This article was published by Thompson Reuters Foundation on Jan. 19, 2022.
It is a cruel irony that after spending months berating China and India to end coal, the major U.S. initiative for climate mitigation, the Build Back Better Act, is being scuppered by a Senator from a coal-producing state, West Virginia. You cannot solve climate change as if equity doesn’t matter.
Today, China and India are indeed the largest and third-largest emitters of greenhouse gases (GHGs) respectively. But it is the stock of GHGs that have caused global warming – and 70 per cent of that was produced by the United States, Japan, the European Union and the UK.
Who should do more between and within nations? It’s humanity’s curse that we prefer mutual destruction to going along with what we see as an unfair peace.
Some try to sidestep the justice issue by arguing we can save the world with some loose change, using innovative tech, carbon markets and pledges by investors. But they are not buying it on the country roads of West Virginia. The world is still hurtling towards the 1.5C of global warming that 175 nations pledged to defend with the Paris Agreement.
What’s missing is a global financing facility that would so incentivize private and public investors to invest in the clean energy transition that today’s reluctant pledgers would scramble to get their fair share. Without the necessary finance, the Paris accord is a bird without wings.
Here is a plan President Joe Biden can authorize without Congressional assent. It delivers the supply-side investment we need for less cost than any other, which will prove helpful as COVID-19 stimulus winds down and inflationary pressures bubble.
PUBLIC BOOST FOR RETURNS
To halt the rise in temperatures below 1.5C, we must eliminate 53.5 billion tonnes of carbon dioxide (CO2) each year for 30 years. This would require additional investments of $2.5 trillion-$4 trillion per year. Whatever it is, it’s too large to sit on government balance sheets but could comfortably be absorbed by private savings.
To mobilize sufficient private savings, the return on investment can be lifted by blending it with near-zero interest, long-term public funds. Investors would bid for these public funds based on how much GHGs their project removes.
The investments of the winning bidders would be subject to conditions and public money clawed back if conditions are unmet. These investments could be anywhere – climate is a global common good – shifting nations from resentful pledging to jealous efforts to find the most efficient ways to reduce GHGs locally.
The money would come from a new Special Drawing Rights allocation by the International Monetary Fund (IMF). SDRs are as unfathomable outside the cognoscenti as they are ingenious.
CLIMATE MITIGATION TRUST
IMF member countries hold in reserve $12.7 trillion of cash in case of a foreign exchange crisis. This self-insurance is particularly inefficient because the currency markets are a zero-sum game.
When money flows out of one country it flows into another. SDRs were invented in 1969 when the Bretton Woods System was under pressure from Vietnam war deficits. They aren’t money, but they give the holder the right to swap them at any time for the currency reserves of another IMF member state.
This right makes the SDR a reserve asset. It allows holders to release an equivalent amount of cash for longer-term but sound investments. SDRs represent just 7 per cent of foreign exchange reserves today. If the IMF Board agreed to take this to 12 per cent, countries could lend over $500 billion of new and unused SDRs to a “Climate Mitigation Trust”.
The trust would swap its SDRs for convertible currencies and lend these to investors for the long-term. There is no cheaper, practical way to accelerate the energy transformation. The trust would be a preferred creditor and lend against good collateral. And once it has auctioned $500 billion and met its goals without adverse consequences, there should be a review and replenishment.
It is essential to recognize that it is not the scale that is novel but the aim. Central banks spent over $25 trillion in the last 12 years in quantitative easing. If they had only bought bonds that financed the energy transition, we would be halfway to halting climate change and a bigger economic impact.
And to address the need for a just transition, it is fitting to use the SDR as an instrument to reduce emissions and mitigate climate change because it is made up of the currencies of countries that contributed 80 per cent of the stock of greenhouses gases.
There have been numerous pledges and calls for bold and effective climate action from the private sector and from governments.
The COP21 summit in Paris was encouraging – and participants at COP26 in Glasgow will remember the urgent words of Barbados Prime Minister Mia Mottley. Citizens the world over are demanding results. Yet as we know, money is the sinews of war.
There will be no conclusive solution for climate change without an effective financing tool. A Climate Mitigation Trust is the best option to accelerate progress towards the critical objective of limiting global warming to 1.5C.
Avinash Persaud is special envoy to Prime Minister of Barbados Mia Amor Mottley, former chairman of the CARICOM Commission on the Economy and an emeritus professor at Gresham College.