Speaker 1: Welcome to zero. I am Akshadrati this week? Did we
Speaker 1: get climate finance wrong? It's been ten years since the
Speaker 1: Paris Agreement and the world has spent more than ten
Speaker 1: trillion dollars trying to cut emissions, and yet, as you
Speaker 1: all know, it's not been enough. The world needs to
Speaker 1: spend a lot more. The trouble is with government pursus
Speaker 1: tight and tightening, most of it will have to come
Speaker 1: from private sources, and so far the attempts, which have
Speaker 1: mostly involved nudging and cajoling financial institutions, haven't really worked.
Speaker 1: So have we got our approach to climate finance wrong?
Speaker 1: Lisa Sachs thinks so. She's the director of Columbia University's
Speaker 1: Center on Sustainable Investment, and if she is right, we
Speaker 1: are in deeper trouble than we think. The current climate
Speaker 1: finance regime was born just months before the Paris Agreement
Speaker 1: was signed. It was created by a speech given in
Speaker 1: September twenty fifteen by then Bank of England Governor McCartney,
Speaker 1: the same McCartney who is now Prime Minister of Canada.
Speaker 2: Climate change is a tragedy of the horizon. We don't
Speaker 2: need an army of actuaries to tell us that the
Speaker 2: catastrophic impacts of climate change will be felt beyond the
Speaker 2: traditional horizons of most actors. It will impose costs on
Speaker 2: future generations that the current one has little direct incentive
Speaker 2: to fix.
Speaker 1: The speech title The Tragedy of the Horizons made the
Speaker 1: case that financial institutions must take climate action more seriously
Speaker 1: and act urgently, for if they wait till it's obvious
Speaker 1: that climate change is going to have disastrous consequences on
Speaker 1: financial stability, it will be too late to prevent deep
Speaker 1: damages to the global economy. And Carnie's answer to that
Speaker 1: problem has led to the current regime of corporate climate
Speaker 1: plans and financial institutions setting net zero goals. But emissions
Speaker 1: from these companies or banks have mostly not fallen in
Speaker 1: line with the targets they've set. Neither has there been
Speaker 1: a drastic reduction in lending that these financial institutions make
Speaker 1: to fossil fuel companies, something that must occur if the
Speaker 1: world is to avoid catastrophic heating. That's why Lisa's answer
Speaker 1: that climate finance has it all wrong is worrying, because
Speaker 1: finance underpins every discussion about how to implement climate solutions.
Speaker 1: So this week on Zero, I ask Lisa why she
Speaker 1: thinks Carneie's approach to climate finance isn't working and what
Speaker 1: financial institutions should be doing instead. By the way, if
Speaker 1: you have feedback for Zero or get suggestions, please write
Speaker 1: to Zero pod at Bloomberg dot net. Lisa, welcome to
Speaker 1: the show.
Speaker 3: Oh, thank you so much.
Speaker 1: So we celebrated the tenth anniversary of the Paris Agreement
Speaker 1: and plenty was talked about, but I think there was
Speaker 1: a bigger anniversary, at least for you, that was celebrated
Speaker 1: a few months before that. I'm talking about a speech
Speaker 1: that a former Bank of England governor gave here in
Speaker 1: London in September twenty fifteen. Tell us about that speech
Speaker 1: and why it's such a big deal.
Speaker 3: Yeah, thank you, and actually I'm coming to you right
Speaker 3: now from the Bank of England. So what a way
Speaker 3: to commemorate that speech ten years ago? That was Mark
Speaker 3: Carney's speech called the Tragedy of the Horizon, and Mark
Speaker 3: Harney was warning, especially the financial community, that climate risk,
Speaker 3: which we already knew of course ten years ago, well
Speaker 3: well before that, we knew it to be a major risk,
Speaker 3: was going to be a financial risk. But in the future,
Speaker 3: that's the tragedy of the horizon. So we better wake
Speaker 3: up to it today and address it today to TechEd
Speaker 3: the future financial system. And that speech, at least how
Speaker 3: it was interpreted, has defined how the finance sector has
Speaker 3: approached and how the climate community has approached climate finance
Speaker 3: for the past decade.
Speaker 1: And it is a powerful speech, especially making it at
Speaker 1: a time when the Paras Agreement hadn't been signed. So
Speaker 1: he says, look, by the time you feel the impacts
Speaker 1: on your balance sheet, it will be too late to act,
Speaker 1: and you will suffer losses for much longer than if
Speaker 1: you start to act now. That's the first part of
Speaker 1: the speech, really well made case. Most people don't recall
Speaker 1: the second part of the speech, which was okay, so
Speaker 1: I'm telling you you've got this risk that you're not
Speaker 1: considering right now, and the way to address that risk,
Speaker 1: Carnie said, was to try and get companies to disclose
Speaker 1: information about their climate risk, about their emissions, allowing these
Speaker 1: investors to then take those risks on their balance sheets
Speaker 1: and thus as a result start to put money toward
Speaker 1: solutions that will tackle the problem. Is that happening.
