Financing the Green Transition

Green macroeconomic policies can be engineered to accelerate a socially and ecologically just transition, according to this paper. Authors João Paulo Braga and Ekkehard Ernst consider climate-smart macroeconomic policies that can smooth the economic impact of transition and create inclusive growth. The authors say new asset classes that value nature should be used alongside the greening of conventional methods.

The authors recognise that transition will require a massive reallocation of funds which will entail a significant cost burden for carbon-intensive producers and consumers, and require millions of workers to change jobs. However, they also note that delaying transition would be more costly, “destroying global incomes five times larger than swift action”.

Overall, the paper finds that green active fiscal policy and green land-use investment have higher employment multiplier effects than conventional approaches. Yet poorly designed climate policy can negatively affect living standards and job growth, and widespread fears around such effects are a key obstacle to a faster transition.

According to the authors, a just transition is especially important in the global south in which many of the globe’s natural defences, known as carbon sinks, are located. These include natural resources such as forests, mangroves and seagrass. Economic conditions in the region cause governments to deprioritise conservation in favour of development, meaning just transition policies are needed to minimise trade-offs between these goals.

The authors consider the labour effects of ongoing efforts to green conventional approaches, such as carbon taxes, carbon pricing, green bonds, and climate-informed monetary and financial policy. Notably, they argue that carbon taxes are a “better solution for a greater variety of countries” than emissions trading, especially when revenue is recycled into positive externalities, such as just transition funds, green infrastructure, or removing regressive taxation.

While greening conventional tools can internalise the cost of emissions and divert funds towards a just transition, they are insufficient on their own. The paper presents two newer asset classes – debt-for-nature swaps (DfNs) and valuing natural capital (VCN) schemes – which could leapfrog the global south “toward clean energy production and local economic development”.

DfNs combine traditional sovereign debt contracts with payments for ecosystem services. In this scheme, creditors concede part of their interest payments in exchange for guarantees that debtors use the cash flow to restore and maintain their ecosystems.

The authors say an international framework to govern such schemes would encourage their uptake. Additionally, they say nature-based sovereign wealth funds can ameliorate the adverse impacts on exchange rates of increasing cash flows without increasing production.

VNC schemes establish nature-based securities that combine financial and ecological rewards, by enabling ecosystem owners to issue securities in exchange for ecosystem restoration. Collateralising nature in this way could help nations protect their biodiversity and development, moving from an economy of production to one of “stewardship”.

The authors identify issues that could undermine this approach, including transaction costs, the lack of accountability framework, and the danger of undervaluing natural assets. They also stress that Indigenous Communities must be included in a meaningful way.