Funding low-carbon investments in the absence of a carbon tax

Abstract

Introducing a carbon tax is difficult, partly because it suggests that current generations have to make sacrifices for the benefit of future generations. However, the climate change externality could be corrected without such a sacrifice. It is possible to set a carbon value, and use it to create ‘carbon certificates’ that can be accepted as part of commercial banks’ legal reserves. These certificates can be distributed to low-carbon projects, and be exchanged by investors against concessional loans, reducing capital costs for low-carbon projects. As the issuance of carbon certificates would increase the quantity of money, it will either lead to accelerated inflation or induce the Central Bank to raise interest rates. Low-carbon projects will thus have access to cheaper loans at the expense of either ‘regular’ investors (in case of higher interest rates) or of lenders and depositors (in case of accelerated inflation). Within this scheme, mitigation expenditures are compensated by a reduction in regular investments, so that immediate consumption is maintained. It uses future generation wealth to pay for a hedge against climate change. This framework is not as efficient as a carbon tax but is politically easier to implement and represents an interesting step in the trajectory towards a low-carbon economy.

La mise en place d'une taxe carbone est difficile, en partie parce qu'elle suggère que les générations actuelles doivent faire des sacrifices au profit des générations futures. Il est cependant possible de corriger l'externalité du changement climatique sans faire de tels sacrifices, en établissant une valeur du carbone et en l'appliquant à des « certificats carbones » qui seraient acceptés comme réserves légales des banques commerciales. Ces certificats seraient distribués aux projets bas-carbone et échangés par les investisseurs contre des prêts concessionnels auprès de banques commerciales, réduisant ainsi le coût des projets. Puisque la distribution des certificats carbone augmenterait la quantité de monnaie en circulation, cela provoquerait une hausse de l'inflation ou forcerait la Banque Centrale à augmenter les taux d'intérêt. Les projets bas-carbone auraient ainsi accès à des prêts moins chers, au détriment des autres investisseurs (dans le cas d'une augmentation des taux d'intérêt) ou des épargnants (dans le cas d'une hausse de l'inflation). Dans ce cadre, les coûts de l'atténuation sont compensés par une diminution des investissements ordinaires, de façon à ce que la consommation soit maintenue. La richesse future est ainsi utilisée pour s'assurer contre le changement climatique. Ce mécanisme n'est pas aussi efficace qu'une taxe carbone mais est plus acceptable politiquement et représente un premier pas intéressant vers une économie bas-carbone.

Keywords:

• abatement strategies
• carbon finance
• climate change
• intergenerational equity
• investment
• policy frameworks
• public policy

Keywords:

• Mots clés: Stratégies d'abattement
• finance carbone
• changement climatique
• équité intergénérationnelle
• investissement
• cadres de politiques
• politique publique

Acknowledgements

The authors wish to thank Céline Guivarch and three anonymous reviewers for insightful comments on a previous version of this paper. All remaining errors are the authors'. The views expressed in this article are the sole responsibility of the author. They do not necessarily reflect the views of the World Bank, its executive directors, nor the countries they represent.

Notes

This target might become more stringent because the EU ‘Roadmap for moving to a low-carbon economy in 2050’ has moved to an objective of at least 25% reduction in GHG emissions by 2020.

The proportional increase in investment needs differs depending on the sector under consideration; for example, it is likely to be relatively larger in the energy sector.

By introducing a price for carbon, the profitability of ‘regular’ capital falls, because it now has to pay for the carbon emissions. Low-carbon capital becomes more profitable and investment funds can be obtained from the market more easily.

In fact, correcting one externality always increases welfare only if there is just one externality. In the presence of multiple externalities, correcting one of them can reduce welfare (Lipsey and Lancaster, 1956).

A carbon market with full auctioning of allowances, and covering all economic sectors, is also an unrealistic option in the short term.

This solution is Pareto-improving only if intragenerational distributional effects can be compensated through ad hoc measures or pre-existing safety nets.

Even though production Y is affected by ΔY, consumption C is maintained by reducing investment I by ΔY.

The welfare derived from consumption would be preserved, even though the structure of consumption would be modified by changes in the relative prices.

The increase in low-carbon investments (and their extra costs relative to regular projects) would be compensated by a decrease in regular investments.

Note that this article does not touch on the choice of mitigation targets, but deals only with ways of reaching a predetermined target. These two aspects are related, for example through the discount rate, which influences the weight of future climate change impacts on current decisions.

Application at the international level combined with a reform of the international monetary system is discussed in Hourcade et al. (2011).

However, accelerated inflation will have a negative effect on the exchange rate. This effect can in turn decrease the attractiveness for investors, with consequences for employment and growth, as well as carbon leakage. These international aspects require further research to assess their significance.

Note that if inflation increase is a surprise, the Central Banks would react afterwards but increase interest rates anyway, in order to lower inflation to its target.