Speaker 3: It is happening. And it's not tackling the problem. I
Speaker 3: think the fundamental misunderstanding of financial risk is that by
Speaker 3: getting better information and managing financial risk that the economy
Speaker 3: will reallocate capital towards solutions. That was the mistake everything
Speaker 3: else about what he was saying that as climate risk
Speaker 3: and climate impacts intensify, the financial sector will feel it,
Speaker 3: but on a delayed trajectory. That's correct. But by the way,
Speaker 3: we're already seeing some effects in the economy and some
Speaker 3: effects in some financial assets, so we better be attentive
Speaker 3: to and manage those risks. But if we want to
Speaker 3: reduce the underlying risks, it is a different set of
Speaker 3: mechanisms altogether.
Speaker 1: But the translation of that problem became the structure of how,
Speaker 1: at least for the past decade, the world has been
Speaker 1: trying to tackle this problem. And we don't even need
Speaker 1: to get to the political side of you know, right
Speaker 1: wing populism or policy changes. It's really the basic logic
Speaker 1: of the operation came from the speech. Came from the
Speaker 1: Paris Agreement. Right we had a target under the Paris
Speaker 1: Agreement that wanted to keep temperatures below one point five
Speaker 1: degrees celsius. That was translated by scientists as the world
Speaker 1: needs to reach net zero by twenty to fifty carbon
Speaker 1: dioxide emissions, and then corporations took that on heart, saying, well,
Speaker 1: that means all of us, at least the big ones,
Speaker 1: all need to get to net zero, and that would
Speaker 1: allow investors, who also have not just their own emissions
Speaker 1: from their little operations and offices and flying around, but
Speaker 1: like major emissions that are connected to them financing these
Speaker 1: corporations to go, Yes, we need to be net zero,
Speaker 1: and we didn't make very much progress. What went wrong?
Speaker 1: Because that feels like a clear logical pathway that the
Speaker 1: world should have followed exactly.
Speaker 3: Well, I hope that ten years on we really can
Speaker 3: take stock about whether that theory of change held or
Speaker 3: what we got wrong about it. What is needed to
Speaker 3: transition any system and our economy in this case, which,
Speaker 3: by the way, the transition that's needed is a compelling
Speaker 3: case economically and for energy resilience and affordability and security.
Speaker 3: This is hardly even about climate now, but that's changing
Speaker 3: the real economy. Instead, if we look at this as
Speaker 3: a financial risk, then the set of tools that we
Speaker 3: have to engage in that is financial regulation, which are
Speaker 3: disclosures and risk assessments. That is not how you change
Speaker 3: the real economy. So that was I think where the
Speaker 3: split was. Then there are other underlying fallacies in what
Speaker 3: you just described. I'll say one basic one, which is
Speaker 3: that the concept of net zero being an atmospheric concept
Speaker 3: cannot be achieved by individual entities setting their own net
Speaker 3: zero targets, which is the direction we went in, because
Speaker 3: individual entities are part of systems, energy systems, transport systems,
Speaker 3: built environment, and they can't shape those systems on their own.
Speaker 3: They can influence them, but they can't shape them on
Speaker 3: their own. So setting a net zero target for an
Speaker 3: entity is a fallacy. It's impossible, and it has led
Speaker 3: to a lot of accounting maneuvers and disclosure oddities to
Speaker 3: try to project some reductions that are disconnected from what's
Speaker 3: happening in the real economy and the real atmospheric concentrations.
Speaker 1: So what is the solution then, if companies should really
Speaker 1: not be aiming for net zero but they should be
Speaker 1: trying to shape the system, Well, we know they can
Speaker 1: because they have labbying powers, etc. But they've never lobbied
Speaker 1: for green policies. They've lobbied for their self interest. Now
Speaker 1: you're asking them to change the system in the interest
Speaker 1: of the rest of the world, and you're asking them
Speaker 1: to lobby in the interest of the rest of the world.
Speaker 1: That is not something they're set up to do anyway.
Speaker 1: So what could be an alternative that would allow for
Speaker 1: corporations to be a part of the solution.
Speaker 3: Believe it or not, I will tell you as someone
Speaker 3: I think I am probably more existentially concerned about climate
Speaker 3: change than anyone, and yet what I think is the
Speaker 3: solution set I do think is in the self interest
Speaker 3: of economic actors. And when I talk to companies and
Speaker 3: the financial institutions, what I'm saying to them resonates more
Speaker 3: than this structure that we've created that misunderstands incentives and
Speaker 3: possibilities and levers the different institutions have. So I just
Speaker 3: want to say that what you've described as being difficult,
Speaker 3: I don't think is so difficult. So what I would
Speaker 3: say is, first of all, what Mark Carney described as
Speaker 3: financial risk, that's true. So every entity and financial institution
Speaker 3: should understand real evolving climate risk, which there are. That's
Speaker 3: prudent risk management. That doesn't solve the climate crisis. But
Speaker 3: it is true that we are facing extreme heat, floods,
Speaker 3: heat that affects labor productivity. The insurance prices are going up.
Speaker 3: So there are real effects in the economy of climate
Speaker 3: change that should be managed from a risk management perspective.
