Wednesday 3 November 2021

Gains from trade

This week's column in the Stuff papers: how government agencies never much like looking to the root causes of problems, when those problems are caused by government. 

Government sets a pile of restrictions that thwart entry by new grocers, then holds a two-week enquiry into whether they should break up the existing supermarkets to address the deficiencies in competition.

Government doesn't let the ETS generate credits from offshore mitigation, then has the Reserve Bank get all worried about whether there are market failures in climate finance. Let the ETS be more comprehensive and there'd be piles of potential financing. 


There are many promising projects for reducing net carbon emissions in poor countries. Gross emissions could be reduced through investment in cleaner technology. Carbon sequestration through protection or renewal of forests can be encouraged.

But in countries without carbon prices, there can be little value in making those investments.

Countries able to afford costly investments in cleaner technology as carbon prices rise will make those investments. The most promising options will be the first ones taken up, and carbon prices will rise.

Meanwhile, opportunities to reduce emissions at low net cost in poorer countries will fail to be taken up for want of the funds to do so.

Governments have seen this as a problem of market failure in need of their enlightened intervention. The Reserve Bank of New Zealand joined the Network for Greening the Financial System – a coalition of central banks that want to “mobilise mainstream finance to support the transition toward a sustainable economy”.

Despite reserve banks worldwide having printed enormous volumes of cash and despite global credit conditions being rather liquid, financing of carbon mitigation projects, particularly in poorer countries, is seen as a problem. And so they support Green Bond initiatives encouraging investors to seek social returns on climate investment projects rather than strictly economic returns.

And organisations like Climate Action Tracker rank countries’ commitments to climate finance on a scale ranging from insufficient, like Norway, to “highly insufficient”, like New Zealand and Switzerland, all the way to “critically insufficient”, like Japan, Australia, the US and Russia.

When the world is awash in investment capital searching for positive returns, the problem in carbon financing is unlikely to be a lack of capital. The problem will rather be a lack of returns.

And so we turn back to a potential root of the problem – and a more promising solution.

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