# OFFSET MARKETS

Earlier this year, global carbon markets were valued at a record breaking $277 billion. The number contrasts strikingly with this summer's wave of devastating fires, many of which proliferated precisely in protected forests designed to offset carbon emissions from other industries. In a 2019 book, GARETH BRYANT traces the history of carbon offset markets, considering how their institutionalization has altered climate-related political contestation. From the text: "The policy predecessor to carbon markets was sulphur dioxide trading in the United States. From the 1970s, the Environmental Protection Authority began to introduce elements of emissions trading in its regulation of pollution. Growing support for the market-based approach vis-à-vis ‘command and control’ measures among sections of government, business and non-government environmental organisations resulted in amendments to the Clean Air Act in 1990 that established a nation-wide sulphur dioxide trading scheme. The scheme's key innovation was that, within the overall cap, emissions allowances allocated or auctioned to certain power plants could be traded to cover the pollution of other power plants. US negotiators extolled the cost-efficiency of tradeable permits in advancing their goal of ‘binding but flexible’commitments in the Kyoto Protocol. The US overcame opposition from the EU by making the inclusion of carbon trading instruments a condition for agreement on key European demands for binding emissions reduction targets. It also successfully overturned opposition from developing countries through the transformation of Brazil's clean development fund into a mechanism where emissions reductions from clean development projects in developing countries could be sold to developed countries and count towards their targets. The Clean Development Mechanism (CDM) was thus born." ### July 17th, 2021 ## Inextinguishable Fire # CLIMATE PLANNING Earlier this week, the EU published a series of proposals aimed at reducing its carbon emissions by 55 percent by 2030. The legislation has revived debates on the economic models best suited to facilitating investment and decarbonization. A Financial Times article by MAX KRAHÉ was circulated widely this week, in which he argued for the importance of central planning in the green energy transition. In an April report for the Royal Belgian Academy, Krahé examines the structural justifications for his position. From the text: "As of today, we lack an agreed-upon, reliable methodology for distinguishing between sustainable and non-sustainable investments. Unfortunately, this is not a problem of insufficient data or the imperfect implementation of a theoretically sound methodology. Instead, the problem lies with the basic methodology of the dominant approach that has been used to draw this distinction so far: a bottom-up approach that tries to rate the sustainability performance of individual companies by looking at firm-level performance indicators—such as emissions, the use of land, water, or energy, average and minimum wages, corporate governance structures, and so on—without taking into consideration the wider context into which these firms are embedded. As the report shows, there are deep, conceptual reasons that stand in the way of determining the contribution that individual investments make to sustainable development. In particular, where we cannot identify counterfactuals, the question of sustainability can only be asked of systems as a whole, and not of their individual components. While there is a combination of methods that allows downwards translation, from system-level sustainability to identifying individual sustainable investments, there is no reliable method to translate upwards, from individual investments to their impact on a system’s overall sustainability, and hence to the unsustainability of that individual investment. Concerning this link, the report’s central finding is that upwards translation is impossible in dynamic systems. The link between individual investments and system-level sustainable development is a one-way street." ### June 26th, 2021 ## Window of Chaos # WATER MARKETS Since the 2000 World Water Forum in The Hague, governance over water resources has gained salience in international development discourse. The allocation of rights (to technology and decisionmaking) and resources (both financial and natural) has shaped local economies in the face of compounding climate emergencies. A 2014 piece by KAREN BAKKER reviews the literature on water marketization, complicating existing accounts which focus exclusively on models of ownership. From the article's conclusion: "Market environmentalism is not synonymous with (or limited to) privatization. It includes commercialization, environmental valuation and pricing, the marketization of trading and exchange mechanisms, and the liberalization of governance. The trend is relatively recent and is by no means hegemonic. In many countries, it has only partially displaced a state hydraulic paradigm of water management—indeed, many aspects of the social and hydrological cycle are still owned, managed, and regulated by governments. Market environmentalism is difficult to implement in practice, with tensions arising from attempts to privatize, commercialize, value, market, and liberalize water governance—for example, between the desire for less government control and drivers for greater governmental control, spurred by fears over water security. Some of these tensions arise from contradictions that are difficult to resolve in practice, notably the contradiction between monetary and nonmonetary values of water and the tension between framing water as an economic good versus incorporating its noneconomic uses. These tensions, which have acted as a brake on market environmentalism, are inherent to water management and are unlikely to be effectively resolved. The question is how, through institutional innovation, governance reforms, and political mediation, they will be handled." ### June 18th, 2021 ## Investment and Decarbonization ## A conversation on investment strategies for the green transition In late March, the Biden administration announced the$2 trillion American Jobs Plan, with approximately half of the sum dedicated to fighting the climate crisis. While the legislation would mark sea change in federal action to avert climate catastrophe, many have argued that it falls dramatically short of the amount required to usher in a green transformation of our infrastructure and energy systems.

