In a well timed recent essay (bearing in mind the current Glasgow climate summit) entitled “Saving Paris”, Special Envoy to Barbados Prime Minster Mia Mottley, emeritus economics Professor Avinash Persaud notes “the unpleasant economics of climate change” is that to meet the 2015 Paris climate summit target to limit the global rise in temperature to 1.5 degrees celcius by the end of the century “the world would have to eliminate 53.5 billion metric tonnes of carbon for the next 30 years.” Indeed, otherwise, it could reach the 1.5-degree rise target in a decade.
He cites estimates by US investment bank Morgan Stanley that the cost would be an additional US$50 trillion split between five areas of zero-carbon technology. He rightly notes that one of the most promising new technologies is using hydrogen to provide clean fuel for power, cars and other industries. Morgan Stanley anticipates that it would cost US$20 trillion to make the gas, increase capacity to power plants and manage its safe storage. Solar, wind and hydro will require another US$14 trillion of investment to deliver 80 per cent of global power by 2050. Electric vehicle take up will require US$11 trillion to build the factories and infrastructure and develop battery technology. Biofuels, like ethanol for aircraft, would require a further US$2.7 trillion of investment. Carbon capture and storage would need US$2.5 trillion.
Persaud argues that to treat climate change as if equity matters. For example, taking account of history as well as current production would “require a new financial instrument that gets us the scale we need while tying together the changing geography of current emissions, the historic contributions to the stock of greenhouse gases, and the need for climate adaptation for frontline states.”
He argues that the countries that contribute most to the stock of greenhouse gases (GHGs) could issue an instrument that gives any investor in projects anywhere in the world that reduce greenhouse gases the right to borrow from them at their overnight interest rates — which are currently near zero — and to roll over this borrowing for as long as the project delivers some minimum rate of reduction in GHGs per dollar invested. “If the collective annual issuance of this near-zero cost funding were US$500bn, it would boost investor returns to such a degree that it would over 15 years, crowd in private savings to the tune of the US$50trn we need. The reason why this is the right instrument is that the near-zero cost of funding uniquely delivers investment to the scale required to transition emerging economies and others, without sitting on the stressed balance sheets of developing country Governments, is not a politically difficult transfer from developed countries, and its use is conditional on achieving a decline in GHG emissions.”
He notes US$500bn per annum is not so much when in the past 12 years, the same group of countries with high historic contributions to the stock of GHGs have purchased US$25trn of government bonds in quantitative easing programmes designed to spur private investment. If instead these same countries had committed to purchasing private sector bonds that financed projects that were independently rated to reduce GHGs, they would have kick-started more investment than they did and they would give the world a fighting chance of defending 1.5ºC.
He notes we do not need to create a brand new instrument to achieve this as the countries which have historically contributed 64 per cent of the stock of GHGs are also the countries whose currencies make up the International Monetary Fund’s (IMF) Special Drawing Rights (SDR’s). He notes that there is even a proposal on the table that countries who do not need their allocation in the US$650bn of SDRs issued in August (2021) should put US$50bn into an IMF administered, sustainability and climate finance trust for climate change adaptation, so his suggestion is one of much greater scale, making it annual and allowing private investors to compete to access these funds on the basis of how much climate mitigation and adaptation they can achieve across the world.
One of the many countries likely to be affected by rising sea levels is The Bahamas, which will need a sustainable fiscal policy and capital market access to invest in infrastructure and mitigation efforts. It was therefore a welcome move from the perspective of debt sustainability by their government that they appear to have decided to implement the frequent but seldom followed expert advice to lower the rate but broaden the base as far as their value added tax reform was concerned. In lowering the rate to 10 per cent from 12 per cent, but coupling it with a broadening of the base, they should get both efficiency gains and reduce opportunities for evasion, which local experts believe is significant. Taking such a bold political decision early is a good sign for the future.
Finally, in the light of Professor Persaud’s proposal, it is worth noting that the Federal Reserve has announced this week their long expected taper, meaning that it will reduce its monthly rate of asset purchases by US$10 billion and US$5 billion, respectively. This means that it will now only purchase US$70 billion in treasuries and US$35 billion in mortgage backed securities this month.
Keith Collister is a leading authority on the business and governmental workings of Jamaica and the Caribbean islands. His career spans the highest levels of the commercial, investment banking and investment management fields, and he is sought after by both the public and private sectors for his advice on the macro- and micro economy of the region. Based in Kingston, Collister is also executive chairman of the ATL (Appliance Traders Limited) Pension Fund, and director of its management company, Nominee Limited. In addition, he serves as an advisor to the Chairman of the Sandals Group on macroeconomics as well as on project feasibility.