Capitalism alone won’t save the planet

With every record-smashing day, week, month and year of global warming that goes by, finding solutions to climate change becomes more urgent. Capitalism helped get us into this mess, and it will have to help us get out of it. But it isn’t capable of doing the work alone.

Eco-capitalism hit a notable milestone when green-bond issuanceoutpaced fossil-fuel borrowing for the first six months of 2023, Bloomberg News reported late last week. Green bonds are debts that supposedly finance clean energy and other climate-friendly projects. Green borrowers raised about $348 billion in the first half of the year, compared with just $233 billion for the oil, gas and coal industries.

Unfortunately, this accomplishment is a bit like winning the English Premier League because Manchester City decided to take the season off. Oil, gas and coal companies haven’t needed to borrow all that much this year because they’re still swimming in the oceans of cash they have made since Russia invaded Ukraine, making fossil fuels scarce.

And though $348 billion is quite a lot of money — adding to a $4 trillion total market for “sustainable” debt — it’s a far cry from the $6.9 trillion Bloomberg NEF estimates will need to be spent annually on clean energy. That massive investment is probably our best hope of zeroing out the world’s carbon emissions by 2050 and limiting man-made global warming to 1.5C above pre-industrial averages. Every incremental tick of the mercury brings fresh and cascading disasters, including the record-high temperatures and record-low sea ice we already are seeing after just 1.2C of warming.

The bigger problem with these green bonds is that we can’t be sure how green they really are. The market still has no universally accepted standards, leaving borrowers mostly free to use the proceeds and apply the “green” label as they see fit. That has led to accusations of greenwashing and to big investors balking at buying the debt.

Bloomberg News cites the example of German utility RWE AG. Its $1.1 billion in green borrowings so far this year are dedicated to wind and solar projects. But RWE also burns mountains of coal as one of Europe’s biggest carbon emitters. Money is fungible. A company can’t just keep its green-bond proceeds in a special pile marked “for clean stuff only.” Every dollar it borrows in the green market frees up money it can spend on dirtier parts of its business.

Another example is Thames Water Plc (about whose financial plight my Bloomberg Opinion colleague Lara Williams wrote last week). The British water utility has issued $3 billion in green bonds since 2022, but ESG investors are spurning it now that they realise roughly a quarter of its supply is lost due to leaks and that it has been pumping sewage into rivers.

“A green bond from a not-so-green issuer isn’t sustainable,” Saida Eggerstedt, head of sustainable credit at Schroders Plc, told Bloomberg News.

Perhaps, given enough time, the invisible hand of the market would work out such kinks. But humanity doesn’t have the luxury of waiting. Capitalism will need guidance and assistance from government. Market purists who
recoil at the notion of such support should remember the fossil-fuel industry globally benefits from vast public subsidies, often in the form of tax breaks.

Meanwhile, tech startups, venture capitalists and others are lining up for their share of $369 billion in Inflation Reduction Act climate spending. Tesla Inc. became the most valuable car maker in the world with a boost from billions of dollars in government loans and largess.

Bolstering the green-bond market will be much cheaper but will still take political will. The European Union earlier this year struck a deal to come up with the world’s first set of green-bond standards. If the EU deal gets through the European Parliament, then it will give investors more confidence in the bonds they buy. And that will make EU-approved bonds more attractive. We need capital to flow to sustainability projects, but it will flow more freely with government oversight and standards.

Similarly, green sovereign bonds give debt-laden countries access to relatively cheap financing, but only because they are backstopped by deeper-pocketed governments and organisations. And like companies, governments will find it much easier and cheaper to borrow if they are subject to enforced transparency around how they are spending green proceeds.

A novel idea for financialising climate solutions is risk manager and environmentalist Robert Litterman’s proposal for carbon-linked bonds. These would let investors bet on whether or not carbon will hit a price target set by a government. This would supposedly create a financial incentive to hasten the clean-energy transition.

But this idea hinges on having a government willing to set a carbon price and do whatever is necessary to make it a reality. That would require the US government, probably in coordination with other countries, imposing a heavy carbon tax and then sticking to it, no matter which party runs Congress or the White House.

Here on Earth-1, as Bloomberg Green’s Eric Roston once put it, “to call a carbon tax dead on arrival would be an insult to dead things, since they have spent at least some time being alive.”

Still, the point remains: When it comes to fighting climate change, even the most far-fetched capitalist dreams need a government to make them come true.

Mark Gongloff is a Bloomberg Opinion editor and columnist covering climate change. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg