Decarbonize the global economy

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By MARIANA MAZZUCATO*

Only the public sector can mobilize and coordinate investments on the scale needed to decarbonize the global economy.

In recent weeks, several members of the Glasgow Financial Alliance for Zero Emissions (GFANZ) – a group of 450 financial institutions – have pulled out over concerns about the cost of meeting their climate commitments. By dropping out, they gave the lie to the notion that private financial institutions can lead the transition to a carbon-neutral economy. What the transition really needs is more ambitious states that move beyond regulating markets to becoming market makers.

The market-led approach is rooted in the belief that private financial institutions allocate capital more effectively than any other institution. The implication is that states should refrain from “picking winners” or “distorting” market competition and limit themselves to “de-risking” green investment opportunities to make them more attractive to mainstream private investors.

But modern economic history tells a different story. In many places and on many occasions, it is public actors who have taken the lead in shaping and creating markets that henceforth bring benefits both to the private sector and to society at large. Many of the great technological advances that we now take for granted happened only because public entities made investments that the private sector considered too risky.

The real story is therefore quite different from the prevailing myth. We owe many economic successes not to public actors who got out of the way, but to an enterprising state that took the lead. Furthermore, the market-leading approach is at odds with the goal of producing a fair global green transition, in which costs and risks are shared fairly within and across countries. “Reducing risks” presupposes a strategy that socializes costs and privatizes profits.

Private finance still has a crucial role to play, of course. But only the public sector can mobilize and coordinate investments on the scale needed to decarbonize the global economy. The question, then, is what this approach should include.

First, states must assume their roles as “investors of first resort”, rather than waiting to intervene only as “lenders of last resort”. Around the world, public financial institutions employ many billions of dollars each year and, because of their distinctive design and governance structures, can deliver the kind of long-term, patient, and mission-oriented finance that the private sector often needs. sometimes not willing to provide. Evidence shows that direct lending from public banks with good governance can play a powerful market-shaping role, informing perceptions of future investment opportunities.

Second, we must rethink the relationship between the public and private sectors, especially when it comes to sharing risks and rewards. When public entities take risks to achieve social goals, the private sector should not take ownership of the financial results.

For example, if a government is funding large renewable energy projects and other green investments, it may have an equity stake in them. Returns can also be socialized by assigning a proportion of intellectual property rights to the state, allowing profits to be reinvested in new green projects. Importantly, companies that benefit from public finance must be subject to conditions that align their business activities with green industrial policy objectives, fair labor practices and other priorities.

Third, to direct private investment towards green activities and to reduce investment in harmful activities, states must strengthen and update the rules that govern financial markets. Such a regime could include central banks introducing green credit allocation policies and rules and standards as regulatory enforcement to prevent greenwashing and regulatory arbitrage.

Fourth, policymakers must recognize that debt financing – provided by both the public and private sectors – is not necessarily a substitute for direct fiscal spending. The logic of repayable financial instruments does not easily reconcile with the public good characteristics of some climate-related investments. Investments in climate justice and reforestation will bring far-reaching returns, but not necessarily the kind that can be used to repay a loan. Navigating these issues and delivering investments at the required scale will require strategic coordination across all areas of social, environmental, fiscal, monetary and industrial policymaking.

Finally, more must be done to provide sufficient fiscal space for countries in the Global South to pursue their own domestic decarbonization and adaptation agendas. Many countries, including those most exposed to accelerating climate breakdown, are facing significant outstanding debt. It is now imperative that debtor countries in the Global North – which are responsible for the bulk of emissions into the atmosphere – help to reduce these burdens through debt cancellations, debt restructuring, loss and damage compensation or by replacing climate loans with climate concessions. .

To limit catastrophic global warming, funding for climate mitigation and adaptation must be increased dramatically. But the quality of funding is also important. Instead of holding out hope that private financial institutions will translate their over-hyped promises of trillions of dollars in zero emissions into credible and responsible action, we must demand that states assume their role. This means mobilizing and directing finance towards clear and ambitious climate goals and shaping financial markets to align with these goals. Closing the funding gap requires a radical overhaul of the financial architecture and a substantial shift in financial flows. Neither of those things will happen without political interventions.

To specify the changes needed, I will be moderating an all-female panel at COP27 with the Prime Minister of Barbados. Mia mottley, the director general of the WTO Ngozi Okonjo-Iweala, Egyptian Minister of Planning and Economic Development Hala El Said and Scottish Prime Minister Nicola Sturgeon. The challenges are urgent. If states do not take the lead on climate finance, the green transition will remain out of reach.

*Mariana Mazzucato is professor of economics at the University of Sussex (USA). She is the author, among other books, of the entrepreneurial state (Company of Letters).

Translation: Mauricio Ayer to the website Other words.

Originally published on the website Project syndicate

 

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