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ESTE TEXTO NÃO REFLETE UMA POSIÇÃO DA SECRETARIA DE ASSUNTOS ESTRATÉGICOS

Low-carbon investment and sustainable growth

A C4 mechanism: Carbon-asset Convertible Carbon Certificates

Climate negotiations faced with a closing window of opportunity

COP 20 at Lima and COP 21 at Paris will have to answer the call of the Cancun

conference (COP-16) for “building a low-carbon society that … ensures continued high

growth and … an ‘equitable access to sustainable development1 . This call shifts clearly

the paradigm of climate negotiations away from adversarial game about sharing the

remainder of a global emissions budget to a cooperative exercise linking climate and

development policies in a diversity of domestic agendas.

To achieve a ‘global peaking of GHG emissions” this exercise has to facilitate deep

restructuration of existing capital stock in developed countries and massive redirection

of infrastructure investments in developing countries to avoid their lock-in to carbon-

intensive development pathways? The overall economic context is not conducive to

ambitious public spending but action cannot wait for better public budgets and strong

economic recovery in Annex 1 countries because the window of opportunity for

stabilizing global warming under 2°C is rapidly closing.

Short of a worldwide accepted sense of this urgency, this note presents a mechanism

bringing a way-forward to continuing world development through massive low-carbon

investments. Its rationale is that searching a least common denominator within the

conventional negotiation tracks is a false realism which will fail to get maximum

participation and will ultimately lead to inaction.

Turning the constraints of an adverse context into a fulcrum for action

1 UNFCCC Decision 1/CP.16, para. 1.6,

http://unfccc.int/resource/docs/2010/cop16/eng/07a01.pdf#page=2

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ESTE TEXTO NÃO REFLETE UMA POSIÇÃO DA SECRETARIA DE ASSUNTOS ESTRATÉGICOS

An ambitious climate action is politically possible only if it contributes to better

respond short term concerns about growth, employment, public and private

indebtedness and employment. It has the potential to do so for two main reasons:

- Its short term macroeconomic impact: it involves low aggregate incremental

investment costs but its ripple effect is potentially high because of a far higher amount

of redirected investments in sectors which represent 40% of the gross capital formation

- Its long term impact on development; affected sectors are key for the

inclusiveness of growth (transport, construction) and for the exploration of new

technological frontiers (material transformation, logistics, production processes in

industry and agriculture).

These investments are currently not blocked by a lack of available financial resources

but by the over-cautiousness of financial intermediation over the two last decades vis-

à-vis long-term investments and its preference for liquid assets. This behavior raises

specific barriers against low-carbon projects (LCP), often close to breakeven points but

looking more risky than Business-as-Usual investments due to higher upfront costs, lack

of a carbon-prices and missing records on their financial performances.

Carbon price signals are needed to overcome this obstacle. But they have to be high

enough to compensate for the fact that they are swamped by many other signals

(including the price of fossil fuels) and for the regulatory uncertainty in the concerned

sectors. Such prices are unlikely in most countries over the short term, if only because

of the political mobilization of both households trapped in carbon-intensive behaviors

and carbon intensive industry of which installed capital is directly hurt.

Well-tailored financial instruments are thus needed to unleash low-carbon investment

opportunities that are today frozen. The basic wrinkle is to reduce the investment risks

of LCPs by sending a signal to investors and their funding partners about the ‘social value

of avoided carbon emissions’ without hitting existing capital. Doing so climate finance

could provide a fulcrum to a sustainable economic recovery if it results in efficient

intermediation bridging long-term assets and short-term cash balances.

The “carbon-certificates-convertible carbon assets (C4)” mechanism presented here aims

at such scaling up of climate finance without an additional burden on taxpayers. It is not

a ‘free lunch’ and does not resort to an headlong endebtedness. Its rationale is rather to

trigger a better use of current savings within a less vulnerable banking system.

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ESTE TEXTO NÃO REFLETE UMA POSIÇÃO DA SECRETARIA DE ASSUNTOS ESTRATÉGICOS

Rationale for a carbon-asset convertible carbon assets (C4) device

Public credit is with taxation one of the few possible macroeconomic ‘lubricants’ to

economic transitions at the level. Several monetary proposals have been suggested,

including the use of Special Drawing Rights (SDR) issued by the IMF, and the

implementation by central banks of ‘green quantitative easing policies’. Those proposals

have the common goal to leverage private climate finance without direct public money

disbursement. But in the absence of a carbon price, they don’t address the specific

obstacles to the attractiveness of LCPs .

The mechanism presented here (C4) is designed along the same lines but with a carbon-

value mechanism improving the LCPs return on investment and reducing their risk by

including a “social value of avoided carbon emissions (SVACE)”.

