Originally published on The Beam.
By Dr. Matthias Kroll, Chief Economist, World Future Council
With a mere fraction of the COVID-19 recovery funds, central banks could support climate protection of a magnitude that would make the 1.5°C target achievable.
The global climate crisis is increasing the need for a sustainable recovery following the COVID-19 downturn. As a result, many are searching for new answers. This includes the search for a pathway to a global Green New Deal. The core part of a new deal is reducing all greenhouse gas emissions on a level which is in line with the 1.5°C goal set within the Paris agreement. This means primarily to substitute fossil fuels through renewable energies (RE). The worldwide investments for the “RE-revolution” would create more new green and sustainable jobs, and will cause the fossil fuel industry to slowly dissolve. It is predicted that the reduced unemployment will — in the long run — lead to an increase of wages and a reduction of inequality within the industry.
Where Would The Money Come From?
One crucial question remains: How could we finance the trillions needed for the necessary green new deal investments and the new green jobs?
In a few cases, a carbon tax can trigger a substitution of fossil fuels by renewables in a successful way. In many countries within the global south, the CO2 price, which will lead to a replacement of fossil fuels, is much too high and would come into conflict with the Sustainable Development Goal 7 – Affordable Energy for All. Also, the national budgets — or the taxpayers, respectively — are usually too tight for the necessary sums for a global green deal. But since the financial crisis from 2008, and again since the COVID-19 recession, there is one new player which has the enormous economic capabilities to finance a Green New Deal: Central banks.
Central Banks Are The New Players In Town…
We are currently experiencing — for the second time — what enormous financial resources can be mobilized in a systemically-relevant crisis with the support of the central banks. The rapid mobilization of large sums of money raises the question of why, in the equally systemically-important global climate emergency, it has been necessary to beg for every single billion for years.
The coronavirus pandemic has not only pushed the climate crisis into the background in the media, it has also attracted lots of financial resources. Today, the financial means available to deal with the coronavirus crisis exceeds the funds required — but not approved — to stabilize the global climate at 1.5°C many times over. The European Central Bank (ECB) alone has recently increased its Pandemic Emergency Purchase Program to €1.35 trillion. In view of the dramatic slump in many industries, an intervention of this magnitude can actually be rated as essential. The price for coping with the systemically relevant climate crisis, on the other hand, appears almost to be a bargain: with a fraction of the funds used to overcome the covid-19 crisis (or the banking crisis of 2008), the central banks could trigger investments in climate protection of a magnitude that would make the 1.5°C target achievable. The central banks would not even need to create additional money for this. It would be sufficient to replace expiring assets from previous purchase programs with new types of “Green Climate Bonds.”
The Global Expansion Of Renewable Energy Must Accelerate Massively
A UNEP report published in June 2020 once again showed a dire shortfall in renewable energy investments, despite a flood of articles about ‘sustainable’ and ‘green finance’ in specialist media: global renewable energy investments have stagnated at around $300 billion a year since 2011. The installed capacity in gigawatts (GW) nevertheless shows that a slight but steady increase is due to the fact that wind and solar technology can be manufactured more and more cost-effectively. Which means that you will get more gigawatts of renewables for the same amount of money.
Even the fact that in many cases, renewable energies can now produce electricity more cheaply than fossil fuels has still not led to a rapid expansion. Investors continue to finance “dirty” energies because their costs and risks have been known for decades and enable reliable calculations, aspects which make a project bankable in the first place. By contrast, investments in renewable energies are still considered to be risky and difficult to calculate, particularly in countries of the Global South.
The slower-than-expected expansion of renewable energies is not due to a lack of potential ‘green’ capital, but to a blatant lack of bankable renewable energy investment projects. This also means that the often demanded redirection of capital from fossil to renewable energies — due to a presumed shortage of investment capital — misses the core of the problem.
How Central Banks Can Make Renewable Energy Projects Bankable
For the problem of investment risks that are difficult to calculate, guarantees are the obvious solution. As mentioned before, in some countries an obstacle to investment is that the price of electricity from renewable energy would collide with the Sustainable Development Goal 7. In that case, a one-time or permanent grant can help. We need new financing tools that can (1) back guarantees on a large scale, and (2) enable substantial grants. In principle, both approaches can already be offered to a very small extent by international development banks. In order to bring the expansion of renewables into a ballpark that allows us to achieve the Paris agreement climate goals, development banks need the central banks as a strong economic partner by their side.
The state central banks of the industrialized world are without a doubt the most powerful economic institutions in the world. They can never go bankrupt in their own currency and can even continue to exist with negative equity. Fortunately, most of the major central banks have recognized in recent years (e.g. through the establishment of the ‘Network for Greening the Financial System’) that the risks of the global climate crisis pose massive risks to the financial system — and thus climate change constitutes part of their mandate. So far, however, their measures have only been directed at making climate risks more transparent for various companies and industries in order to provide investors with the relevant information. It is obvious that such a soft form of intervention will not be enough to effectively counteract the climate emergency.
It would be much more effective if the central banks would back guarantees of the development banks on a permanent basis. This would minimize the risk for the development banks and multiply the number of renewable energy projects enabled by guarantees. The central banks could also allow development banks to sell Green Climate Bonds to them with such long terms that they are, in effect, non-repayable grants. This would also multiply the number of bankable renewable energy investment projects.
The idea that central banks purchase Green Bonds in a virtual perpetual way to transform loans into grants could also be found in the aspiring Modern Monetary Theory (MMT) and can be used to finance many other purposes of a Green New Deal.
The ECB Alone Could Play The Game-Changer
A new study by the World Future Council shows that a modest ECB “Climate Bailout” program of €150 billion per year could reduce global CO2 emissions by a whopping one-third by 2030. The program would not even have to create new money, but only to reinvest the proceeds from expiring bonds of former quantitative easing programs. Should other central banks participate in that kind of climate bailout, a reduction of CO2 emissions to net zero globally by 2040 would even be possible.
€150 billion to cope with the global climate crisis appears to be a bargain, compared to the €1350 billion that — reasonably and without relevant opposition — is now being used to overcome the coronavirus crisis.
We need to start thinking about how to practically finance a Green New Deal and a swift transition to 100% renewable energy, and central banks should start playing a proactive role. Let’s treat the climate emergency as what it is, and let’s bail out the climate, too!