Financing transition in an adverse context: climate finance beyond carbon finance

Abstract

The Cancun conference decided to establish a Climate Green Fund (CGF) to help developing countries align their development policies with the long-term UNFCCC objectives. This paper clarifies the links between the two underlying motives: the first, technical in nature, is the necessity to redirect the infrastructure instruments in these countries (energy, transportation, building, material transformation industry) to avoid lock-in in carbon-intensive pathways in the likely absence of a significant world carbon price in the coming decade; the second, political in nature, is the interpretation of the CGF as a practical translation of the notion of the common but differentiated responsibility principle, since the funds are expected to come from Annex 1 countries. This paper shows why this latter perspective might generate some distrust given the orders of magnitude of funds to be levied in Annex 1 countries especially in the context of the financial crisis and major constraints on public budgets. It then explores the basic principles around which it is possible to minimize these risks by upgrading climate finance in the broader context of the evolution of the financial and monetary systems. After exploring how such links could help make climate policies that contribute to reducing some of the imbalances caused by economic globalization by reorienting world savings and reducing investment uncertainty, it sketches how this perspective might be palatable for the OECD, the major emerging economies and fossil fuel exporters.

Appendix: The banking canal of the monetary device

Tables 1, 2, 3 and 4 offer a numerical example of the balance sheet consequences for the Central Bank and a commercial bank of a 1000 loan to a low-carbon entrepreneur expected to realize 10 units of CO₂ emission reduction. The VCRA is set at 10, which values the expected emission reduction at 100.

Table 1 Balance sheets at the opening date of the low-carbon loan

Table 2 Balance sheets at mid-maturity of the low-carbon loan

Table 3 Balance sheets at the end of the payback period of the low-carbon loan before the asset swap

Table 4 Balance sheets after the carbon asset swap

Table 2 indicates that the loan to the entrepreneur is divided into two credit lines. On the first line, the commercial bank borrows 900 deposits at rate r ^d and lends 900 at rate r ^l. The second line refers to the 100 liquidities equivalent to the value of expected emission reduction lent by the Central Bank to the commercial bank that can be paid back with certified emission reduction. Prudential rule about minimum capital requirement only applies to the first credit line (900r ^l), as a zero coefficient risk is applied to the line coming from the carbon-based liquidities. Then net worth increase in the bank should only be +0.08*900r ^l instead of 0.08*1000r ^l as in the BAU case, that is the funding of a conventional project.

The Central Bank owns a new 100 claim on the commercial bank. Thanks to the 1000 loan, the entrepreneur launches a project with expected returns R ^LC which makes the total expected revenues amounting to 1000R ^LC. Two lines appear in the liability side of the entrepreneur’s balance sheet corresponding to two types of debt: 900 will be paid back with the monetary revenues of the projects and at the interest rate r ^l, and 100 paid back with effective emission reduction.¹¹