Speaker 3: And by the way, companies better do that too, because
Speaker 3: companies that are in flood zones or that rely on
Speaker 3: supply chains from regions that are very vulnerable, so from
Speaker 3: good risk management that is important, but we should not
Speaker 3: conflate that with the solution set. The reason why I
Speaker 3: think the solution set is in the interest of companies
Speaker 3: and of the financial sector is that now more than ever,
Speaker 3: the transitions that are necessary to create efficient, secure, resilient,
Speaker 3: affordable energy systems that can support new types of industry
Speaker 3: and industrial innovation, and built environments that are efficient and
Speaker 3: can have cost savings. All of this actually is compelling
Speaker 3: for economic reasons. These are financiable. Sometimes they're so obviously
Speaker 3: financiable that finance is driving them. The largest installed solar
Speaker 3: capacity in the US is in Texas, not because anybody's
Speaker 3: lobbying for climate policies in Texas, but because the economics
Speaker 3: makes solar capacity the most compelling, and we see that
Speaker 3: in all parts of the world that there are clean
Speaker 3: solutions now that are already the more affordable solutions where
Speaker 3: they're not yet financiable is because we need to create
Speaker 3: the market and connect users, the downstream consumers with the producers,
Speaker 3: and adjust the utilities and the way that the grids
Speaker 3: are managed to be able to optimize these benefits. As
Speaker 3: one example, if different industries can save money by storing
Speaker 3: some of their own energy and having better demand response,
Speaker 3: that's saving for the industry, but the utility needs to
Speaker 3: be able to manage that flexibility on the grid. When
Speaker 3: we can solve those market structures in these solutions become
Speaker 3: compelling for the companies and compelling from the finance perspective.
Speaker 1: That has certainly played out in the renewable sector rit large,
Speaker 1: not just solar, but win also batteries and now increasingly
Speaker 1: electric cars. You know, plenty of developing countries now have
Speaker 1: more electric car sales in their share of new vehicles
Speaker 1: sold than many of the most developed economies. That's happened
Speaker 1: through a set of government coordinating mechanisms where there's been
Speaker 1: either a target set to try and reach a certain
Speaker 1: amount of renewables in the grid, initially to there being
Speaker 1: incentives in terms of subsidies, which is the sort of
Speaker 1: formula that the US uses mostly to try and fund
Speaker 1: these technologies that the governments think the world needs but
Speaker 1: are expensive and need to start to compete with the alternative.
Speaker 1: But we are now also in that place where given
Speaker 1: the politics and given the policy changes, people are looking
Speaker 1: towards investors as the driver of change because these financial
Speaker 1: risks are real. So last year, Norge's Bank Investment Management,
Speaker 1: which is the world's largest manager. You know, all the
Speaker 1: oil money that Norway has earned has gone into this
Speaker 1: huge part that the government uses for all sorts of things,
Speaker 1: invests in pretty much every investable company in the world
Speaker 1: with like one or two percent of their stake, said
Speaker 1: last year that they believe the financial sector's conventional approach
Speaker 1: to estimating the physical risk of climate change is hugely
Speaker 1: understating the problem. So they're kind of confirming what Conny
Speaker 1: said ten years ago and saying it in twenty twenty
Speaker 1: five with greater urgency. So when they were asked, okay,
Speaker 1: then what should NBIm do as a result of understanding
Speaker 1: this US risk, shouldn't they be investing more aggressively in
Speaker 1: climate solutions? They said, no, that's not their mandate. The
Speaker 1: mandate comes from the Norwegian government and it currently is
Speaker 1: not the government's mandate. So what is the solution here?
Speaker 1: Is it to go back and try and essentially create
Speaker 1: a political movement that would put the right leaders in government.
Speaker 3: I think the solution is easier, but that that's a
Speaker 3: perfect example of what the solution is not. That was
Speaker 3: a perfect example that even though financial risk may be real,
Speaker 3: that that in and of itself is not the motivation
Speaker 3: to go finance new solutions. And whether the mandate comes
Speaker 3: from the government of Norway or from beneficiaries that are
Speaker 3: expecting returns on their portfolio, anyone invested in the markets
Speaker 3: is expecting financial returns. They don't want their companies to
Speaker 3: go out and be financing things that might be loss
Speaker 3: makers or that will be loss makers because there's no
Speaker 3: market for them. They want to be maximizing the risk
Speaker 3: adjusted returns in the current economy. And by the way,
Speaker 3: let me just note that as long as our consuming
Speaker 3: sectors consume fossil fuels, the demand for fossil fuels will remain.
Speaker 3: The solution is not to say stop financing the fossil
Speaker 3: fuel sector. The solution is phase out the demand by
Speaker 3: making the alternatives cheaper, more affordable, more accessible, which is happening.
