The Solution Paths and Barriers are Largely Understood
1. Climate change is an extraordinary challenge facing the world community, fuelled by a mix of continuing increases in anthropogenic greenhouse gas emissions and environmental feedback loops that threaten uncontrollable change.
2. The solution paths are largely understood: a rapid global shift from emission-production to clean-energy generation; equivalent measures across all emitting areas of the economy; energy efficiency measures to buy time until that shift can be completed; and sequestering carbon through agriculture, forestry and other measures.
3. Action on greenhouse gas emissions has been so weak to at that some level of climate change is now happenning and will continue to do so. Even if we stopped global emissions cold tomorrow a latency effect with greenhouse gases means we can expect global warming to continue for another 30 years. If we are are to mitigate major negative impacts, measures to address adaptation and the resileince of our economies, societies amd ecosystems are now essential.
4. There are three aspects of the problem:
Urgency – the critical constraint on avoiding a 1.5C° warming will be the time taken to develop and deploy the industries of the low-carbon economy.
The Catch 22 of low-carbon industrial development – many zero and low-emission commodities are currently low-volume and therefore high-cost. They will naturally increase in volume and decrease in cost – even to the point of being cheaper than alternatives (as has already occurred with solar and wind power in several countries). But the urgency means that this process has to be short-circuited so that high volumes are developed and deployed even at high cost, with an accelerated transition to low cost occurring as a result. Green hydrogen for example.
Developing countries are where the climate challenge will be won or lost, but the deployment of high-cost, low-carbon solutions represents a potentially unreasonable opportunity cost compared to short-term poverty eradication, and a competitive disadvantage to third-party funders.
5. Climate Bonds can fund the transition to a low-carbon economy
The urgent need for deployment can be addressed by mechanisms that: (a) develop a suite of critical low-carbon industries in parallel and (b) establish annual growth rates for low-carbon industries that average 25% per year until 20% of resource capacities harnessed.
The volumes of investment required are large – some $5-7 trillion per year. Bonds allow us to borrow against future economic benefits to allow for the investment needed now to deliver those benefits.
The past 200 years have seen numerous successful national initiatives to build infrastructure to meet environmental or social challenges: the vast sewer construction projects of the 19th and early 20th centuries that removed the spectre of cholera in Europe; the building of national energy grids to power the 20th century’s economic booms; the building of hospitals as the foundation of modern health systems. Much of this effort was financed by the issuing of bonds – long-term debt repayable at pre-agreed rates, guaranteed by governments.
6. There is more than enough private capital in the world to fund the necessary transition.
- The capacity of government to directly fund the transition to a low-carbon economy from current revenues (taxation) is limited. But, with some US$120 trillion of institutional funds under management plus retail investor and corporate funds, adequate capital resources exist. We simply need to get it flowing in the right direction.
- The scale of investment required will demand a constructive partnership between long-term investors, who manage the larger bulk of the world’s deployable capital and governments. With government planning measures that support green investments, fiscally efficient incentives, and a combined effort to create new public-private structures to allow capital deployment, the capital can be mobilised.
7. Institutional investors will invest in long-term Climate Bonds given adequate and secure returns.
Pension funds, for example, understand the importance of supporting the shift to a low-carbon economy. But they also have to ensure secure returns for their members. Long-term bonds are well suited to both the financing of long-payback climate projects and to providing pension funds with security of returns over that longer term.
For investors, Climate Bonds will simply be investments in new fixed income opportunities, packaged to be more attractive than many existing options. Given the scale of likely offerings, they can be expected to become a new asset class.
Because Climate investments are often novel, government contingency guarantees or political risk insurance are frequently needed.
8. The investibility of specific initiatives will depend on delivering secure, long-term returns at competitive levels of risk, rather than on values arguments.
Investibility for long-term investors will also involve the aggregation of individual low-carbon economy initiatives into larger scale opportunities for investment. It will require a close engagement between government, investors and industry.
The investments required to address climate change can be profitable – for investors, for companies involved, and for national economies stimulated by capital spending and clean-energy innovation. Climate Bonds can help keep the planet inhabitable for billions of humans while funding our pensions.
9. The transition to a low-carbon economy presents capital with what is likely to become the largest commercial opportunity of our time: investing in clean energy and low-carbon infrastructure.
10. Achieving the scale and speed of development needed will require an active enabling role on the part of governments, at all levels.