The opportunity for green recovery – and why we need ecological interest rates

If the chancellor had got his carbon sums right, he could have helped save the economy and the climate together. An ecological interest rate would help.

‘Climate change is as big a threat to world peace as war,’ UK Prime Minister Boris Johnson recently told the UN Security Council, as he committed the UK, host of this year’s key climate conference, COP26, to leading the world on climate action. What that leadership currently looks like is a government that announced an increase in its military spending of £16.5 billion in November 2020, and in 2020–21 spent at least £41.2bn on the military and just £3.1bn on reducing carbon emissions, according to Scientists for Global Responsibility. At the same time the UK is cutting the budget for overseas aid that might help poorer countries adapt to climate upheaval, while splurging £27bn on a carbon-heavy roads programme and extracting every last drop of oil and gas from the North Sea to burn and further warm the climate.

As Sir Mark Lowcock, under-secretary-general at the Office for the Coordination of Humanitarian Affairs, and former permanent secretary at the Department for International Development, told the BBC Radio’s Today programme on 23rd February, ‘Your question is right obviously if you’re implying there’s policy inconsistency and incoherence between, on one hand, raising issues like climate change in the Security Council, which is a good thing to do, and, on the other hand, cutting back the things the UK is doing to tackle those issues. That’s obviously inconsistent and people will see through it.’

Chancellor of the Exchequer Rishi Sunak’s Budget was a missed opportunity
Photo by HM Treasury on flickr (Creative Commons)

The budget was an opportunity to correct those inconsistencies and incoherence. It could have done so by financing the programme of work laid out in the Climate and Ecological Emergency Bill. The world is currently on the cusp of a deadly, post-pandemic carbon rebound, according to the International Energy Agency, but quick, common sense, green recovery investments by government can make a difference. We also need to view the economy through a wider ‘real world’ ecological lens, and the Treasury and Bank of England could help do so by introducing ecological interest rates.

With so little time left to prevent uncontrollable destabilisation of the climate and our life-supporting ecosystems, this budget should have been about pouring enough water on climate fires and irrigating resources to those in need, not getting lost in misleading debates about small changes in corporate taxation and imagined limits on public spending that misunderstand the very nature of money, and how it is created and flows in the economy.

Don’t fall for the false notion that the UK is like a household with a ‘maxed-out credit card’ – it will be the excuse for not being able to ‘afford’ necessary action. A nation is not a household, it has a central bank and can control the supply and cost of money.

New economic language

The argument for climate action is largely won, but the struggle to picture what that looks like in practice is still at a dangerously early stage. That’s clear when you look at the fate of previous ‘flagship’ budget commitments, such as the Green Homes Grant, which as of February this year had only paid out less than 5% of its £2bn, and looks set to lose much of what remains. It’s what allows the government to provide over £5bn in pandemic-related support to airlines, but nothing to the lower-carbon Eurostar train service. It’s also what allows a government claiming climate leadership to pursue a £27bn road programme against the advice of its own officials, and to fail to address with tax instruments or other regulation the problem that average UK pollution from cars, which had been falling, has since 2016 been rising again because it has been pushing bigger, more polluting SUVs.

But, glaring gaps in action on climate and the undervaluing of socially useful work get lost in misleading talk of national gaps between spending and earning.

To re-engineer the economy it is going to take more than a few new policies and slight shifts in spending priorities. We’ve long known that we can afford necessary action. Now we need to change the way we talk about economics and how its purpose is understood. Is it possible to imagine a world in which the money system, and the prices placed on money, operate in such a way that they help resize the economy to fit within planetary boundaries?

If we’re going to tether the economics discipline to the real world, a new language is needed. One place to start is with the challenge of attempting to make interest rates, well, interesting. With more focus than ever on a green economic recovery, the fact there is no constructive connection between money, its cost and our ecological life-support system could, and should, stop traffic. Always of concern to policymakers, interest rates tend only to capture the attention of members of the wider public if they have savings or a mortgage. But if you take even a passing interest in life’s ecological foundations, you should be talking about having an ecological interest rate. Globally the economy has outgrown the carrying capacity of the biosphere, as a conservative, annual assessment of ecological overshoot makes clear. It is as if we are trying to shove size 10 economic feet into size 6 planetary shoes.