Speaker 3: As we do that, even more the demand for fossil
Speaker 3: fuels phases out and then the financing stops. So we
Speaker 3: should understand the levers. So what is the solution now
Speaker 3: more than ever, as I was saying, the investments that
Speaker 3: are needed to create a clean, efficient economy, are billions,
Speaker 3: if not trillions of dollars of investment opportunities that Norges
Speaker 3: Bank and other financial institutions will want to invest in
Speaker 3: when we make them financible. That is the challenge, which
Speaker 3: I don't think is such a big challenge, but it
Speaker 3: is also the solution set. So what can the finance
Speaker 3: sector do because they can't lead on making markets that
Speaker 3: don't exist financiable, but they have unique expertise in understanding
Speaker 3: what is financiable. How do they perceive different types of
Speaker 3: risk market risk, off take risk, technology risk, political risk,
Speaker 3: regulatory risk, construction risk, so that we can in the
Speaker 3: real economy, using other types of tools, the export credit
Speaker 3: agencies and the development banks that have concessional finance and
Speaker 3: guarantee mechanisms and other risk sharing tools can address the
Speaker 3: risks so that they become financiable by the private sector
Speaker 3: with real returns. That's why I think that this is
Speaker 3: in the financial sector's interest to help create these financiable investments.
Speaker 1: After the break, I ask Lisa whether China's approach to
Speaker 1: climate finance can be reproduced in Western countries. And if
Speaker 1: you're enjoying this episode, please take a moment to read
Speaker 1: and review the show on Apple Podcasts, Spotify, and YouTube. Recently,
Speaker 1: Liney Chevri wrote simple but deep. I love the analysis
Speaker 1: of this podcast. Thanks Lina. The biggest place where finance
Speaker 1: is not flowing a must flow is developing countries where
Speaker 1: we know the opportunity of having cleaner energy and the
Speaker 1: benefits are far greater as a result, and the risks
Speaker 1: of actually investing from an investor perspective are also greater.
Speaker 1: So how do you solve that problem?
Speaker 3: Yes, that is what I spend a lot of my
Speaker 3: time thinking about. Not only are the clean energy opportunities
Speaker 3: in emerging markets huge, but frankly so much infrastructure development
Speaker 3: in emerging markets, in clean industry, in mobility solutions, in
Speaker 3: information and communication technologies, the digital hubs. These are great
Speaker 3: investment opportunities. But emerging markets are perceived as risky, and
Speaker 3: when they are risky, either by mandate, some institutional investors
Speaker 3: cannot invest in them, or even those who aren't driven
Speaker 3: by mandate, the private credit markets don't want to invest
Speaker 3: in places that are risky. So we are trying to
Speaker 3: unpack that risk because some of the risk is a
Speaker 3: misperception of risk by not understanding because people are not
Speaker 3: familiar with emerging markets. Some of the risk are real risks.
Speaker 3: Risks like currency risk because the developing countries borrow in
Speaker 3: hard currency but they have their revenues in their own currency,
Speaker 3: or some types of political risk if the utilities may
Speaker 3: not be reliable off takers, or liquidity risks because when
Speaker 3: debt becomes due, developing countries don't have large reserves like
Speaker 3: the developed countries do. So each of these risks has
Speaker 3: determinants factors that are leading to these risks. If we
Speaker 3: can understand why these risks exist in emerging markets, we
Speaker 3: can solve them structurally, We can solve them with new
Speaker 3: risk sharing tools, and we can help investors understand that
Speaker 3: some of the perception is actually not correct.
Speaker 1: Is there an example of a place where that's happening.
Speaker 3: Yes, So one recent publication that starts that helps, but
Speaker 3: much more needs to be unpacked, is that after a
Speaker 3: lot of advocacy, the development finance community released their data
Speaker 3: on default rates across their portfolios and it's called the
Speaker 3: GEMS database. And what the GEMS database showed is that
Speaker 3: the default rates in low income countries is much lower
Speaker 3: than what their risk ratings would imply. That was already helpful,
Speaker 3: it needs to be much further unpacked because this is
Speaker 3: financing from development finance institutions, which of course has more
Speaker 3: protections than private investment does. But private investment can co
Speaker 3: invest with development finance and benefit from those guarantees. And
Speaker 3: in developed countries too, a lot of financing is benefits
Speaker 3: from public sector guarantees or supports, So we need to
Speaker 3: unpack that. But that's at least one area.
Speaker 1: But all of this request coordination and coordination often comes
Speaker 1: from governments. When it cannot because of the politics or
Speaker 1: because of their physical capacity. Who else can step in?
Speaker 3: Yeah? Absolutely, so many other actors can step in. The
Speaker 3: appropriate financing stack or the financing solutions to d risk
Speaker 3: can involve a number of different financial entities that have
Speaker 3: an interest in coordinating with other financial entities. So yesterday
Speaker 3: I was at a wonderful workshop up on export credit
Speaker 3: agencies and the role that export credit agencies can play
Speaker 3: in de risking critical investments. But export credit agencies have
Speaker 3: an interest in collaborating with other development finance institutions, the
Speaker 3: multilateral development banks, with local commercial banks that can bring
Speaker 3: additional local currency finance. So even different actors within the
Speaker 3: financial sector, not one financial entity that wants to make
Speaker 3: a market, but to work with the other types of
Speaker 3: financial actors to create a financing stack.
