Economic rationale for a ‘ paradigm shift’ in the climate affair and its consequences

1. Economicrationale for a ‘paradigm shift’ in the climateaffairand itsconsequences Workshop "Innovative solutions for climate finance, the energy transition and a EU narrative" Jean-Charles Hourcade Baptiste Perissin-Fabert

2. LessonsfromKyoto’sunfinished business • A ‘mental map’ : a world cap and trade system withunique carbonpricethrough all sectors and countries withcompensatingtransfers • a mapwhichdoes not indicatethatsignificantcarbonprices: • hurtemergingeconomies over the short run (highershare of energyexpenditures in households budget and in production costs) • do not preventthem to belocked - incarbon intensive growth pattern (carbonpricesalonecan’t shift urbandynamics, building and transport infrastructures) • a mapwhich ignores that technologies are not selected in function of theirlevelizedcosts in a ‘shareholder’ regime of firm management • ‘fair’ compensatingtransfersare difficult to negotiate in a ‘burden sharing’ approachwhich: • Focus of the debate on whopicks the (very few) remains? • Losesight of the benefits of cooperation

3. Whyprice-signalsdoes not suffice.Why ‘finance’ matters in an uncertain world

4. The meaning of Cancun’s « paradigm shift » • From fair “burden sharing” to “equitable access to development” • NationallyAppropriate Mitigation Action alignedwithdevelopment objectives (Bali) • The Global ClimateFund as a tool to meet, at least in part, the common but differentiatedresponsibilityprinciple (CBDR) To besituated in a specificIntellectualcontext in the ‘aftermath?’ of the 2008 financialcrisis: « Green Growth » as a new form of ‘Marshall Plan’

5. Climate Finance atrisks of the distrust? • Acontext of ’depressioneconomics’, ‘public debts’ and rebalancing of the world economicequilibriumcanonly: • exarcerbate the ‘donor fatigue’ in the Annex 1 countries • Reinforce the social resistanceto carbonpricing (explicit or implicit) • Limitations of currentclimate finance initiatives: • CDM: uncertainty about carbonprices and problems of counterfactual • Lowleverage ratio on 1€ or $ of lowcarbon Public Finance Mechanisms • Fragmentation • A problem of orders of magnitude: a funding gap of 90%???? • leveragedinvestcosts< upfrontinvestcosts < inducedinvestcosts • Redirectedinvest high times higherthanincrementalinvestcosts

6. The economicrationale for turning the question upside down Can weaffordclimatepolicies <-> No debtbailout and economicrecovery w/o climatepolicy • A shift of lessthan 1% of the GDP isneeded to fundincrementalcosts • Concernedsectorsrepresentaround 40% of the GCF and some are critical for inclusive growth • The redirection of investmentsconcerns about 8-9% of the GCF • Climatepoliciescancontribute to a stimulus for a sustainable and inclusive growthrecovery finance • But climate finance should not remaina marginal department of global finance • Is linkingtwo sensitive issues is a diplomatic non-starter? ignoring the short termconstraints on economies leads to a diplomaticdead-end

7. Turning the question upside-down The world economybetween ‘instable growth’ and ‘depressioneconomics’ • « Savingglut »and « Buridan’sDonkey »dilemma for investors • Risks of depressionvs risks of re-unleashingspeculativebubbles • Bankingsystemsstillfragile and in process of deleveraging • Tensions due to a «currency cold war » Any new growthregimeimplies • To redirectsavingstowards infrastructure and industryinstead of speculation • a more inward-oriented industrialisation • A more resilient financial and monetary order Lowcarbon finance is a good candidate to contribute to sustainableeconomicrecoverywith …. less « ups and downs »

8. The agenda • Injectliquidity, providedthatitisused to fundlow-carboninvestments (LCI) • Awake the Buridan’sDonkey:public guarantee to lower the risks of LCIs and enhance the solvency of low-carbon entrepreneurs’ • Make the Banking System interestedin fundingLCIs: • bankscanbetter face theirprudentialconstraints and improvetheirrisk-weightedassets(RWA) • Makeinstitutionalinvestorsinterested in carbon-basedfinancialproducts to attractsavings (instead of real estates and others …) • Trigger a wave of LCI in infrastructure • Revitalizing the industrialfabricin OECD countries • More inward-orientedgrowthin emergingeconomies

9. The SVC, a notional value not a carbonprice • A signal of the politicalwill ‘to dosth’ againstclimate change • It increases over time -> counterbalance the role of discount rate againstinvesting in long lived capital stocks • Surrogate of a « gobalprice signal »toavoid the fragmentation of climate finance • Politicallynegotiable : • The Indianpeasantwill not beobliged to payit to irrigateitsfields • The SVC differstheoreticallyacross countries but isconditionalupon the content of theirdevelopmentpolicies (Shukla) • Countries maythusacceptsimilar SVC for differentreasons, includingvariousviews of the co-benefits of climate mitigation

10. Sketching a possible mechanism • Itsanchor: an agreement, under UNFCCC on a Social Value of AvoidedCarbon Emissions(SVC) • Voluntarycommitments by governements, over every five years to back a quantity of carbonassets, • Central banks open drawingrights on thesecarbonassetsand accept as repaymentcarboncertificates (CC) to fundLCIs • After certification of projectcompletion: asset swap …. CCs are turnedintocarbonassetsthatappear on the balance sheet of central banks (like gold), banks or entreprises • An Independent Supervisory Body • NegotiateswithgovernmentswhichNAMAsthese LCI shouldcontribute to • Secures the « statisticaladditionality » of the investments

12. To bedevelopedlater • A deal on the « Social Cost of Carbon » • Money creationbacked on real wealth(Avoidedclimaterisks, Infrastructureinvestments) • No risk of ‘speculativebubble’ on carbon • Normative targetswithwhenflexibility and back pulling force • A concreteway to secure« equitableaccess to development » by supportingNAMAs’ full incremental costs‘ by a real inflow • A respectedCBDR thatcanbeprogressivelyextentedto the mostadvancedemergingeconomies • Can support anycarbontradingmechanism and bottom-up initiatives (sectorial arrangements in the industry, citiesinititiatives ….) and stabilize the ‘business context’ • Can be palatable for ‘non climate’ concerneddecision-makers 12