Topic three at COP26 in Glasgow is “mobilising finance.” Financial markets will play a key role in decarbonising the global economy, so this is an important topic.
According to the conference organisers, this means “developed countries must make good on their promise to mobilise at least $100 billion in climate finance per year by 2020”. Presumably this hasn’t been updated since the conference got pushed back a year, so perhaps they mean 2021. In any case, “soon” seems to be the point.
Finance is mobilising us
We’ll get to “mobilising finance”, but the first thing to note is that finance seems to be mobilising us. A few weeks ago, Treasurer Josh Frydenberg observed that Australia is already being punished by global capital markets for our status (deserved, I think; underserved, he argued) as a climate recalcitrant. Frydenberg went on to point out that “reduced access to these capital markets would increase borrowing costs, impacting everything from interest rates on home loans and small business loans to the financial viability of large-scale infrastructure projects”.
Top fossil Matt Canavan responded by suggesting that we tell capital markets to “bugger off”. Now I’m all for colourful language, but I’m not sure exactly how one swears at decentralised capital markets. One can’t just call up Zuckerberg or the Google guys to do that. Or even the world’s largest fund manager, BlackRock CEO Larry Fink, for that matter.
In any case, Canavan was quite explicit in saying we should all pay more for our mortgages so we can keep using fossil fuels. I thought the Coalition were against a carbon tax, but apparently Canavan is for a mortgage tax related to climate. How thoroughly odd.
That idea went down like an anti-vaxxer in a room full of thoughtful people. Even Barnaby Joyce refused to defend it. But Canavan did a great service with his remarks. He drove home the point that inaction on climate is very costly. Bill Shorten got roasted for failing to cost his climate policies, and saying (rightly, mind you) that the cost of inaction was higher than the cost of action. Canavan unwittingly put a dollar figure on it.
Australian household debt is more than 100% of GDP. Government debt is about 47% of GDP — and households all have an implicit share of that. So if interest rates went up by just 25 basis points (0.25%) because of climate risk, then that would be about $1000 per household per year. Careful work on carbon-related risk premia suggests it could be much more than this. How much is your household willing to pay every year for Australia to do too little on climate?
Mobilising finance
Since other countries are doing something serious on climate, the COP26 organisers are focusing on how to mobilise finance to achieve decarbonisation. As they put it: “International financial institutions must play their part and we need work towards unleashing the trillions in private and public sector finance required to secure global net zero.”
True enough, but the question is how. One part of that is just dollars. $100 billion a year from governments would be a good start. But that won’t be nearly enough if private capital doesn’t follow in a big way. So how can governments get more bang for their climate buck?
The answer is by acting as what University of Warwick professor Robert Akerlof and I have called a “mover and shaker”. In a 2016 paper in the Quarterly Journal of Economics we showed how centrally connected members of social or economic networks can help coordinate the beliefs of others.
The idea is simple (although, like all economics, it takes some math to get the details right): suppose you are connected to Bill Gates and I am connected to Bill Gates, but we don’t know each other. There’s a new Greentech project that may or may not work out, but we all know that the chances of success go up if it has lots of money behind it. If Gates invests in the project, you know it’s probably a good idea. I also know that. But the clincher is that even though we don’t know each other, because Gates is a central network actor we know, each of us is likely to invest. That makes investing more attractive to each of us. So more money goes into the project, making it more likely to succeed.
The ultimate central network actors are governments. They can coordinate the beliefs of private capital markets by acting as a kind of “anchor investor”. This is another well-known feature of capital markets — anchor investors are important for everything from hedge funds to office towers to shopping centres. And those with “blocks” of capital help projects succeed.
One of the key things to come out of COP26 will be a commitment from governments to put serious money behind new technologies (of many different kinds). If governments stump up tens of billions in a coordinated fashion, then the private sector is likely to follow with trillions more. Just like the false dichotomy between “technology and taxes”, it’s hard to escape the role of finance in solving climate problems.
It was Upton Sinclair who said, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”. This most certainly applies to the Canavans and Pitts of this world who appear to hold some kind of public relations gig for the fossil fuel lobby. However, were the High Court to uphold the principle of duty of care for future generations, it is possible to see a pathway to liability for those who have worked so hard to prevent that care being provided. This might bring to mind the much paraphrased remark of Samuel Johnson, “Nothing concentrates the mind like a hanging…“
Excellent Griselda. I was thinking how fast humans were to come up with a vaccine – apposite of the quote about nothing concentrating the mind like a good hanging. The hangman’s rope certainly helped us concentrate. The first quote lined up with my thinking that the whole debate is equivalent, at the moment, with half of capital dedicated to creating a vaccine while the other half of capital (fossil fuel industries) dedicating their minds to creating more viruses.
‘Capital’ is in the docks at the moment and the time of judgement approaches. They may only partially recognise it now, but it’s coming.
Fact #1: Australia’s coal-fired power stations are old and clapped out, and need to be replaced.
Fact #2: lowest-cost new-build power supply is storage-backed renewables.
Fact #3: Australia’s vehicles are getting old and clapped-out, and will soon need to be replaced.
Fact #4: Australia’s vehicles are powered by $40 billion worth of petroleum imports each year.
Fact #5: Within the decade, the far and away cheaper new cars will be battery EV’s, not petrol or diesel.
Fact #6: electric vehicles don;t need imported petroleum,. they need locally produced electricity.
Conclusion: decarbonising Australia’s power system will save us money, not cost more money.
That’s a very plain, unarguable overview.
My car is 3 weeks old.
Why am I not surprised that you’d claim that?
More fool you, if true.
What? Government actually leading on something. I’ve got to see that.
I love how ” it’s all about COP26″. Nothing about Kunming.
https://www.abc.net.au/news/2021-10-11/cop15-china-aims-at-reversing-biodiversity-loss/100524696
Richard Holden misses the significance of the OECD failing to meet the US$100 billion per annum climate finance pledge in 2020. Important research published in Climate Policy shows that no less than 136 developing countries have made their NDCs partially or wholly conditional on receiving one or more types of support – climate finance for mitigation or adaptation; technology transfer and capacity building. Developing countries won’t act in Glasgow until the OECD meets its Paris promises.
Private sector investors mostly want a return on investment, so public money is still crucial for funding climate adaptation in Least Developed Countries and Small Island Developing States, on projects that private investors wont touch. That’s why our Pacific neighbours want government grants and soft loans to address core adaptation challenges and loss and damage from natural disasters.
The other problem ignored in the article is that Australia’s public climate finance has come out of the aid budget, under both ALP and Coalition. Other countries are looking elsewhere for their climate funding: financial transaction taxes, levies on maritime bunker and aviation fuel emissions, carbon market auctions, crackdowns on corporate tax avoidance and tax havens, or the redirection of fossil fuel subsidies. We need to talk more about innovative sources of climate finance.