Speaker 1: And development banks are big, there are many, but they
Speaker 1: are not as big as private financial institutions are. There
Speaker 1: examples where private and financial institutions have stepped up.
Speaker 3: There are, they're not enough because and I think this
Speaker 3: goes to the question of the perception, because the more
Speaker 3: data that we can have that shows what good investments
Speaker 3: there are, the more that we'll see. But there are
Speaker 3: a few. The way that the private sector usually comes
Speaker 3: in to emerging markets where there really are assessed risks,
Speaker 3: whether they are real or perceived, is together with an
Speaker 3: entity that can take on that first risk or that
Speaker 3: can help to de risk it. So there are co
Speaker 3: investments with development finance institutions or blended finance vehicles where
Speaker 3: either a philanthropy or a other type of catalytic fund,
Speaker 3: a guarantee mechanism, or a development finance institution, or in
Speaker 3: the case of Singapore, the monetary authority puts in some
Speaker 3: initial capital and on that basis the traditional institutional large
Speaker 3: private investors feel more confident because there's a mechanism to
Speaker 3: take on the first loss. One region in which I'm
Speaker 3: quite interested in what this could look like is in
Speaker 3: Southeast Asia, which from a climate perspective for the world,
Speaker 3: is a very important region. It has the second largest
Speaker 3: growth in energy demand after India. If that energy demand
Speaker 3: and is met with clean energy, that will save the planet,
Speaker 3: and if it's not, then that will lead to massive overshoot.
Speaker 3: From the region's perspective, actually the driver of the clean
Speaker 3: energy transition is not climate. It's that to meet their
Speaker 3: growing energy demand in the most resilient, secure, affordable, independent
Speaker 3: way and to support the growth of clean industries within
Speaker 3: their economy and by the way, to decrease congestion in
Speaker 3: their roads and to clean their air. They have an
Speaker 3: interest in an integrated clean grid that requires connecting different
Speaker 3: sources of clean energy generation, which is located throughout Southeast
Speaker 3: Asia with all throughout the region, because in order to
Speaker 3: make the clean energy reliably available and affordable, you need
Speaker 3: to be able to move it from where it is
Speaker 3: to where it's needed. And by the way, the country
Speaker 3: that this the most is Singapore, because Singapore can't generate
Speaker 3: its own clean energy, so its ability to truly decarbonize
Speaker 3: its economy will depend on its being able to reliably
Speaker 3: secure adequate clean energy from the region. So the whole
Speaker 3: region knows that they will benefit from a clean integrated
Speaker 3: energy system. Why hasn't that happened.
Speaker 1: Yeah, well, I mean that seems like it's in their
Speaker 1: self interest.
Speaker 3: It's in their self interest, and it's a great investment.
Speaker 3: This is going to be a huge energy market. One
Speaker 3: basic starting point is that until this year, there wasn't
Speaker 3: even a scenario in the region for what does this
Speaker 3: clean energy system look like. So if you were an
Speaker 3: energy investor and you wanted to go invest in the
Speaker 3: fastest one of the fastest growing energy regions in the world,
Speaker 3: from an investment perspective, it's not even clear where you
Speaker 3: make that investment because there's no scenario. Then the cost
Speaker 3: of capital, as we were discussing in emerging markets is
Speaker 3: very high for clean energy. When the cost of capital
Speaker 3: is high, the levelized cost of energy is higher than
Speaker 3: fossil fuel production. So on a competitive basis, clean energy
Speaker 3: is not competitive only because of the higher cost of
Speaker 3: capital in emerging markets. And then the final point I
Speaker 3: would say is that for an integrated energy system, if
Speaker 3: you have cross border infrastructure, then the investors need some
Speaker 3: assurance that they're going to be able to trade power
Speaker 3: across borders. How do you do that when you have
Speaker 3: different energy systems, different markets or so on. So until
Speaker 3: this year, there wasn't a plan. Now we're putting we're
Speaker 3: supporting the wonderful institutions in the region, especially the Ausion
Speaker 3: Center for Energy and the Member States, to say, oh,
Speaker 3: you know what, it would be good to have a
Speaker 3: plan for what this looks like. And when we have
Speaker 3: a plan, we can identify where they're good investment opportunities.
Speaker 3: And then the finance comes, which is how do we
Speaker 3: make this all financiable? And so we have been speaking
Speaker 3: with both public and private financial institutions. Of course, the
Speaker 3: Asian Development Bank is already involved, the IFC is involved,
Speaker 3: and most recently we've been speaking with JP Morgan as
Speaker 3: one of the many interested private sector entities who sees
Speaker 3: opportunities in financing, and we've been saying with JP Morgan,
Speaker 3: let's figure out how we can make this grid financibal.
Speaker 3: Then it'll unlock a lot of financing opportunities in the region.
Speaker 3: So together with JP Morgan, we are organizing a series
Speaker 3: of workshops that will bring together these public and private
Speaker 3: sector financial institutions, also together with some of the utilities
Speaker 3: and the regulators, to say what is needed to make
Speaker 3: this all financible, and when it's financible, it will unlock
Speaker 3: a lot of important investment opportunities.
