The Centre for Economic Policy Research (CEPR) has recommended the continent attempts to power its green transition through the issuance of European climate bonds.
An article by the CEPR makes the case that while current funding models can provide half of what is needed in the transition, their focus is on mitigation and not on replacement. To combat this, and to speed the move, the CEPR recommends the bloc raises money through debt issuance.
Authors Irene Monasterolo, Antonia Pacelli, Marco Pagano, and Carmine Russo wrote: “In the EU, climate investment needs range between €550bn and €912bn per year. Nevertheless, such estimates mainly cover climate mitigation investments to reduce GHG emissions. In contrast, financing climate adaptation investments to build resilience to climate change is still largely neglected and imprecisely estimated.”
They added: “The European Commission currently plans to fill part of these investment needs with ambitious programmes such as the Green Deal and NextGenerationEU. However, the resources budgeted by the EU and its member states so far cover less than half of the relevant investment needs. Moreover, these programmes primarily focus on mitigation and fail to address the growing need for adaptation investments, which have the nature of public goods and thus require public funding.”
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The solution, says the CEPR, is for a ‘joint climate debt financing scheme’. Therefore, it proposes a three-pronged reformatory approach: introducing a uniform EU carbon pricing scheme, issuing the aforementioned climate bonds, and implementing a long-term, climate policy plan funded by those bonds.
The authors went on to explain that the bonds would have additional benefits. Their issuance, they believe, would contribute to meeting demand for a European safe asset.
They added: “We expect the European climate bonds to be highly liquid, being issued regularly and in large amounts. Therefore, investors will perceive them as a safe sovereign asset issued by a supranational financial authority with a high credit rating and direct backing from the revenue from sales of ETS allowances. Furthermore, these bonds may satisfy the growing appetite of global investors for environmentally sustainable portfolios.”
They believe the bonds will also enhance European economic growth and fiscal capacity. Finally, their issuance would benefit monetary policy on the continent, enabling the European Central Bank to ‘green’ its asset purchase programmes and expand its own green asset portfolio.
