Sometimes great improvements come out of great tragedies, like health care, the universal vote and state pensions after the two world wars. Covid-19 could have a similar effect on climate action. The European Commission is campaigning for its Green Deal to be at the heart of the economic recovery package and 13 EU environment ministers have taken the same line. The next step is to win over treasuries and heads of state. Fear of high debt levels could convince them.
Many countries across the EU are already deeply in the red. Public debt is at least 100% of GDP in some cases, according to The Economist, and governments will need to borrow much more to finance stimulus packages to get back on their feet after the devastating impacts of the coronavirus.
Governments’ main insurance against default is the European Central Bank, which is currently creating over €100 billion a month — more than it ever did in response to the subprime and eurozone crises. The ECB is using these funds to buy up new government and corporate debt, reassuring investors (public and private banks, pension funds, insurance companies and others) that they will get their money back.
The goal is to keep interest rates affordable and borrowing possible. But how far can the ECB go and how sustainable is the debt? Over the past five years, the Bank has already bought up more than €2.6 trillion of loans, all of which must be repaid.
It follows that the safer the new debt, the better. This is why calls to green the Covid-19 recovery measures have such a good chance of going mainstream. Back in 2016, the ECB spent over 60% of its corporate purchase programme (buying company debt) on carbon-intensive assets. But that sort of policy is deeply irresponsible. It means saddling future generations of taxpayers, who must finance bailouts if debts go bad, with a crushing burden of high-risk loans.
By contrast, climate action measures like building renovation, renewables and green transport are safe investments. Adding 10% to a home mortgage for insulation and other retrofits reduces the risk of default: the home is worth more, energy bills are lower, people are healthier and it is good for jobs. Bundle a thousand of these mortgages together and you have a green bond for the ECB to buy.
So far so good. But there is one key challenge to overcome: figuring out how to rapidly increase the number of green investment opportunities. There must be projects for governments and businesses to fund if there is to be debt for the ECB and central banks to buy. Last year €100 billion worth of green bonds were issued in Europe. That is a spectacular increase compared to just a few years ago, but not yet enough to make a big impression on the ECB’s ‘debtometer’.
Make no mistake, this is a race. In the short term, EU leaders are prioritising all-important health, wage and cash supply emergencies. But at the same time, they are discussing and developing the economic recovery measures which must follow. This is where climate action will flounder or triumph. So much money is being created or borrowed that there are bound to be spending cuts later to repay the debt, as happened after the 2008 crisis. Put simply, green investment opportunities must be identified and prioritised now, to avoid being locked out later.
The views expressed in this opinion are those of the author and do not necessarily reflect the position of FORESIGHT Climate & Energy
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