The international community has agreed on an ambitious agenda to curb climate change. Some 195 countries have decided to try and cut greenhouse gas emissions to a level that will limit the rise in average global temperatures to well below 2C. The question we now face is: how are we going to finance the changes needed to reach this goal? Quantitative easing – creating new money – might just be the answer.
How to finance 1.5C
To reach zero emissions by 2050 (and for a likely chance to stay below a rise of 1.5C), we need to scale up and accelerate the move towards 100% renewable energy, and replicate globally what is already being created in many communities, cities and regions: a fossil-free society based on a customer-centric and inclusive energy infrastructure.
The International Energy Agency has established that $1tn per year of renewable energy investment would be needed to stay under the 2C limit. To achieve the ambitious 1.5C limit agreed in Paris, substantially higher investment will be required. Our rough – and unofficial – estimate puts the figure between $1.5tn and $2tn.
The UN Green Climate Fund (GCF) – tasked with obtaining the “significant portion [of] new and additional” funds from developed countries, to $100bn per year until 2020 – currently stands at just $10.2bn. Previous experiences with getting financial commitments from taxes or semi-public funds – such as from emissions trading – also tell us that the sums provided regularly fall short of what’s promised.
Assuming that the GCF does manage to obtain a sum close to the promised $100bn a year, it is crucial that it receives the funding in the form of non-repayable grants. Only then will the GCF have the ability to make renewable energy and other projects attractive to private co-investors. If the only problem facing climate financing was a lack of credit, it would have been solved a long time ago.
The role of central banks
Since the beginning of the financial crisis, central banks have created trillions to stabilise the global financial system. First they bailed out private sector banks, and then they bailed out governments by buying up private and public bonds worth billions. The European Central Bank is currently buying assets with newly created money of €60bn a month to stimulate the economy in the eurozone and prevent deflation, for example. All this is possible because central banks can never become insolvent in their own currency as they alone issue the legal tender.
But an important side effect of these bailouts has been the realisation that central banks could play a more active role with their monetary policies; newly created money can be used to finance urgent global tasks that would otherwise not be undertaken. Just a percentage of that spent to bail out private banks could pay for investments needed to stabilise the world’s climate
Creating money to prevent climate change
To provide the necessary financial resources ( a big part of the $100bn promised to the GCF), central banks would carry on with what many of them are doing already: buying bonds with newly created money. But instead of buying existing private and public bonds, central banks would buy our proposed green climate bonds, which would be issued by the GCF, to finance climate change mitigation and adaptation projects.
Under our proposals, these bonds would be for the long term (100 years or more) and would only bear small, if any, interest rates. They would become permanent assets of central banks and form the foundation of regular money creation, ensuring that the GCF is at the receiving end of new and non-repayable money.
Who profits and how?
For developing countries, the advantages would be immediate access to the foreign exchange required for the construction of new sustainable infrastructure. If the central banks of developed countries purchased green climate bonds, they would benefit from an increase in demand for their goods and services. The purchase of such bonds would also finance new exports, which would revive domestic economies and lead to job creation.
Climate protection investments and the transition to 100% renewable energy are not only a moral obligation to future generations, but are also socially and economically beneficial today, as has already been shown in hundreds of communities around the world.
As the Austro-British economist Friedrich Hayek once said, capitalism has one key advantage: the ability to respond to a sudden new demand with a spontaneous expansion of the relevant supply and – as long as there are idle economic resources – without risking inflation.
If the GCF is given the financial power to expand demand for the renewable energy infrastructure required to reach the 1.5C goal, capitalism will have shown that it can meet the climate challenge.