But what if there was an overlooked digital currency that could help solve the climate crisis, not just make it worse? Believe it or not, there are such tools. , Bitcoin, Tether, and none of their ilk boosters.
Advances in renewable power generation and battery storage over the past decade mean that technology is no longer the main barrier to decarbonizing the world. The International Energy Agency announced this week that it will add more renewable energy over the next five years than it has done over the past two decades. That’s a 30% increase from our forecast 12 months ago.
However, finances remain a significant issue. Data released at last month’s United Nations climate conference showed that while the world is currently investing more than $1 trillion a year in the energy transition, renewable energy alone will not be enough to prevent catastrophic warming. Up to $4 trillion will be needed annually. Total annual spending on the low-carbon economy needs to reach $6 trillion.
The challenge is most severe in developing countries, which currently account for a significant share of global emissions, yet the proportion of investment required to prevent it is underestimated.
Avinash Persaud, a Barbados economist and former State Street currency analyst who advises the Caribbean, said: We need to do that, but we can’t do that without funding.” Countries on financial approaches to tackle climate change. “The cost of capital is so high in emerging markets that we need to put in alternative capital.”
Wouldn’t it be great if there was a magic pot of money to solve this problem? Fortunately, it exists in the form of the world’s oldest digital currency.
Forty years before the 2008 financial crisis, pseudonymous programmer Satoshi Nakamoto began thinking about Bitcoin as an alternative to fiat currency. The impending collapse of the Bretton Woods-era fixed exchange rate regime prompted the International Monetary Fund to create its own digital money. The Special Drawing Right (1) is a form of digital asset issued to IMF members that can be exchanged into any currency and pays 0.05% interest. There are currently about $935.7 billion in outstanding balances, all held on the balance sheets of central banks and multilateral lenders.
SDRs have been largely ignored since their inception, but over the last few decades their use has increased to support a form of global quantitative easing (QE). In 2009, the IMF issued its $250 billion SDR, easing global liquidity following the previous year’s credit crunch. Last year, another $650 billion was allocated to help the economy cope with the financial strain of the Covid-19 pandemic.
Persaud’s proposal, dubbed the Bridgetown Initiative, aims to issue another $500 billion as a foundation for funds that can be invested in climate projects that can achieve the greatest carbon reduction impact for SDR spending anywhere in the world. increase. Such a mechanism would allow emerging markets to borrow at the same price as wealthy countries, avoiding the extremely high double-digit capital costs that currently make most such investments unbankable.
“We need to take advantage of the very low cost of capital of the international reserve currency,” he says. “There is no renewable energy project in the world that is profitable at 20% cost of capital.”
What don’t you like about this? For one thing, QE rarely has a worse reputation than it does now. Central banks are raising interest rates and shrinking balance sheets in the most inflationary environment of a generation. In essence, it’s a tough environment to sell a global debt monetization program.
At the same time, the $500 billion involved is very modest compared to the scale of global financial intervention. About $11 trillion has been spent on QE programs due to Covid-19 alone. The US Federal Reserve’s balance sheet is nearly 10 times larger than he was at its peak the eve of the 2008 financial crisis. Next to the global money supply of well over $100 trillion, it is hard to argue that increasing equities by around 0.5% through the issuance of new SDRs would move the needle significantly. Last year’s $650 billion SDR allocation made no measurable difference to an inflationary environment driven by supply chain damage, high energy prices and trillions of dollars of overhangs in pandemic-era savings.
The bigger problem is that such programs run the risk of appearing like free lunches. I am afraid that SDRs are issued according to the size of a country’s economy and are distributed indiscriminately to all countries, including those in default on debt payments and countries under sanctions. That aspect often plagues wealthy governments in the West, who eventually have to approve such plans.
Attempts to use them to direct large sums of money to developing markets come with conditions from wealthy countries contributing to the SDR allocation. However, with too many conditions attached, there is a risk that SDR financing will look little different from other underutilized forms of multilateral finance, such as loans from the World Bank and IMF. .
However, something needs to be done. The pandemic has demonstrated the full capacity of world governments to mobilize extraordinary fiscal measures to deal with the crisis. We will need all the tools to tackle climate change in the next decade.
Details from Bloomberg Opinion:
• How to fund climate projects in a currency crisis?: David Fickling
• Using markets to fight climate change and hurricanes: Tyler Cowen
• Climate change cannot be stopped with 593 pages of green tape: Huw van Stenis
(1) Technically they are “reserves” rather than currencies, but the distinction seems to be meaningful only to financial economists.
This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.
David Fickling is a Bloomberg Opinion columnist for energy and commodities. Prior to that, he worked for Bloomberg, The News, The Wall, The Street Journal, and Financial, The Times.
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