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Is Climate Finance the Next Bubble?

By Arvind Subramanian / Providence

Over the past few years, especially after the recent UN Climate Change Conference (COP26) in Glasgow, private investors have seen opportunities for midwives in developing countries to make a rapid transition to zero carbon dioxide emissions. rice field. After all, if BlackRock CEO Larry Fink and climate activist Greta Tambomberg can find a common cause, William Blake’s fascinating “when people meet mountains, great things happen”. I can see the outlook.
Headache optimism is reflected in the numbers. Asset managers believe that tens of trillions of dollars can be used to finance environmental, social and governance (ESG), primarily in the form of green finance. Former Bank of England Governor Mark Carney claims to have mobilized $ 130 trillion to help raise funds for the Net Zero transition. The $ 100 billion annual climate funding that developed countries have promised to provide to developing countries at COP15 in 2009 is an unfulfilled pledge and is beginning to look like a major change in comparison.
Developing countries’ response to the new promotion of net-zero emissions has, of course, focused on the hypocrisy of fossil fuels in developed countries. As pointed out by Vijaya Ramakhandran of the Breakthrough Institute and Todd Moss of the Energy for Growth Hub, developed countries are calling on developing countries to phase out coal and natural gas, but continue to rely specifically on the latter energy sources. .. The failure of the rich world to urge the necessary funds only exacerbates hypocrisy.
But the fears of developing countries are irrelevant. Perhaps they need to worry that climate funding is not too low, especially from the private sector. It’s not difficult to understand why.
Implicit bargains – raising money in exchange for fossil fuel reductions – underlie the current intellectual consensus on climate change. The rich provide funding while the poor move to renewable energy. But ten years ago, the responsibility was to mobilize money to the governments of wealthy countries, which is now expected to be done by the private sector.
This negotiation is problematic for two reasons: implicit political contempt and looming economic risks.
“We, the rich, have a messy politics, but the poor do not.” For example, when French protesters opposed fuel tax hikes in 2018 and 2019, the debate was climate change. Focused on the difficulty of measures and the need to accept those tax rollbacks as an understandable result of democratic politics. But such latitudes end where the Global North and Global South begins. There, finance is somehow a magical bullet that overcomes social and political obstacles to climate change.
The recent withdrawal of the Indian government on planned reforms of the agricultural sector, following a successful 15-month protest by farmers, shows how this view is going in the wrong direction. One of the concessions that farmers made from the government was to prevent any efforts to reduce the large power subsidies they received. Subsidies are catastrophically harmful in terms of CO2 emissions, soil quality, water availability, and air pollution. However, reducing it can be very difficult, with or without external funding.
More important is the economic risk of bargains. Climate change gives investors the opportunity to bring global social benefits without sacrificing profits. And ESG-related lending, which connects conscience and capital, has become a major financial boom.
However, increasing evidence suggests that this activity indicates all medical conditions associated with financial mania and the bubble. Tariq Fancy, a former senior investment manager at BlackRock, details them. Opportunities for green projects in developing countries are touted. Suspicious ESG standards and ratings obscure how to measure the ESG impact of financing and cast doubt on borrower incentives given the relatively light and backloaded nature of penalties for violations. Because funding is substitutable, some companies may only obtain ESG funding to divert other sources of funding to non-ESG activities.
If trillions of dollars in climate finance are sent to emerging markets, the flow can reach 5-10% of the GDP of these economies. This is similar to the surge in funding that preceded the 1997 Asian financial crisis and the 2013 “tapered tram”. Unregulated private capital flows of this magnitude lead to overheating, volatility, ill-advised lending, and overvalued exchange rates. Ultimately, when mania sees what it is, the costly consequences follow: the flow of capital is reversed and both production and the financial sector collapse. We’ve seen this movie country by country before and know how it ends: terrible.
As I argued with Harvard University’s Dani Rodrik, Turkey is just the latest example of financial globalization failing. Long-term private capital inflows, as always, spoil rather than control unsustainable macroeconomic policies until the inflow suddenly outflows.
Of course, as interest rates begin to rise in developed countries, capital will become more expensive for poor countries. But as long as there is still sufficient liquidity in the system, the risks associated with large-scale ESG and climate financing are real. The cynical view is that private climate finance can hurt poor economies and have little positive effect on the climate, but it allows the financial sector to cover its somewhat damaged reputation with patina. There is a possibility of doing it.
The conventional wisdom is that the next financial crisis will come from the bursting of the crypto bubble. However, climate finance can pose more serious risks. Financial markets are, of course, due to the perception that cryptocurrencies and the like are inherently risky assets (if they can be called assets), the types of investors they attract, and the whims of Ponzi on them. However, I am wary of cryptocurrencies. In contrast, halos, where ESG investments appear to be more serious and less risky and social benefits are perceived, can easily plunge regulators into generosity and carelessness.
As Mark Twain wisely warned, “Killing you is not something you don’t know. You know it isn’t.” Private climate finance will be the next bubble economy. There is a possibility and the world needs to awaken to danger.
— Project Syndicate

* Arvind Subramanian, Senior Fellow at Brown University, is a prominent non-resident Fellow at the Center for Global Development.

http://www.gulf-times.com/story/707443/Is-climate-finance-the-next-bubble Is Climate Finance the Next Bubble?

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