A comment by Dr. Matthias Kroll, Chief Economist in the Future Finance department at the World Future Council, and Anna Leidreiter, Senior Programme Manager – Climate, Energy and Cities.

With the landmark Paris Agreement adopted in December 2015, governments committed to endeavour to keep global warming below 1.5 °C and set a deadline for net zero greenhouse gas emissions in the second half of this century. This historic agreement signals what lies ahead: the unprecedented and complete decarbonisation of the energy systems, transforming it to 100% renewable energy within the next few decades.
And it is indeed the most climate vulnerable countries that are pioneering this global transformation. In the Marrakech Vision, which was adopted at the 2016 Forum meeting at COP22, the 48 members of the Climate Vulnerable Forum (CVF) paved the way to unprecedented climate action, striving to meet 100% domestic renewable energy production as rapidly as possible. To implement these actions, the developing countries advocate for an “international cooperative system” and for “attaining a significant increase in climate investment in […] public and private climate finance from wide ranging sources, including international, regional and domestic mobilization.” However, the question remains:

How can we unlock the needed money at scale and speed?

For developing nations, such as the Climate Vulnerable Forum members, that do not have yet the necessary domestic industry, implementing 100% RE means in a first phase importing the technology from industrialised countries. Hence there is a high demand for the related foreign currencies. For this, according to common trade practice, a developing country has to raise its exports to the applicable industrialised countries or running into debt to gain the needed currencies. However, this is not only time consuming but also implies a future debt burden in a nondomestic currency and the related current account problems. Therefore it is not an option for implementing the Marrakesh Vision, in particular the transformation to 100% RE.

Using private capital is only possible if there is already sufficient financial return to cover interest and reimbursement costs of the provided credits. But the bulk of the needed RE-Investments in most of the 48 developing countries have – under the current conditions – too little commercial profitability for dealing with private credits.

Thus, one way to accelerate RE-Investments would be to improve economic conditions by using grants from public money from the industrialised countries (e.g. for debt guarantees or feed-in tariffs). However, to reach the goal of the Paris agreement by matching public grants with private capital, yearly sums considerable larger than 100bn from national budgets are needed, which still seems very questionable. Especially since previous experiences with getting financial commitments from taxes or semi-public funds – such as from emissions trading – also tell us that the sums provided regularly fall short of what has been promised. Thus, the crucial question is: How can CVF members gain the necessary large scope of financial grants from industrialised countries for the rapid implementation of a domestic 100% RE infrastructure?

Establishing a new grant system by issuing standardised ‘Green Climate Bonds’ to the G20 central banks

An alternative way could be the involvement of the central banks of the G20 or other industrialized countries. Central banks can never become insolvent in their own currency due to their monopoly of issuing the legal tender – even if they purchase non-performing assets. The economic potential of central banks was witnessed during the bank bailout, leaving no apparent reason why they should not contribute to saving the climate with a fraction of the funds previously used. The proposal is therefore that central banks of G20 countries would continue doing what most of them have done to combat the effects of the financial crisis: Buying bonds to create new liquidity. So, instead of talking about “QE for the banks” we should focus on “QE for the climate”.

Creating a win-win situation

To finance the transformation to 100% Renewable Energy in the 48 CVF countries, G20’s central banks would buy standardised “Green Climate Bonds” issued by MDBs, the GCF or any other appointed financial institution engaged in climate finance, and finance concrete RE investment projects in the concerned developing countries, rather than investing in existing financial assets.

The standardised Green Climate Bonds should have a perpetual duration and would ideally only bear small, if any, interest rates. Due to their very long term, Green Climate Bonds would become permanent assets of the central banks and thus form the foundation of regular money creation. This would ensure that the CVF countries are at the receiving end of new and virtually non-repayable money, with which they can increase the profitability of many existing climate protection investments. When G20’s central banks buy new Green Climate Bonds, and record this in their balance sheets, they also gain a new monetary policy tool. The advantage of this new tool is that it leads directly to the purchase of new goods and services in their own countries. The real economy is thus stimulated without a need for the usual detour of credit creation by private banks. This means that no new debtors and creditors need to be found. The new money is created, debt-free. If CVF countries purchase new RE equipment in industrialized countries, the new money will be channel back into the system of the industrialised nation’s banks, and their reserves at the central bank would rise.[1]

From vision to action: how to realise this innovation?