Responding to this large investment gap, a recent Phenomenal World essay by Anusar Farooqui and Tim Sahay proposes a plan for a public ratings agency for green finance, which would “be mandated to assess the economic viability and contribution towards decarbonization of project proposals” and “serve as a public signal for the state, investors, cities, and firms to back, fund, and undertake projects that are both viable and contribute significantly to decarbonization and resilience against climate change.”

## A proposal for a public ratings agency for green finance

The Biden administration has committed the United States to cutting its carbon emissions in half by 2030 and achieving net zero emissions by 2050. The International Renewable Energy Agency (IRENA) estimates that the global transition to a low-carbon future will require \$131 trillion in infrastructure investment by 2050. With the US share of global GDP and carbon emissions around 16 percent, a back-of-the-envelope calculation puts its gross financing needs at roughly \$21 trillion—or 100 percent of GDP over the next three decades. In other words: approximately 3.3 percent of GDP per annum in investment has to be financed to achieve Biden’s commitments. But the aggregate climate-related financing promised by the twin bills introduced by Biden is no more than \\$100 billion, or 0.5 percent of GDP per year over the next eight years. How is the rest going to be financed?

# GREEN CENTRAL BANKING

In the wake of recent financial convulsions, central banks have emerged yet again as the first responders to crisis. But to confront the crisis of anthropogenic climate change, there is growing acknowledgement that central banks should go further, beyond their limited remit of maintaining price stability.

Central banks should be more cognizant of their own role in creating credit-fueled growth; monetary policy already features distributing the benefits and burdens of decarbonization. Crucially, stepping up ambitions for active climate change mitigation would involve abandoning spurious notions of "market neutrality."

In a recent e-book, PATRICK BOLTON , MORGAN DESPRES, LUIZ AWAZU PEREIRA DA SILVA, FRÉDÉRIC SAMAMA, and ROMAIN SVARTZMAN argue that facilitating decarbonization is in fact consistent with concerns over financial and price stability:

"An additional ambitious and controversial proposal is to apply climate-related considerations to central banks’ collateral framework. The goal of this proposal is not that central banks should step out of their traditional role when implementing monetary policies, but rather to recognise that the current implementation of market neutrality, because of its implicit bias in favour of carbon-intensive industries [...] could end up affecting central banks’ very own mandates in the medium to long term. Honohan (2019) argues that central banks’ independence will be more threatened by staying away from greening their interventions than by carefully paying attention to their secondary mandates such as climate change. Thus, and subject to safeguarding the ability to implement monetary policy, a sustainable tilt in the collateral framework could actually contribute to reducing financial risk."

## GREEN INDUSTRY

The compound risks of climate catastrophe and Covid-19 have defined the year thus far. As the world continues to reel from the effects of the pandemic, and storms and wildfires dot the map, calls for marshaling a green recovery have proliferated.

The history of green investment thus far has been infamously more modest. In a comparison of the Japanese and American solar panel industries from 1973 – 2005, MAX JERNECK elucidates the rocky paths to financing low-carbon industry. From the paper:

"The United States was the birthplace of the solar cell, and American firms dominated the industry in the 1970s. Beginning in the early 1980s, the American photovoltaic (PV) industry lost ground to foreign, and particularly Japanese, competitors. By 2005, the American share of the global market had declined to under ten per cent.

In Japan, technologically innovative PV firms had ample financing and were sheltered from the turbulence of financial markets. In the United States, the financial system was unwilling to finance small entrepreneurial firms, causing the industry to become concentrated among large corporations. By identifying and evaluating 'difference makers,' it is possible to draw conclusions about which aspects of the low-carbon development process were amenable to human action, and therefore relevant to the task of devising a strategy for the future transition to a low-carbon economy. Knowing where to look requires a theory of both the mechanisms driving industrial change in general, and the particular institutional arrangements regulating them in the countries under study."

• In a related paper for Science, Jerneck takes a closer look at the financing impediments to the solar industry in the US. Link.
• In the New Republic, Kate Aronoff writes on the prospects of a National Investment Authority. Link. Read also Saule Omarova's Data For Progress proposal for a NIA. Link.
• "On what foundations might an alternative economy be built? Neither population nor GDP will be its fundamental metric, but rather land scarcity." Troy Vettese in 2018 on a "half-earth" approach to climate catastrophe. Link. See also: Robert Pollin in 2019 on degrowth and a Green New Deal. Link.

