The State must take the lead against climate change

As a touted green alliance of financial institutions unravels, the private sector has once again shown that it is not up to the task of climate leadership. The global transition to a net-zero economy will simply not happen at the pace needed unless states assume their proper role as market makers and investors in public goods.

CAIRO – Several members of the Glasgow Financial Alliance on Net Zero Emissions (GFANZ) – a group of 450 financial institutions – have resigned in recent weeks because they were concerned about the cost of meeting their climate commitments. With their departure, they disproved the notion that private financial institutions can lead the transition to a carbon-neutral economy. What is really needed for the transition are more ambitious states, which shape markets instead of just fixing their mistakes.

The market-based approach centers on the idea that private financial institutions allocate capital more efficiently. This implies that States should refrain from “picking winners” or “distorting” competition in the market, and limit themselves to “de-risking” green investment opportunities to make them more attractive to dominant private investors.

But modern economic history tells a different story. In many places and times it was public actors who took the lead in creating and shaping markets. That then generated benefits both for the private sector and for society more broadly. Many of the great technological advances that we take for granted today were only possible thanks to the fact that public organizations carried out investments that were excessively risky for the private sector.

The true story is then very different from the myth that has been spread: many economic successes were not due to public actors refraining from interfering, but to the “entrepreneurial state” taking the lead. On the other hand, the market-based approach is faced with the goal of achieving a just global green transition, in which costs and risks are shared fairly between and within different countries. “Reducing risks” means implementing a strategy that socializes costs and privatizes benefits.

Private finance continues to play a key role in this, of course, but only the public sector can mobilize and coordinate investment at the scale needed to decarbonise the global economy. The question, then, is to define what this approach should include.

Firstly, States must embrace their role as “investors of first resort” instead of waiting and acting only as “lenders of last resort”. Public financial institutions spend many billions of dollars a year around the world and, because of their unique design and governance structure, are able to offer the long-term, patient, and mission-oriented financing that the private sector is often unwilling. to provide. Evidence shows that direct lending from well-governed public banks can have a powerful impact on the structure of markets, as it informs the perception of future investment opportunities.

Second, we need to rethink the relationship between the public and private sectors, especially as it relates to sharing risk and reward. When public entities take risks to meet social goals, the private sector should not appropriate the financial rewards.

For example, if a government finances large renewable energy projects and other green investments, it might own part of the corresponding equity capital. The returns can also be socialized if a part of the intellectual property (IP) rights is assigned to the State, which would allow it to reinvest the benefits in new green projects. Importantly, companies that receive public funding must meet conditions that align their business activities with the goals of green industrial policy, fair labor practices, and other priorities.

Third, to direct private investment towards green activities and reduce investment in harmful ones, states must strengthen and update the rules governing financial markets. Such a regime could see central banks introduce green credit allocation policies and regulators tighten rules and regulations to prevent eco-imposture and regulatory arbitrage.

Fourth, policy makers should recognize that debt financing -provided by the public or private sector- is not necessarily a substitute for direct fiscal spending. The logic of reimbursable financial instruments does not easily harmonize with the public good characteristics of some climate-related investments. Investing in climate justice and reforestation will bring far-reaching returns, but not necessarily those that can be used to pay off loans. To overcome these problems and implement investment at the necessary scale, it will be necessary to strategically coordinate the design of policies in the social, environmental, fiscal, monetary, and industrial areas.

Finally, more needs to be done to provide countries in the Global South with enough fiscal space to implement their own local adaptation and decarbonization agendas. Many countries, even those most exposed to accelerating climate shocks, face significant over-indebtedness. It is essential that the creditor countries of the Global North -responsible for most of the emissions into the atmosphere- help reduce that burden through haircuts, debt restructuring, compensation for damages and the replacement of climate credits with climate subsidies. .

To limit catastrophic global warming, the scale of financing for climate mitigation and adaptation must be increased dramatically, but the quality of financing is also important. Rather than delude ourselves that private financial institutions will turn their much-publicized trillion-dollar promises to reduce emissions into credible and enforceable action, we must call on states to play their part. That means capturing and directing finance toward clear and ambitious climate goals, and shaping financial markets to align with those goals. Closing the financing gap requires a radical redesign of the financial architecture and a substantial shift in financial flows. None of that will happen unless policies are put in place to intervene.

To specify the necessary changes, I moderated a panel of women at COP27 with the participation of the Prime Minister of Barbados Mia Mottley, the Director General of the WTO, Ngozi Okonjo-Iweala, the Egyptian Prime Minister of Planning and Economic Development, Hala El Said, and Scottish First Minister Nicola Sturgeon. The challenges are urgent. The green transition will be impossible if States do not take the lead in climate financing.

The author

Mariana Mazzucato, Founding Director of the UCL Institute for Innovation and Public Purpose, is Chair of the World Health Organization Council on the Economics of Health for All.

Translation into Spanish by Ant-Translation

Copyright: Project Syndicate, 1995 – 2022

www.projectsyndicate.org