The size of the economy is fuelled by the supply of credit, which may then take different monetary forms. More money in circulation tends to increase conventional economic growth – as measured by a rise in the narrow indicator, GDP. This doesn’t necessarily mean the productive economy is getting bigger, nor that the majority are benefitting from it, but it almost certainly does mean that sources of irreplaceable ecological value are being liquidated.

Interest rates are the price paid for borrowing money, and when the price of money is positive, which it usually is, more has to be paid back than was actually borrowed. Hence interest, and especially compound interest (interest paid on the original sum borrowed and the accrued interest), also motivates orthodox growth reliant, as it is, on an extractive model that exploits the biosphere and human labour.

Why efficiency will not save growth

We know that the economy’s footprint is already too big, but there is a constant refrain suggesting that technological fixes and improved efficiency will save us, and mean that we can carry on pretty much as we are. Unfortunately, while there are gains to be had, there are physical limits to what technology and efficiency can deliver, and they are constantly swimming against the flash tide of growth. For example, we hear a lot of hype about the improved fuel efficiency of aviation. But, between 2013 and 2019, aviation passenger traffic went up four times faster than fuel efficiency improved. Elsewhere, the carbon emission benefits of supposedly efficient hybrid cars were shown to be only around one third of those promised, and mean that hybrids offer only small gains on fully petrol-powered cars. The manufacturer Ford, for example, markets an ‘Ecoboost hybrid’ which has emissions at least 35% higher than the EU target for regular cars.

Globally, from 1990 to 2009, there was a period in which rising growth saw a ‘relative’ decoupling from the rate of resource extraction (and carbon emissions increase). From 2009 however, even this relative decoupling appeared to stagnate. And several have written about the ‘decoupling delusion’.

Photo by Li-An Lim on Unsplash

The International Resource Panel report ‘Resource Efficiency and Climate Change: Material Efficiency Strategies for a Low-Carbon Future’, published by the UN Environment Programme in late 2020, found that emissions from the extraction and production of materials such as metals, minerals, woods and plastics more than doubled from 1995 to 2015, accounting for a full quarter of global emissions. In 2020 it was reported that in 2017, for the first time, consumption of resources passed the 100bn tonnes mark, and global material use is projected to rise dramatically on current trends to 170–184bn tonnes by 2050.

Driving all this growth and increased consumption is, of course, our economic and financial system, with money and its price as lubricant and enabler. Because money is a social construct – ‘a promise to pay’ – it cannot be finite. We can always make another promise. But the human’s or ecosystem’s ability to fulfil that promise – to meet the liability – is finite. According to Mark Carney, former governor of the Bank of England, the financial sector is investing in fossil fuels to such a catastrophically high level ‘that if you add up the policies of all of companies out there, they are consistent with warming of 3.7–3.8C’.

Ecological interest rates in practice

What might an ecological interest rate look like? Monetary policy (control of the amount of money in circulation and how it is created) is essentially meant to warm things up, or cool them down (more than appropriate given the threat of global heating). This depends on the needs of the economy at any particular time, and what is needed in the interests of society and ecological health.

In a climate emergency this means making money expensive and hard to access for what you want less of – such as high-carbon goods and services – and cheap and easily available for what you want more of – such as clean, community-owned renewable energy and mass home-retrofit programmes and public transit systems. It’s basically the same principle as for good taxation policy, namely – tax more what you want less of, and less what you want more of.

So the cost of borrowing should be made much higher for those banks and other investors who are actively investing in coal, oil and gas, and fuelling the crisis. Currently, the rate of interest rarely if ever includes ecological impact. There’s plenty of talk about so-called ESG factors (environmental, social and governance), but this doesn’t even scratch the centrality of the interest rate in allocating the trillions of capital in the economy.

