Unconventional monetary policies to finance the low-carbon transitions Camille Ferron and Romain Morel 8 July 2014 1

Unconventional monetary policies to finance the low-carbon transitionsCamille Ferron and Romain Morel

8 July 2014

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Unconventional monetary policies I 9 July 2014 2

1. Main issues: climate and economic challenge

2. The three mechanisms studied

3. Global economic impact

4. Potential barriers

Summary


Investment needs: a paradigm shift from brown to green

► A need to shift private finance from brown investment to green investment

► A need to mobilize private finance and “supply-side” policies, associated to relevant “demand-side” policies

World UEOverall amounts 1108 221Additional amounts 432 60

Amounts of investment needed in a 2 degrees scenario

(billion USD per year)

Data: IEA, World Energy Outlook, 2014

► Budget constraint

► Deflation

► Precedent uses of unconventional monetary policies■ SDRs■ QE


The current economic situation lead to try unconventional policies






Summary


Three mechanisms based on unconventional monetary policies

SDRs Green QE CCs

Former unconventionnal useUsed to finance development aidUsed to help countries during the 2008 crisis

By Japan in the 1990sBy the US and UK after the 2008 economic crisis

Geographical scale International Currency area Currency area

Strong point Fair system (quota-shares)Speed and ease of implementation (can be a green component of a traditionnal QE)

The SCC limits the risk of a carbon bubble

Co-benefitsFunding of a majority of projects in developing countriesCompleting international reserves

Funding some projects in developing countries

Funding some projects in developing countriesCompleting international reserves

Need for MRV Monitoring of projects Monitoring of projectsMonitoring of projects + assessment of emission reductions

Economic limits Lack of effi ciency and transparency

Inflation and carbon bubbleLoss of credibility of the central bankUncertain consequences on the behavior of private financial operators

InflationPlurality of carbon pricesIlliquidity of carbon certificates that could lower their attractivity

Institutionnal limits

Need for the agreement of the US CongressNeed for the agreement of developed countriesNeed to find a way to circumvent the initial role of SDRs

Need for a European agreementPotential need for a modification of the TreatiesNeed to convince private banks to participate

Need for a European agreementNeed to convince private banks to participateNeed for an agreement on the Social Cost of CarbonNeed for an agreement on the methodology of emission reductions computation

► Two mechanisms based on existing elements and one original mechanism

► Different scales of implementation

► Possible co-benefits






Summary


Stimulating private investment with limited macroeconomic impacts

► Impacts for entrepreneurs and investors■ Limited budgetary expenses■ Stimulated climate investment

► Limited macroeconomic impacts■ Inflation■ Green bubbles






Summary


Limits that can be tackled thanks to an efficient MRV procedure

► Economic limits■ Windfall profit and rent-seeking■ Moral hazard■ Crowding-out of private investment■ Transaction costs

► Hence a need for an efficient Monitoring, Reviewing and Verification (MRV) procedure with limited costs of implementation

► Need for multilateral agreements■ To issue new SDRs■ To implement a CC or a Green QE mechanism in

Europe or internationally

► Potential need for the modification of existing treaties

► Need for agreements on methodological issues

Institutional and political agreements that seem difficult to reach


► A need for further research■ financial volume■ environmental consequences■ economic consequences

► Major challenges■ Bringing private finance on board■ Implementing a robust selection and MRV procedure

► Associated jointly with appropriate « demand-side » policies , monetary policies could give a kick-start to a green recovery


Conclusion


Thank you for your attention

Camille Ferron and Romain MorelResearch [email protected] [email protected]

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Unconventional monetary policies I 9 July 2014

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Unconventional monetary policies to finance the low-carbon transitions Camille Ferron and Romain Morel 8 July 2014 1