It’s the economy, stupid! A Climate World Bank. A commentary by Gianfranco Pellegrino

June 13, 2017
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Trump’s withdrawal from Paris agreement has an immediate consequence – USA will no longer give money to fund adaptation and conversion to sustainable energies for developing countries. This shows that the issue is an economic one. Trump does not want Americans make sacrifices in order to bequeath to future generations a cleaner world. This may suggest to see whether emission abatements without sacrifice are possible.

John Broome (Oxford) and Duncan Foley (New School for Social Research, New York) suggested a way to do this. Emission abatement involves investments in non-carbon-based energy sources. In order to stimulate these investments specific policies are needed – tax credits, a carbon tax, decreased prices for certain green goods. Governments can experience difficulties and disincentives against these policies, as Trump’s behavior shows.

Broome and Foley suggest that governments can release ‘climate bonds‘, asking private investors their money to fund renewable and sustainable technologies. The debt so created will be passed onto future governments and future citizens. Present generations transfer to the future generations both harms – climate-change-related harms – and benefits – conventional capital (roads, new cities, infrastructures, technologies) and natural capital (any amount of natural resources not used). By shifting a part of their investments to fund public debt, present generations would decrease their bequest to future generations.

However, we can assume that economic growth and technological development will go on in the future. If so, future generations will be richer than us. Accordingly, they will not suffer much from a decreased bequest from their past generations. In exchange of this, they will enjoy a substantial benefit – a cleaner world. This deal will be advantageous for anybody involved: present generations save – by funding emission abatement at a cheaper price – and future generations will have a cleaner world.

In order to make this deal possible, Broome and Foley suggest, we should establish a Climate World Bank, managing interests for these climate bonds, either taking directly the revenues from the carbon tax or from selling emission permits, or taking from governments revenues. Interests rate could be differentiated according to different vulnerabilities to climate change adverse effects of the countries borrowing.

This World Climate Bank would be strikingly similar to the current World Bank. After the failure of an institutional approach to climate mitigation, a finance market mechanism may be the way. What economy broke, economy might fix.