Green and social considerations are closely connected. Accepting this in theory is rather straightforward; enacting it, less so.
Carbon markets are a case in point. Initiatives aimed at pricing carbon dioxide emissions so that polluters would find it more costly to continue with business as usual are effective when the price they assign to carbon is high enough to prompt a switch to green. That switch, however, has economic and, therefore, social repercussions that are harder to manage.
Across the world’s 62 emissions trading schemes (ETSs) currently in operation or under consideration, some players have already had a leg up in the game; others are set to find themselves worse off if the ultimate goal — greening the global economy — is achieved. These are mechanisms created and managed by public administrations at national, subnational and regional levels, where a certain number of emission allowances are issued and then traded within that jurisdiction. The EU’s ETS, the world’s largest, has priced carbon at more than €50 per tonne this year; some analysts expect it will reach €90 by 2030. Those figures depend on tighter supplies of carbon allowances following more ambitious policy. Others operate in conditions that lead to very different numbers: the world’s average price is €3 per tonne.
Further, because of its environmental vigour, the EU’s green policy makes the industries captured by its ETS less competitive. So, it has devised a carbon border adjustment mechanism to correct this disadvantage, and of course reduce the risk of carbon ‘leakage’. Imports from countries with more lax or less-developed rules on pollution (typically emerging markets) will become more costly. The US has also announced plans for a similar tax, which would help pay for its $3.5tn government spending package.
Tense situation
It does not take an expert to guess what a carbon border tax would do to exporters from less environmentally advanced jurisdictions. Unfortunately, not even experts seem to have worked out an effective and equitable solution to this environment versus economic development tension. India’s environment minister, Prakash Javadekar, put it in straight terms: a carbon border tax would be “unfair”. He said: “We are paying, we are suffering from climate change which was caused by the reckless emissions for hundreds of years by the developed world.”
In that developed world, finance is already redirecting capital towards green assets and away from highly polluting ones. Applying those policies elsewhere continues to run into obstacles — among them, the limited supply of sustainable assets and the perceived risks associated with certain borrowers and issuers.
It does not take an expert to guess what a carbon border tax would do to exporters from less environmentally advanced jurisdictions
Better definitions and understanding of sustainable and transition finance would help. This is something that many international organisations, such as the World Bank, its private sector arm, the International Finance Corporation (IFC), and the International Capital Market Association have long been working on.
But even for a relatively well-established asset like green bonds, for example, emerging markets’ share of that space remains small. And of that share, for emerging market green bonds issued between 2012 and 2020, 71% came from China, according to data published in an April report by asset manager Amundi and the IFC. Bond-listing venues paint the same picture: European names dominate both in terms of proceeds and number of listings, albeit with China’s new OTC Bulletin Board rising fast — since 2015, it has hosted cumulative volumes of green, social and sustainability bonds larger than those moving through Euronext Paris, according to data provider Refinitiv.
Much expectation lies also on China’s newly operational ETS, which, although only capturing emissions from fossil power generators, covers about 40% of the country’s total. Its launch this year means that the world’s ETSs now capture 22% of global emissions.
Environment versus economy
There is a common thread here. Large, powerful jurisdictions with the financial muscle and the conviction to tackle environmental risks are, on average, improving the world’s response to climate change. However, they will inevitably continue to look after their national economic interests. The reality at the statistical fringes of those climate initiatives is different: a populous group of countries caught in the ever more urgent, ever more complex tension between environmental and economic considerations.
Other forces are coming into play. Sustainability considerations may well become the new bread and butter of bodies like the World Trade Organization and development finance institutions. The same may eventually become true for private sector banks and investors. Initiatives to improve voluntary carbon markets, for example, operating separately from government-led ETSs are welcome.
Recently, the Taskforce on Scaling Voluntary Carbon Markets, created by UN special envoy Mark Carney and chaired by Standard Chartered’s chief executive, Bill Winters, announced plans to improve its standards and governance. Some say it should focus more on protecting carbon-credit suppliers, potentially the weaker part of the carbon trade. Also welcome, and essential, will be banks’ continued work with business and governments finding themselves in tighter spots. The world’s move towards a greener system needs readjusting so that the most vulnerable do not find the heaviest load on their shoulders.
Silvia Pavoni is the economics editor at The Banker.