## CENTRAL BANKS AND CLIMATE

Common wisdom around central bank independence (CBI) is increasingly a matter of debate. Before the Covid-19 crisis, a growing number of scholars and commentators have proposed means by which central banks can address looming climate catastrophe—either by integrating new risks into their assessments, or by promoting more active resource allocation—and argued that central bank's attention to climate risk has focused too squarely on financial stability.

In a 2018 working paper, SIMON DIKAU and ULRICH VOLZ outline how, despite the "second-best" nature of this kind of intervention, the shift is already occurring:

"Allocating financial resources toward or away from certain sectors and companies implies favoring certain segments of the economy over others and appears to be incompatible with our modern understanding of independent central banks. Nonetheless, many central banks in emerging and developing economies have resorted to these policies as viable, second-best solutions to promote sustainable development and green investment. The notion of the neutrality of monetary policy has come under intense scrutiny more recently, not least in the context of discussions about the distributional consequences of the negative interest and quantitative easing policies adopted by major central banks. It is apparent that central banks in developing and emerging economies especially, and in Asia in particular, have been at the forefront of using a broad range of instruments to address environmental risk and encourage green investment."

Full paper available here.

• On VoxEU, Markus K. Brunnermeier and Jean-Pierre Landau on the applicability of central banking tools for the climate crisis: "The conventional wisdom on monetary policy is that it has no impact on long-term growth; its influence is mostly felt on a 1.5 to 2.5 years horizon. By contrast, climate change is all about the long term; effects and policies materialize and matter over several decades." Link.
• An IMF report by Pierpaolo Grippa, Jochen Schmittmann, and Felix Suntheim surveys the field: "Climate change will affect monetary policy by slowing productivity growth (for example, through damage to health and infrastructure) and heightening uncertainty and inflation volatility." Link.
• As governor of the Bank of England, Mark Carney gave an oft-cited 2015 speech, proposing a scheme of physical risks, liability risks, and transition risks. Link. And Jean Boivin argues for abandoning CBI in the face of Covid. Link.

## Shaping the base of a renewable economy

The transition to a post-carbon energy economy will require extraction. As the sun set on the Bernie Sanders campaign, and with it the prominence of the Green New Deal in the contest for the presidency, the Trump administration issued an executive order encouraging private US exploitation of mineral resources in space. Whatever the shape of the coming transition away from fossil fuels, the need to understand the social and distributional costs of a changing energy infrastructure has never been greater. In a new report, I survey the state of mining, near-future ploys for extra-terrestrial extraction, and the persistent externalities of extraction.

Recent years have seen growing attention to the material requirements of information technologies, and especially to the social and environmental harms of sourcing rare earths and cobalt. Researchers highlight, for example, the dependence of electric vehicles and wind power infrastructure on rare earths, or batteries on lithium. But these discussions have tended to omit emphasis on necessity of extraction, relying instead on a more familiar idiom of consumer and corporate responsibility. Both the Trump administration's vision of celestial expansion and some visions of a post-carbon future depend, stated or not, upon a continuing regime of mineral extraction and outsourced harm.

## STRANGE PUSH

### A retrospective look at cap & trade

Of the various issues mired in severe and ongoing party polarization, climate crisis is among the most puzzling. Despite longstanding discussions of bipartisan market-based policy proposals like carbon taxes and cap and trade, large-scale government and industry action remains elusive.

In a masterful 2013 book-length report, Harvard political scientist THEDA SKOCPOL offers an autopsy of the 2009-10 push for cap and trade legislation. The detail-rich account illuminates not just the legislation's failure, and its leaders in the U.S. Climate Action Partnership (USCAP), but the innumerable complexities of the broader Washington policymaking apparatus.

(h/t to climate economist Gernot Wagner, associate professor at NYU and founder of Harvard's Solar Geoengineering Lab, for bringing this piece back up in a recent newsletter and column.)

"If environmental politics in America was ever a matter of working out shared bipartisan solutions to expert-assessed problems, it is now far from that—but in what ways and why? And what is to be done? My report ponders these matters.

The corporations that participated in USCAP could double their bottom-line bets—by participating in the "strange-bedfellows" effort to hammer out draft climate legislation that was as favorable as possible to their industry or their firms. But heads of the leading environmental organizations in USCAP had to stick by whatever commitments they made in the internal coalitional process, or else it would fall apart.

The USCAP campaign was designed and conducted in an insider-grand-bargaining political style that, unbeknownst to its sponsors, was unlikely to succeed given fast-changing realities in U.S. partisan politics and governing institutions."