Its basic principle consists in central banks injecting liquidities into the economy, in the

same fashion as the “unconventional monetary policies” implemented after 2008, but

under condition that the money is used to fund LCPs. A prerequisite is that

governments provide a guarantee on a given amount of carbon assets. This will allow

the central banks for opening credit lines, the reimbursement of the credits being made

by carbon-certificates certifying the reduction of GHGs emissions, valued at the pre-

determined SVACE and ultimately swapped into carbon assets.

This targeted credit facility makes it possible for banks to expand credit to LCPs as it

improves their profitability and offsets their extra risks relatively to conventional

projects. Specialized investment funds, including the Green Climate fund, could also use

this facility to back highly rated “AAA” climate bonds, in order to attract long-term

saving. Institutional investors could be interested in safe ‘‘climate colored’’ bonds for

both ethical and regulatory purposes.

For the central banks, this device is equivalent to buying a carbon asset at a price which

translates society’s willingness to pay for emissions reduction. For the macroeconomic

policies it generates liquidity backed on ``actual wealth'' in the form of productive

equipments and of averted carbon emissions, both certified by an independent body. It

entails low inflationary risks given that both the volume and price of carbon

certificates that the central bank is allowed to back will be bounded (ultimately to a few

percent of the central bank balance sheet).

From principles to climate negotiations

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ESTE TEXTO NÃO REFLETE UMA POSIÇÃO DA SECRETARIA DE ASSUNTOS ESTRATÉGICOS

This type of mechanism could be included in the climate regime to be defined in Paris

if: a) it relies on voluntary initiatives by a ‘club’ of countries, b) it is not seen as a full-

fledged global architecture but as a support to a diversity of bottom-up initiatives and

as a way of hedging against the economic and political costs of their fragmentation c) it

incorporates no other penalty for a defaulter country than to be de facto excluded

from the access to investments facilities provided by the system.

To meet these conditions the C4 device necessitates an agreement of volunteer

countries around a common set of principles agreed within the UNFCCC and

periodically adapted:

1. A mutually agreed SVACE for the sake of overall consistency of decentralized

initiatives: such agreement, for example within the corridor of values of carbon given

by the IPCC to stick to the IPCC recommended trajectory can be easier to mutually

agree than on a world carbon price, since a SVACE will not create immediate extra costs

on firms and consumers.

2. Rules to determine the quantity of carbon assets issued by central banks (and

guaranteed by their states) and the access rights of the recipient countries to the

opened credit lines, so as to set a pullback force motivating countries to comply with

their pledges and to gradually close the gap between these pledges and an emission

trajectory converging to zero emission;

3. A credible MRV process under an Independent International Supervisory Body,

in charge of determining the conformity of the projects to the NAMAS presented by the

Parties, attributing carbon certificates to projects and certifying their completion.

4. A share of the carbon assets considered as a contribution to the Green Climate

Fund (GCF).

In addition to LCPs, this system could support any recognized “club” of actors in

developing initiatives recognized by the UNFCCC. This could be the case for sectorial

agreements in energy intensive industries and for initiatives taken by cities and local

authorities to improve the synergies between climate policies and local development.

Beyond, because this carbon-based monetary instrument embarks economic partners

in a forward contract, this device would create a reference for carbon pricing

mechanisms, progressively facilitating their social acceptance.

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ESTE TEXTO NÃO REFLETE UMA POSIÇÃO DA SECRETARIA DE ASSUNTOS ESTRATÉGICOS

Conclusion:

The voyage towards COP20 and COP21 will be successful only if poses the first terms of

a new ‘social contract’ worldwide which incorporates the care for our global commons.

Upgraded climate finance has to be part of this contract, and will be provided it

contributes to equitable access to development and to long term investment adapted

to a low-carbon economy. This contract will be concluded only if the ‘non-climate’

concerned decision-makers are convinced that it can contribute to address the

economic and political challenges they face in a still unstable world economy.

By proposing a monetary based financial device, developed countries would assume

their historical responsibility in the climate affair and in the financial breakdown. They

could realistically do so thanks to the positive impact of expanded infrastructure

markets domestically and abroad. Emerging countries would get a support to redirect

their infrastructure for higher energy security and more inclusive regional and urban

development. As to the fossil fuels actors, they would be helped in investing a bigger

share of their rents for the preparation of the post-fossil fuels era.

Ultimately, all countries are interested in finding pathways between extreme monetary

rigor which freezes economic growth and extreme laxity which fuels speculative

bubbles and debt risks. They could also perceive the interest of an evolution of

monetary systems where carbon assets recognized a reserve currency and one element

of the DTS, would lead to less exposure to turmoils of currencies and domestic asset

prices. It would thus be misplaced to suspect the C4 device to be a diplomatic ‘non-

starter’ because the UNFCCC process has no legitimacy to address monetary issues and

because the risk is high to trap it in a labyrinth of sophisticated controversies.

Climate negotiations will not solve everything but are legitimate to provide a grip for

advances in the global governance, with the co-benefit that this governance be

consistent with the UNFCCC objectives. The C4 mechanism is such a grip and provides

opportunity, not to be missed, for a large alliance around climate policies.