jeudi 2 mars 2017

Green Growth for the Energy Transition (the French law on energy transition). Act III: what are the financing mechanisms?

Prudence Dato (IREGE/ Savoie Mont Blanc University)

As a follow-up to the economic analysis of the French law on energy transition, we devote this third note to the financing mechanisms of energy transition. The scenes in the act III draw attention to the limits of current public policies and to the role of financial sectors in the transition to a low-carbon economy.

Act III; scene 1: Current policies are not doing the job.

The public funds that are directed to support the energy transition comprise both public budget and fiscal policies. Public budget is used to subsidy low-income households: it concerns energy subsidies and social electricity tariffs, for instance. Fiscal policies take the form of tax credit and eco-loans that are supposed to motivate renovation of buildings and adoption of energy-efficient equipment. Are these measures efficient in a long term? Unfortunately, Tyszler et al. (2013) finds that they do not provide a long term solution for lifting a household out of fuel poverty.[1] One reason is that their implementation is complex because of administrative issues, lack of bank’s expertise in evaluating home renovations, etc. Also, they reduce the borrowing capacity of the household to face non-energy issues. So, what could be the solution? Promoting “collective eco-loan” for residents living in the same building or imposing home renovations during private residential property transactions for instance, could serve as solutions. This is now the time when the financial sector appears on stage…

Act III; scene 2: Trying to go beyond a green image.

Although there has been a growing awareness of the role of the financial sector in the transition to a green economy, most of the banks and insurers are mainly concerned with their image instead of structured strategies.[2] Is “green image” the solution? Their strategies should be beyond communication on the green projects they have financed or on their direct environmental impact.  Why not consider the indirect environmental impact of the business activities they have financed (coal mining businesses and coal-fired power plants, for instance)?  Consequently, banks and insurers would account for the potential impact of climate change on financial stability. As stated by Carney (2015), “an abrupt resolution of the tragedy of horizons is in itself a financial stability risk”.[3] This is now the time when central banks appear on stage to help finance the energy transition…

Act III; scene 3: Are the central banks the happy ending?

Central banks are bound by their financial stability macroprudential mandates that refrain them from driving the transition to a low-carbon economy. But the good news is that, given the large commitment of countries for the Paris Agreement, we can now start believing that governments will adapt the mandate of central banks to the risks of climate change. For instance, Green Quantitative Easing (GQE) programs could drive green bonds deployment…

[1] Tyszler, J., Bordier, C., & Leseur, A. (2013). Combating Fuel Poverty: Policies in France and the United Kingdom. CDC Climat Research, CDC Climate Report (41).
[3] Carney, M. (2015). Breaking the tragedy of the horizon—climate change and financial stability. Speech given at Lloyd’s of London, September, 29.

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