To benefit from the new grant system from the G20 states, the CVF states have to develop a national roadmap which describes how to reach a domestic 100% RE production and the related infrastructure (e.g. grids and energy storage) in the quickest way. This roadmap has to indicate how many RE investments are already profitable, how many RE investments could be initiated if there is a credit guarantee from G20 states and how many RE investment is needed which requires an additional grant to gain profitability. By defining the profitability, it has to be taken into account that the price for the RE electricity is in line with the SDG goal of an affordable energy access for all. A key principle in designing these roadmaps should be ‘money only against performance’ (e.g. generating RE electricity and feed it into the grid).

The completed roadmap has to indicate the needed amount of grants and the needed currencies for importing the RE equipment from the industrialised countries (in the long term, production of RE equipment should also take place in the CVF countries). Then the involved MDBs, GCF or other appointed financial institutions issue standardised ‘Green Climate Bonds’ with perpetual maturity and sells the bonds to the related central banks which are the producer of the currency. The central banks pay for the Bonds with new money in their own currency and the MDBs or other financial institutions could finance the grants for the 100% RE transition in a perpetual way.

The amount of the new Green Climate Bonds which are purchased by the central banks has to be in line with the normal long term increase of the money supply. This ensures that the central banks could continue with operating their usual monetary policy in an independent way. To prevent any currency imbalances the central banks should among themselves accept the new standardised ‘Green Climate Bonds’ as a new kind of exchange reserves.

The benefit for the G20 states of such a new grant system is that it financed an additional demand from the CVF states (which would otherwise not happen), which leads to more domestic employment, higher revenues and increasing tax receipts. The G20 states could now transfer a huge amount of financial means to the CVF states to improve the local energy infrastructure, stimulate the domestic economy, stabilise the overall political situation and prevent global climate change without burden their national budget.

The benefit for the CVF states is that they can build up a renewable energy based economy without the needs to get foreign currency in advance by increasing their exports and without falling in debt at foreign creditors. Reliable energy supply would boost socio-economic development, provide access to those who are currently excluded and therefore can lift people out of poverty . With the new generated (domestic) renewable energy they could also substitute the import of coal, oil and natural gas. The saved foreign exchange can help financing sustainable development. Further, building the domestic renewable energy infrastructure, jobs particularly in installations and maintenance as well as regional demand for RE industry will be created.

The time is now

Therefore, CVF members are recommended to submit a proposal to the G20 which demonstrates how the G20 members could channel financial means for the 100% RE transition to the CVF states without a burden of their national budget.
If the RE investments reach the profit zone (due to credit guarantees or financial grants), it is also possible to engage private capital for co-financing. This could increase the amount of financial means in a significant scale.
This proposal is feasible also if some G20 states join. If central banks of only a few G20 countries (and other advanced economies) commit themselves to purchase the new standardised Green Climate Bonds, the grand system could start on a smaller level related to size of the participated countries.

[1] Should excess reserves result, the banks could reduce these reserves by lowering their refinancing at the central bank. The money supply would thus fall again. Banks would reduce their reserves at the central bank, which they do not need to refinance credit creation, and thereby reduce the money supply, because of the endogeneity of the money supply. The Bank of England has recently identified this as the correct description of monetary policy practice. cf. Bank of England: “Money creation in the modern Economy”, in: Quarterly Bulletin, Vol. 54, No. 1, 2014, Q1. The effect of the endogeneity of the money supply is especially important when central banks buy more Green Climate Bonds (for a short period of time as start up financing) than needed for actual money creation