Recent research investigates the importance of successful capital markets in climate change protection and energy transition.
This affects investments in fossil-free steel plants, power generation, and heating systems. The Potsdam Institute for Climate Impact Research (PIK) and the Mercator Research Institute’s (MRI) study on Global Commons and Climate Change (MCC) was published in the prestigious Journal of the Association of Environmental and Resource Economists (JAERE).
According to the study, the existing spread between savings and lending rates, which is 5.1% on average globally, contributes to an additional 0.2 °C of global warming as compared to a frictionless economy with no interest spread. The study team anticipates a climate strategy based on the cost-benefit principle in its model-based analysis.
This means that the government would know the precise quantity of climate damage that grows over time, making CO2 emissions more expensive in proportion to the harm they cause, and would thus be able to obtain the most cost-effective time path for increased carbon pricing.
If the policy is based on a fixed temperature goal, the current interest spread means that a carbon price 27% higher than in a world without a credit cost premium is required.
Governments need to take a close look at whether the higher interest rate for loans merely reflects the actual intermediation costs or whether it is also a result of too little banking competition, for which there is some evidence. If the market structure is indeed the reason for the spread, and cannot be modified in the medium term, then policymakers can effectively counteract it in the short term by subsidizing investment.
Kai Lessmann, Study Lead Author, Potsdam Institute for Climate Impact Research
The analysis reveals that if the government decides to provide economy-wide investment support, it is better for the climate and the economy than if only eco-projects are subsidised.
Kai Lessmann adds, “The structural change toward fossil-free technologies then occurs automatically. These are generally more capital-intensive and thus benefit to a greater extent from reduced credit costs. Also, the carbon price, which increases over time, exerts its steering effect.”
The research team created a sophisticated computational model for the study and gave it empirical data.
We identify eight different channels through which the credit cost premium ultimately affects climate gas emissions. To be sure, there are also restraining effects—for example, high interest rates reduce the growth of economic output and thus also of energy consumption. But the climate-damaging impact predominates. For example, the credit cost premium increases the abatement costs per tonne of CO2, so that when oriented to the cost-benefit calculation, less climate protection is then practiced as a result.
Matthias Kalkuhl, Study Co-Author, Mercator Research Institute on Global Commons and Climate Change
The negative impact of high borrowing prices on climate protection is now more visible than ever, especially in the Global South. Annual capital costs as a percentage of investment amount are in the double digits in several nations.
While many solar and wind power parks would be more profitable than gas or coal-fired power plants in the long term, they are not being built since the initial capital required per megawatt of installed capacity is more. Governments frequently lack the resources to respond, forcing them to seek assistance from the rich North.
Source: https://www.pik-potsdam.de/en
