Hey! Look! Climate policy that would actually work!

by | Nov 26, 2009 | Climate and resource scarcity, Economics and development

So imagine if you will that you’re a small energy company. You’re thinking about building a wind farm, say, off the coast of Yorkshire. Problem is, you’re struggling to find investors to finance the project. Every time you talk to venture capital companies, private equity firms or other financiers, you get the same response.  They’re worried about the risk – specifically, the risk of politicians lacking (how to put it?) lead in their pencil.

What, the investors ask you, happens if policy failure means that fossil prices stay low, so your wind farm can’t compete? Or, for that matter, if prices for emissions permits stay at rock bottom because government caves in to lobbying on permit allocation? What happens if the government simply misses all of its climate targets?

So maybe the investors agree to finance your project, but at punishing rates of interest. Or maybe they decide not to finance it at all. Either way, your energy firm and the government are stuck together in a vicious circle of self-fulfilling prophecy. The government can’t deliver its climatepolicy targets unless people like you build things like wind farms.  But you can’t access capital at reasonable rates unless the investors are convinced that there’s a real future for what you want to build – and they figure that the government’s record of fudges kind of speaks for itself.

This is the kind of dilemma that David and talked about in our report on institutional architecture for climate change, where we argued that a key requirements for moving forward on climate policy was clearer signals from the future – whereby everyone believes that the low carbon economy is actually going to happen, and consequently acts in ways that deliver exactly that outcome.

Well, Michael Mainelli – a good friend of ours whom we worked with on the London Accord, which brought together a raft of investment banks in a collaborative research project on climate change – has come up with a delicious proposal that would in effect amount to just such a signal from the future. You’ll like this.

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What are the odds the eurozone will collapse?

by | Jan 29, 2009 | Economics and development

About 10-20%, if you believe the bond markets. Spreads on the debt of southern European sovereigns like Greece, Spain, Portugal and Italy have now widened to record levels over their Northern compatriots’ bonds. These countries all lost their AAA bond rating from Standard & Poor’s earlier this month, which means S&P’s thinks there is a chance, albeit a slim one, that these countries default on their debt.

Some think this could presage the eventual collapse of the eurozone, though others think the rating agencies are getting it wrong again, and see this as a good buying opportunity, such as money managers BlackRock.

“You have got to ask yourself at what point this becomes ridiculous,” Scott Thiel, head of European fixed income in London at BlackRock, which manages $1.3 trillion, said in an interview Jan. 23. “That’s too high if you step back and take a deep breath. We’ve begun to add back exposure” of these bonds.

An interesting question is whether the US could lose its AAA rating. Seeing as the entire credit markets are priced over US Treasuries, this would be a colossal disrupture to bond markets – sort of like the clock at Greenwich stopping.