Illustration by Gregori Saavedra

Could this be the year finance finally starts to help the climate?

We have the technology to power the world sustainably, and the money to pay for it. The challenge is to bring the two together
January 25, 2023

Some things move too quickly, and some are too stuck in place. Carbon dioxide falls into the first category: after it pours out of the tailpipe of your car or the smokestack of your power plant, it rapidly mixes into the atmosphere, warming the temperature everywhere. Money is kind of the opposite: over the decades it has been piling up in the global north, in places where it can’t do enough to stop the climate crisis.

As became clearer over the last year, this asynchronicity is perhaps the most fundamental obstacle to solving our climate crisis. But to understand the myriad hacks now being devised to try and fix this imbalance, you have to back way way up, and think about history.

Fossil fuel changed the world, obviously, beginning with Britain’s coal mines. People with access to coal suddenly had the equivalent of dozens or hundreds of servants, eliminating the constraints imposed by the stamina of human muscles or the draught power of livestock. This fundamental shift set up those parts of the world able to make full use of this new magic for centuries of astonishing prosperity. As John Maynard Keynes once observed, in all the centuries between Christ and coal the planet’s per capita GDP had perhaps doubled; in the time since, in rich societies, we measure those doublings in decades.

And so it would be the most obvious and fairest course to deploy the awesome power of coal and oil and gas around the world, to work the same magic for everyone. Starting about 35 years ago, that’s what happened in China—the rapid expansion of fossil-fuelled energy explains much of the country’s growth, and the rise of hundreds of millions from poverty. One can imagine the same thing happening across the global south, a steady levelling of the world.

Except, of course, for something else that happened 35 years ago: the dawning realisation that burning fossil fuel was changing the earth in fundamental and dangerous ways. And ironically, it is damaging precisely and most quickly those places that have burned the least coal and oil and gas. Bangladesh is a rounding error in global carbon accounting; it also faces an inexorably rising Bay of Bengal.

Engineers have dramatically driven down the price of clean energy; pointing a sheet of glass at the sun is now the most cost-effective way to produce power

So if Bangladesh—or Indonesia or India or Vietnam or Pakistan or others of the emerging southern bloc—burn fossil fuel, they do great damage to the planet, and in the process to themselves. (India had to cope with almost unbelievable heat before the monsoon last year; Pakistan with the Biblical-scale flooding that comes as the temperature rises.) But they can’t be expected to simply forgo the wealth that fossil fuel brought to the west; China’s example beckons.

Enter a deus ex machina—the machines in this case being solar panels, wind turbines and the batteries to store the power they produce. Engineers have dramatically driven down the price of clean energy; pointing a sheet of glass at the sun is now the most cost-effective way to produce power, being 89 per cent cheaper than a decade ago. This should let us square the circle: Indonesia can just build some solar farms and we’re good to go. The force of financial gravity is finally working in the right direction. Indeed, a massive study from Oxford University last year found that moving the world on to clean energy would save $12 trillion, even before you factored in the avoided costs of destroying the Earth.

Except, of course, it isn’t that easy. For one thing, this shift has to happen fast: scientists say that we need to cut emissions in half by 2030 to have a chance of meeting the targets that we set in Paris. It also has to happen against the organised opposition of the fossil fuel industry. And perhaps most importantly, it’s going to require lots of capital. Some of it has to be spent in the north—and some of it, somehow, has to make the trek south.

Let’s begin with the (slightly) easier task, which is making money available for rapid change in the rich countries that have long relied on fossil fuel. Last year was a useful indicator on this score—against all odds, Joe Biden managed to win passage of his so-called Inflation Reduction Act (IRA), which was essentially a climate bill. It authorises the US government to spend at least $369bn—and perhaps as much as $800bn—on the gamut of new technologies, most especially heat pumps and electric vehicles (EVs), and on the solar panels and so on that can power them. It sounds like a lot of money, and it is a lot of money: the IRA is a throwback not to the timid Clinton or Obama years, but to the period of FDR’s New Deal, a full-on approach to let government tackle social crises.

And yet it’s not that much money, given that there are 140m homes in the US alone, and that to be rid of fossil fuel almost all of them will need new furnaces in the basement and new cars in the garage (if indeed there is a garage—finding chargers for people who park on the street is going to be one more challenge).

Wake-up call: floods in Bangladesh provided a more urgent backdrop than usual to climate talks in Egypt last year © Chronicle / Alamy Stock Photo Wake-up call: floods in Bangladesh provided a more urgent backdrop than usual to climate talks in Egypt last year © Chronicle / Alamy Stock Photo

Wake-up call: floods in Bangladesh provided a more urgent backdrop than usual to climate talks in Egypt last year © Chronicle / Alamy Stock Photo

The same is true across the north—there are about 25m homes in the UK, and 40m in Germany. But the European Union, spurred on by Putin’s gaspolitik, has begun to throw money at the problem too. And it has a real chance of working: direct government aid will accomplish part of the task, but the idea is that it primes the pump. As people use government money to build battery factories, they will become battery advocates; as demand for heat pumps produces more electricians trained to install them, those electricians will become their evangelists. And so on, in a virtuous cycle that has at least some hope of delivering rapid change. After all, since these technologies are already cheaper to operate than their fossil fuel counterparts, governments are increasingly pushing on an unlocked door.

