[LINK] Electricity prices

[stephen at melbpc.org.au]

Mike sensibly writes

> .. it is with some faith in the authorities on economics that I argue 

Good on you Mike. However, I say we need more global-fire-in-the-belly.

In my opinion you make reasonable points. But we need more imagination. 

Allow one to present another energy perspective especially with respect
to global economics and the environment. It is obvious that yes, indeed
energy costs have risen dramatically, and certainly will in future, and
that Au politicians believe this is the way for environmental action or
non-action. This is certainly one simplistic answer. If it's bad tax it.

Or surely don't do anything to perhaps reduce dramatically rising costs.

Tobacco causes cancer? Simple. Tax it out of contention. Energy use may
cause global warming? Tax it to reduce usage. Surely we do need answers 
but to me the increase-tax answer is simply lazy and basically pathetic.

How about this as another way forward for example .. (eg, John Mathews)

"No one argues that it was capitalism that created the global warming 
problem. 

But hardly anyone takes the next step to argue that it must therefore be 
capitalism that will solve the problem. How will it solve it? The answer 
is -- by financing the transition to a clean energy economy.

The Kyoto Protocol process framed the issue as a public problem that 
called for government solution and public financing, that is, tax-based 
environmental financing. (Sound familiar?) 

The whole process fell apart at the Copenhagen conference in December 
2009. Even the limp gesture of a Green Climate Fund amounting to $100 
billion (a sum which falls far short of the investments in clean 
technology required) has not been honoured.

Yet the investments in clean energy needed to really address climate 
change – the renewal of the entire energy system over the course of the 
next three to four decades – will dwarf these sums. 

So where are the funds going to come from?

The answer is that they will have to come from the bond markets – the 
true engines of capitalism. 

The scale of these markets is awesome. The Bank for International 
Settlements states that the total size of the global debt securities 
market (domestic and international securities) was about $100 trillion as 
of June 2011. 

Almost all of those funds are invested ultimately in projects that uphold 
the fossil fuel economy – drilling new oil wells, building coal-fired 
power stations, pipelines and all the rest of it.

Yet the institutional investors (pension and superannuation funds, 
insurance funds, sovereign wealth funds) which are the dominant players 
in these markets, are deeply unhappy about making such carbon-exposed 
investments with all their uncertainties – such as possible exposure to 
rising carbon taxes, or future punitive actions.

But the funds are not flowing to alternative eco-investments – as yet. 

In fact, compared to the level needed, the scale of financing of green 
energy so far is puny. Bloomberg New Energy Finance estimates that there 
are $243 billion outstanding fixed-interest securities that meet their 
definition of green finance, up from $186 billion in 2009. It sounds 
impressive until you realize that investments in a clean energy economy 
will call for trillions.

There is a group of financial markets activists based in London that are 
trying to do something about this.

They are called the Climate Bonds Initiative↑  (Disclosure: I am a member 
of this group.) 

 http://climatebonds.net

So far, the Initiative has issued a standard to be used to certify bonds 
issued as ‘climate bonds’ with the emphasis on certifying that funds 
really are directed at low-carbon projects.

Think for a moment what a difference an active ‘climate bonds’ market 
would make. 

Governments would no longer be able to spout green rhetoric that they 
would reach, say, a 10% reduction in emissions by some target date. With 
climate bonds, they would be held to account, and would be forced to 
invest the sums raised in projects that would really reduce emissions. If 
they failed to do so, the bonds would lose value, and the government 
would face a ‘Greek’ like crisis.

Some caveats. You might think that the whole international finance system 
is so dodgy that climate change action should have nothing to do with it. 
That was the Kyoto approach. But in reality, institutional investors 
would stabilize the financial system by being able to invest in green 
projects that carry authentication and certification. By tying investment 
to real carbon emissions reduction processes, the scope for engaging in 
byzantine financial schemes like CDOs would be drastically reduced.

Wouldn’t climate bonds issued by, say, the Greek government have to carry 
an impossibly high penalty coupon rate? Yes they would – so the Greek 
government would not be a likely candidate under current circumstances.

Projects financed by climate bonds would be expected to carry lower 
interest charges than those for conventional infrastructure projects – 
because their prospects improve over time – and so the projects that they 
designate stand a far greater chance of being implemented.

Some questions obviously present themselves. 

If climate bonds and green finance are so good, why are institutional 
investors not already crowding into this space? 

The answer is that the potential bonds targeted at eco-investment are not 
yet being offered at scale or in sufficiently attractive form to attract 
major investors. Sean Kidney, head of the CBI, was at Davos last month 
talking up the issue, and laying out a framework for accelerating the 
entry by institutional fund managers into eco- or green investment. Some 
of his points: the projects offered need to have scale; they need to be 
structured simply and transparently; and they need to come certified as 
being able to guarantee that funds raised will indeed be invested in the 
projects designated.

Secondly, are governments the only agents who could offer, and 
underwrite, climate bond issues? 

Certainly not; indeed the whole idea is that development banks should get 
in on the act as a means of accelerating the uptake of green projects 
around the world. Development banks operating in Brazil, India or 
southern Africa would be prime candidates to issue such bonds – 
particularly if they have insurance backing from the World Bank’s 
Multilateral Insurance Guarantee Agency (MIGA). 

Already the World Bank (in partnership with the Scandinavian SEB) have 
tested the market, issuing small-scale green bonds↑ , and found a 
positive response.

Third, the bond markets with their colossal scale represent one option 
for green finance but not the only one. There are also the equity 
markets, where stocks and shares in corporations are traded. Globally 
they amount to around $55 trillion, as opposed to $100 trillion for 
bonds. But institutional investors got badly burned through their 
investments in equity markets during the 2008/09 global financial crisis, 
and they are not rushing back to these markets. 

Bonds are the way to go.

These approaches to financing the emergent clean energy economy need to 
be sharply distinguished from ‘carbon finance’.

It is a beguiling idea that carbon markets – the trading of certificates 
that represent carbon pollution in some form (whether saved or emitted) – 
will provide a means to mitigate emissions. 

Behind the long-running debate over cap and trade schemes for dealing 
with carbon emissions, there stands this ultimate rationale for such 
approaches, namely the operation of markets for carbon credits (or 
pollution credits) of various kinds. They are difficult enough to 
regulate in a national setting, but international carbon markets 
constitute a financial bubble waiting to happen. 

The world will not solve its carbon emissions problem by inflating carbon 
balloons. But of course the ‘carbon markets’ would make a lot of City and 
Wall Street investment banks and their clients a lot of money – which is 
why they are promoted so assiduously.

The ‘next’ great transformation of capitalism needs to be focused with 
laser-like precision on changing the energy markets (from fossil fuels to 
renewables), the resource and commodity markets (from resource intensity 
and waste disposal to circular economy resource-linkage), and above all 
the finance markets to drive the transformation. 

Until the bond markets are seriously involved, at the scale of tens of 
trillions of dollars, the transition cannot be said to be seriously under 
way.

<http://www.opendemocracy.net/openeconomy/john-mathews/financing-
transition-to-green-economy>

Cheers,
Stephen