Flexibility and efficiency (together with long-term perspective)