Speaker 1: So this is the case where a technology that now
Speaker 1: has been at least globally shown to be de risk
Speaker 1: but is facing this problem of cost or capital is
Speaker 1: being addressed by bringing in this coordination mechanism. You're saying,
Speaker 1: it's not driven by climate, so it is driven by
Speaker 1: other factors. And the way to think about it from
Speaker 1: a corporations perspective is, obviously they have to deal with
Speaker 1: the risks they face today, but they also have a
Speaker 1: risk in the future of just not knowing where their
Speaker 1: business is going, and so they have to keep an
Speaker 1: eye out for future business opportunities, And you're saying, the
Speaker 1: coordinating mechanism here is not climate, is actually the future
Speaker 1: business opportunities. And JP Morgan, as a big financier, wants
Speaker 1: to make sure that they are tapping into this future
Speaker 1: business opportunity. That's great, that works for renewables. That is
Speaker 1: maybe fifty percent of the problem. Fifty percent of the
Speaker 1: problem is technologies that are not yet financiable, that are
Speaker 1: not yet cheap, that require a bunch of rich governments
Speaker 1: to do something about it. Typically, But if those governments
Speaker 1: are not going to step up, what do we do
Speaker 1: about the rest of the problem.
Speaker 3: Yes, So, first of all, I think it's important to
Speaker 3: know that we probably have about seventy percent of the
Speaker 3: technologies that are needed for global decarbonization. So the challenge,
Speaker 3: the real constraint is not that we don't have the technology,
Speaker 3: it's the deployment. What's very interesting is that that deployment
Speaker 3: is happening faster in emerging markets than it is in
Speaker 3: developed countries. Because we have the technologies. They know that
Speaker 3: to deploy those technologies across their systems is compelling from
Speaker 3: an efficiency perspective, from a cost saving perspective, and that
Speaker 3: it can be done by bringing together those actors in
Speaker 3: the system that would benefit from the new technologies. So
Speaker 3: we see more deployment in emerging markets than in developed countries.
Speaker 3: But there are some places where we need new innovation.
Speaker 1: Plenty of them, green steel, green cement, sustainable aviation fields, etc. Etc.
Speaker 1: What about them?
Speaker 3: Yes, So, first of all, we do need public finance.
Speaker 3: We need public finance. This is not going to be
Speaker 3: so by the private sector alone. What we should be
Speaker 3: thinking about in every financing solution, or what needs to
Speaker 3: be in what we need to be financing is what
Speaker 3: is suitable for public finance and how? What is suitable
Speaker 3: for private finance and how? And then where can we
Speaker 3: find blended mechanisms or how can we use some types
Speaker 3: of public or innovative risk sharing mechanisms to bring in
Speaker 3: the private sector. Those are basically the three categories. The
Speaker 3: public finance can come in many different mechanisms. We fund
Speaker 3: R and D that is one of the best ways
Speaker 3: to fund new technological innovation. We use subsidies to incentivize.
Speaker 3: We also use mandates by the way and procurement, so
Speaker 3: government doesn't even necessarily have to be laying out financing
Speaker 3: to shift the markets if you mandate certain efficiency standards,
Speaker 3: the markets shift. If you commit to procurement of some
Speaker 3: standard of some clean technology, then the markets shift. If
Speaker 3: you can aggregate demand in that way, then the markets
Speaker 3: meet that aggregate demand. So some of the additional investments
Speaker 3: needed can come in that way. Some of them remain
Speaker 3: very difficult, and you've named a couple of them. So
Speaker 3: let's take green steel, where right now the technology that
Speaker 3: would decarbonized steel is more costly in some parts of
Speaker 3: the world. Actually, because we're already seeing that in Sweden's
Speaker 3: Stegra is able to produce clean steel at a rate
Speaker 3: that is marketable on the market, and you have companies
Speaker 3: that are willing to buy the green steel in Sweden.
Speaker 3: But in Asia, where there's most of the world's steel production,
Speaker 3: the clean versions are not yet cost competitive. This is
Speaker 3: an example where I believe it to be possible to
Speaker 3: bring together actors from within the system, which we are
Speaker 3: also doing in January together with the real estate company
Speaker 3: in Hong Kong that has an interest in procuring clean steel,
Speaker 3: and realize that it can't do it on its own,
Speaker 3: So we are bringing together Boo Steel, which has been
Speaker 3: very involved from the supply side, and producing clean steel,
Speaker 3: the real estate companies, the car companies that have an
Speaker 3: interest in buying, the private sector financial institutions that are
Speaker 3: happy to finance when there's going to be a commercial market,
Speaker 3: the public sector officials that can understand well what types
Speaker 3: of mandates would create this market. And then maybe in
Speaker 3: this case we may need either development finance, concessional finance,
Speaker 3: or philanthropy to address the green premium until the point
Speaker 3: that the prices come down.
Speaker 1: So the one place where we know coordination happens really
Speaker 1: well is China, and of course that is the place
Speaker 1: which is now as a result of that coordination among
Speaker 1: government actors, among companies and finance, the place where most
Speaker 1: green technologies are made, and they are made more cheaply
Speaker 1: than anywhere else. But that kind of politics can be replicated.