So let’s, for the moment, assume we’re getting somewhere in these rich nations, and turn our attention instead to the possibilities for poorer parts of the world.

Activists at the UN climate conference in Sharm el-Sheikh in Egypt last November took on this question in their demands that historic polluters pay compensation for damage to the global south. The watchword was “loss and damage”, and events like the flooding in Pakistan were fresh enough in delegates’ minds that they built momentum to set up a fund to pay for damages. There’s not the slightest doubt that this makes moral sense: Pakistan has contributed less than 1 per cent of the carbon in the atmosphere, while the United States, has emitted around a quarter of the CO2 heating the planet. If Sindh is underwater, that is partly the fault of Texas.

But justice, in political terms, is what you can actually force someone to provide, and it’s hard to imagine the world’s richer nations ever agreeing to pay that tab. America’s Congress won’t pay reparations to the descendants of African-American slaves, so it seems unlikely that it will pay reparations to drought-stricken Africans, at least not in sums of money that begin with a T, which are the kind that we’re talking about.

Money could flow voluntarily, however. Huge quantities of private capital are stored up with no project big enough to use it on. It’s a little hard to track, but the bulk of those financial assets are in the retirement accounts of Americans and Europeans; they represent the winnings of lifetimes spent in the sweet spot of northern industrialisation. Very few people are going to donate their life savings to build solar farms in Senegal. But there’s no good reason why they shouldn’t want to invest their money in Senegalese utilities, funding the capital to build renewable infrastructure that would provide power to local communities (sometimes, the first electricity that these people have had) and in the process blunting the rise of emissions. After all, in the west, people’s pensions are often invested in utilities—they’re boring, safe investments with reliable rates of return.

Our finest minds have been drawn to the City or to Wall Street. The idea that their dark art could be used to good ends is heartening

So there’s no reason—except that at the moment it’s almost impossible. Because there’s no real track record for investing in Senegalese utilities (much less ones putting up new clean energy technology), money for these projects comes at such a high premium that they’re not cost-effective. “Interest rates were 15 per cent for this kind of thing even when they were almost zero in the west,” says John Kerry, the US government’s climate envoy. I was wandering the halls of the Egyptian conference building where the climate talks were held when I ran into Nicholas Stern of the LSE, another old warhorse of this fight. I ran Kerry’s figures by Stern—whose 2006 report for the British government began rewriting the economic story of the climate crisis—and he agreed. “With money at 6 or 7 per cent, solar in Africa can outcompete anything and turn a profit. At 15 per cent you can’t make a profit, and so it won’t happen.”

So the question becomes how to make that money cheaper, and how to do it without going through the congresses or parliaments where the process can be demagogued and delayed. The answer, Kerry and Stern think, has to do with the pleasantly opaque MFIs, or “multilateral financial institutions” like the World Bank or the International Monetary Fund. These institutions could take a relatively small amount of public money—Stern estimates $60bn a year—and sprinkle it like magic dust on clean energy projects, “de-risking” them sufficiently so that all of a sudden the (say) retired bus drivers of Seattle would be able to confidently invest some of their retirement savings in making sure that the current bus drivers of Senegal are driving electric vehicles refuelled by solar panels.

This kind of financial alchemy is, frankly, just about the only thing the west has excelled at in recent years—our finest minds have been drawn, more than in the past, to the City or to Wall Street to come up with new “financial products”. The idea that their dark art could be used to good ends is heartening. But the development banks are notoriously slow and hide-bound, and don’t attract top-end dealmakers. It came as no big surprise last September when the Trump-nominated head of the World Bank David Malpass, speaking at a Washington press conference, refused to commit himself to the proposition that people were heating the atmosphere. “I don’t even know.

I’m not a scientist,” he said, which at this point in time is the type of talking point reserved for conspiracy theorists and far-right agitators. Having opened himself up, Malpass was promptly flayed—Al Gore (who could be knocking back well-earned whiskies with Kerry and Stern at some retirement home for veterans of the climate wars), seized the moment to demand that Biden fire Malpass.

At Sharm el-Sheikh, Kerry’s successor as the senator from Massachusetts, Ed Markey (a father of the Green New Deal who himself has been in this fight for years), said he’d make it his business to bring the Democratic Senate caucus on board with that demand in the new year—and since the US traditionally gets to name the president of the World Bank, that might be enough to make it happen.

There are, of course, other even larger and more sweeping proposals for reform of the international financial architecture. For example, Mia Mottley, president of Barbados, has been building support for rewriting the so-called Bretton Woods agreements to issue half a trillion dollars in “special drawing rights” for poor countries beset by climate disasters, so they aren’t merely piling new debt on top of old. And leaders of other low-lying nations—such as the prime minister of Bangladesh, Sheikh Hasina, and Mohammed Nasheed of the Maldives—have been raising the prospect of a debtor’s strike from climate-vulnerable nations to force swifter action.

All this talk may result in action this year—it better, since time is running short. And all of it reflects the essential facts of the climate crisis circa 2023: the technology needed to produce power without damaging the planet is available and affordable—and by every calculation it makes financial sense to install it swiftly. And there’s sufficient capital out there to let it happen. But somehow the supply of money needs to be connected with the places where financing is most needed. Cash has to start moving like carbon dioxide.