Yet even within the scope of already available mechanisms, however, there are practical ways to implement the principles under discussion here. Banks have to hold certain amounts of capital against the lending they do. These so-called ‘capital adequacy requirements’ are set in Basle, Switzerland, by the Bank for International Settlements, according to the risk weighting of a loan which ranges from 0% (not at all risky) to 150% (very risky).

At the moment the cost of debt to the big oil and gas companies is the same as to the major renewable power companies. But the risk weighting of lending to fossil fuels could be raised so that more capital would need to be held against it. Conversely, clean-energy loans could carry very-low-to-zero risk weightings. At one end of the market for selling money, after outrage at the predatory pricing by so-called payday lenders, a modest interest rate cap was introduced in the UK in 2014. And, most countries have ‘usury laws’ to control the upper limit of how much interest can be charged. But, of course, that logic could be flipped, and states could insist on a higher, minimum rate to be applied to money lent to fossil fuel companies.

At a more household level, high-carbon lifestyles have been locked in by the easy availability of credit, which actively incentivises them and makes them attractive. Car finance is a major example. With everything that we know about the human health and climate impacts of SUVs and diesel cars, why are banks allowed to lend for their purchase in such a way that people don’t even think twice? Rather than waiting a decade for the phase-out, the risk weighting of loans to petrol and diesel engine cars could similarly be top rated. In this way high-carbon loans become less attractive to the lenders making them and more expensive to borrowers.

Central banks and supervisory monetary authorities have as their core mandate the maintenance of financial and monetary stability. Acting to prevent the allocation of vast financial resources to climate breakdown, with its catastrophic implications for humanity and the wider economy, is therefore directly aligned with their fundamental purpose. One thing the UK Budget did do was to make that more explicit. Chancellor, Rishi Sunak, changed the remit of the Monetary Policy Committee, which is the Bank of England’s body responsible for setting interest rates, so that it must ensure that its decisions are ‘environmentally sustainable and consistent with the transition to a net zero economy’. How it makes that compatible with its mandate simultaneously to promote ‘strong’ conventional GDP growth has not been made clear.

When he ran the Treasury for the Labour government, Gordon Brown used to joke that there were two types of chancellor: those who failed and those who got out in time. Now we need a chancellor to get the carbon sums right so that we can all escape the climate emergency in time.

The Case for an Ecological Interest Rate is published by the New Weather Institute, Prime Economics and the Rapid Transition Alliance. It is developed from an article first published by Prime Economics.

Andrew Simms is an author, political economist and campaigner. He is co-director of the New Weather Institute, coordinator of the Rapid Transition Alliance, assistant director of Scientists for Global Responsibility and a research associate at the University of Sussex. He was for many years the policy director of the New Economics Foundation, where he co-authored and published the original Green New Deal. He tweets from @andrewsimms_uk.

2 thoughts on “The opportunity for green recovery – and why we need ecological interest rates

  1. An interesting and attractive proposal. I’ve some unease though. Wouldn’t high interest rates for the dirty sectors mean that investors place spare capital there, to obtain a high return? We see this, for example with pension funds that we are trying to get to divest from fossil fuel industries – one of their arguments is that fossil fuels give good returns. Although the situation is somewhat different (they are talking about dividends, and also stock values rather than interest, and fossil fuel investments have had declining profitability in recent years) I could see them shifting money into those dirty sectors to get the high returns. In effect isn’t this what banks such as HSBC, a key focus of the bank divestment campaign, do?
    On the other hand, I could see that the availability of cheap credit would “crowd in” investment into the clean sectors, in that entrepreneurs would more likely take out loans to fund such development.
    The second issue is whether a focus on bank interest is sufficient: companies create capital by share issue, and this route would still be available for them. In his book on the City, Tony Northfield argues that this trend of self-capitalisation is increasing. It might be a bit unfair to imply criticism for not tackling the whole architecture of capitalist finance (where bank finance is just one element), but I’d be interested in your thoughts nevertheless.

  2. This is an extraordinarily important article going to the financial heart of how we can bring about a workable green recovery programme. I hope Compass will take the lead in promoting this idea where it counts.

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