Speaker 1: Is there anything from the China model that can be
Speaker 1: replicated outside of China?
Speaker 3: I think there are two really important points. One is
Speaker 3: that China sees a huge competitive advantage in building the
Speaker 3: economy of the future. This is actually part of the
Speaker 3: point is that they are it's benefiting their companies and
Speaker 3: the country to be investing in the component parts of
Speaker 3: the clean energy future. They are we are not going
Speaker 3: to be able to compete for the price of solar panels,
Speaker 3: certainly not evs, and they're doing this from an economic basis.
Speaker 3: So that's one point is that we should This is
Speaker 3: a perfect example of how economics and climate objectives have aligned.
Speaker 3: The other thing is that, of course China sets vision
Speaker 3: and a plan and a strategy and can be coherent. That,
Speaker 3: by the way, can be done by any form of government.
Speaker 3: Just have a plan and how do you achieve that plan?
Speaker 3: Within all of these sectors, there is immense competition. That
Speaker 3: is what has led to the development of the most
Speaker 3: incredible technologies at the cheapest price. Immense competition because everything
Speaker 3: in China is at an immense scale. So this is
Speaker 3: not that it is so heavily subsidized by the government.
Speaker 3: The government has set direction, created and enabling framework. Any
Speaker 3: form of government can do that, and then there was
Speaker 3: immense competition and the winners prevail, and there are a
Speaker 3: lot of losers in that case, by the way, But China,
Speaker 3: I think exemplifies two things we can all learn from.
Speaker 3: One is that plans are useful. Planning is helpful. You
Speaker 3: can align your incentives and your markets and your skill
Speaker 3: sector with your plan. That is a good takeaway, And
Speaker 3: the second takeaway is that there is tremendous economic opportunity
Speaker 3: in the new clean energy future and if we don't
Speaker 3: lean into that globally, then China will and we're already
Speaker 3: seeing that. So it should be a message to all
Speaker 3: of us that to be investing in the component parts
Speaker 3: of a clean, efficient, reliable economic future can be a
Speaker 3: real competitive and diplomatic advantage. By the way, this is
Speaker 3: a good way to show leadership in the world is
Speaker 3: to be the financing and technology partner to all of
Speaker 3: the emerging markets that are huge markets for these new technologies.
Speaker 1: So if you go back to McCartney's speech, then clearly
Speaker 1: he pointed to a problem that needed to be highlighted
Speaker 1: and given the platform to actually focus attentions and solve
Speaker 1: a problem. But then his solution set isn't the right one.
Speaker 1: Now McCartney is in government, he is the Prime Minister
Speaker 1: of Canada, and what we've seen is he is continuing
Speaker 1: to think of his solution set as the logical outcome.
Speaker 1: So on this podcast, we had a minister from Karnie's
Speaker 1: cabinet who resigned as a result of a deal that
Speaker 1: he signed with Alberta, the state that produces most of
Speaker 1: the oil and gas in Canada, and as part of
Speaker 1: that logic of signing that deal, which you know, I
Speaker 1: hopelessness can go back and look at the details of
Speaker 1: but the logic was, look, governments are not in this
Speaker 1: case Alberta not ready to invest in green solutions, but
Speaker 1: Marconi things, because clean energy has become cheaper, markets will
Speaker 1: do so. And so his logic here now is because
Speaker 1: the politics is not there, We're going to let the
Speaker 1: markets do the bidding. But you're saying no, Actually, for
Speaker 1: a lot of this, we still need government solutions. We
Speaker 1: still need government support, We still need public finance, even
Speaker 1: if it doesn't come from a national government. Are we
Speaker 1: concluding in twenty twenty six then that really let's go
Speaker 1: back to the board and get the politics of supporting
Speaker 1: climate action right, because that is the only way we
Speaker 1: actually solve this problem and make it in a place
Speaker 1: where all of these technologies make our lives better regardless
Speaker 1: of climate anyway.
Speaker 3: I think the takeaway for twenty twenty six is that
Speaker 3: markets follow the real economy, but there are many actors
Speaker 3: that shape what happens in the real economy rapidly declining
Speaker 3: technology costs that has an impact. Commitments, procurement commitments have
Speaker 3: an impact. Collaborations among private sector participants can create markets,
Speaker 3: but we should understand that what gets financed depends on
Speaker 3: the real economy and when demand changes or a company
Speaker 3: signals its commitment to procure clean energy or to procure storage,
Speaker 3: that makes those solutions financiable. Governments absolutely should be at
Speaker 3: the table. And by the way, governments themselves have many
Speaker 3: different actors cities, states, even within those there are different
Speaker 3: agencies that have different tools that they can use, green banks, utilities.
Speaker 3: So I don't want to get too consumed by the
Speaker 3: idea that we need to convince our leadership that is
Speaker 3: not thinking very coherently that they, of course they could
Speaker 3: do more, but we're not hamstrung by their lack of sanity.
Speaker 3: We can work with other real economy actors to make
Speaker 3: markets financible. One thing that was odd in Canada, I
Speaker 3: have to say is that we of course understand that
Speaker 3: it's mandates and these procurements that make the markets. At
Speaker 3: the same time as saying we're going to let the
Speaker 3: markets solve it. Prime Minister Carney also rolled back, for instance,
Speaker 3: the EV mandate and the tools that were in place
Speaker 3: that would have shaped the demand. That is incoherent. Actually,
Speaker 3: because the way that you shape and said, then you
Speaker 3: know there's going to be a demand for fossil fuel
Speaker 3: for years to come, Well, yes, if you aren't using
Speaker 3: your real economy tools to shape that demand. That is
Speaker 3: another fallacy in this climate debate is that the way
Speaker 3: that we decrease the demand for fossil fuels is by
Speaker 3: decarbonizing the sectors that use them. Why he rolled back
Speaker 3: the mandates that would have had that effect while saying well,
Speaker 3: oil's here to stay. That was the most incoherent part
Speaker 3: to me.
Speaker 1: So in trying to give agency to trying to tackle
Speaker 1: problems of climate change, there are three big actors. There's governments,
Speaker 1: there's private industry, and then there's individuals. Individuals have the
Speaker 1: least agency in this fight. But if you look at
Speaker 1: governments and finance, what you're saying is on accountability, you
Speaker 1: really need to look at net zero targets and climate
Speaker 1: goals and mandates and policies toward the government, and you
Speaker 1: should hold them to account and you should create the
Speaker 1: politics that enables that. But when it comes to private sector,
Speaker 1: whether that's finance or business trying to hold them accountable
Speaker 1: to net zero? Is there a wrong idea, But you
Speaker 1: should hold them to account for what kind of future
Speaker 1: that they as companies are trying to make money from.
Speaker 1: Is that future a green future which will help the world,
Speaker 1: or is that a future that is making everybody's lives worse?
Speaker 1: Is that the best summation of.
Speaker 3: How to take I think it's a very good one.
Speaker 3: But I'm going to give a summation that is even
Speaker 3: more a moral even though I am the try to
Speaker 3: be the most principled person, but I think that we
Speaker 3: can solve this even without expecting the private sector to
Speaker 3: have any morality to it. My summation would be that
Speaker 3: there really are risks to be managed. We should manage
Speaker 3: those risks, but not assume that managing those risks is
Speaker 3: going to necessarily it won't on its own lead to
Speaker 3: new solutions. So let's first of all, stop talking about
Speaker 3: climate as a financial risk as a solution set. It
Speaker 3: is a financial risk, and we should be aware of that,
Speaker 3: better accounting for it, and better managing it throughout the
Speaker 3: real economy and the financial sector. On the real economy side,
Speaker 3: what you said, by the way, is right. Our livable
Speaker 3: future also now is increasingly, if not already the most
Speaker 3: compelling affordable solution already. That's going to create massive investment
Speaker 3: opportunities where it's not already financible or already the most competitive.
Speaker 3: There are many tools in our toolkits, at different levels
Speaker 3: of government, in different parts of the private sector, through collaboration,
Speaker 3: through procurement commitments, we have many tools to address the risks,
Speaker 3: the perceived risks that make these not financible. What I
Speaker 3: would say to the private sector and the financial sector
Speaker 3: is help be a part of these solution sets. That's
Speaker 3: not even a cost, that's not a cost. If you
Speaker 3: can come to the table and help us think how
Speaker 3: do we make these transitions financiable, you are the first
Speaker 3: in line to benefit from these new affordable, efficient, resilient investments.
Speaker 3: And I would rather be a leader than a lagger.
Speaker 3: But those who lead are going to change the systems,
Speaker 3: and those who lag are going to be part of
Speaker 3: these nu clean systems in any event, even if they're
Speaker 3: going to have higher costs in retrofitting and so on.
Speaker 3: So I believe that if we lean into creating the
Speaker 3: markets that are ultimately in all of our collective interest.
Speaker 3: We can do that without expecting any institution to be
Speaker 3: moral or to believe in some future that is not
Speaker 3: in their self interest. We're just trying to come together
Speaker 3: to create a financible, new, efficient, resilient, clean system economy
Speaker 3: for all of us.
Speaker 1: Thank you, Lisa, Thank you so much, and thank you
Speaker 1: for listening to zero. Now for the sound of the week.
Speaker 1: That is the sound of chickpeas being roasted. As coffee
Speaker 1: prices rise globally mainly because of climate change, many companies
Speaker 1: are looking to one hundred year old recipes to make
Speaker 1: coffee alternatives, and roasted chickpea powder is one of the
Speaker 1: ingredients for those alternatives. Read the full article linked in
Speaker 1: the show notes. If you liked this episode, please take
Speaker 1: a moment to rate and review the show on Apple Podcasts, Spotify,
Speaker 1: and YouTube. This episode was produced by Oscar boyd Our.
Speaker 1: Theme music is composed by Wonderly Special. Thanks to Alistair
Speaker 1: marsh Samarsadi Mosses Andim Laura Milan and Sharon chen I
Speaker 1: am Akshadrati.
Speaker 3: Back soon.