We need an ecological interest rate

| 2nd March 2021 |

UK chancellor Rishi Sunak leaving Number 10 Downing Street for the Summer Budget Statement in 2020.

Number 10
The UK budget must be about pouring enough water on climate fires and irrigating resources to those in need - not about plucking geese and ‘maxed-out’ credit cards.

A new language is needed to tether economics to the ’real’: the real world of soil, air, forests, oceans and - simply - life.

The world is on the cusp of a deadly post-pandemic carbon rebound, according to the International Energy Agency. But quick, common sense, green recovery investments by the UK Government can make a difference. We also need imaginative steps to connect the economy to ecological reality.

The Budget is one of those rare calendar moments of near compulsory interest in economics. Because nobody really understands the subject, people reach for metaphors. Picking the wrong one, however, can be lethal. 

There will be talk of geese being plucked and credit cards over-used.

Money

But the images we should be conjuring are whether we’re pouring enough water on the climate fires, and irrigating the economy to ensure that its benefits are fairly distributed, rather than accumulating in some private lake.

Most importantly for this budget is finding new ways to anchor economic commentary in the hard realities of preserving our planetary life support systems. Having an ecological interest rate would be one way to do that.

In the UK, with pandemic spending high and the historically strange sight of a Conservative government making the state the wage payer of last resort, the inversion of political reputations is nearly complete with talk of overdue corporate tax rises.

This year’s metaphor of choice originates with Jean-Baptiste Colbert, Louis XIV’S finance minister, who said: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” 

Another might be a return of the tenacious, but false, comparison of the nation being like a household with a ‘maxed-out credit card’ – the popular political excuse for not being able to ‘afford’ action that is necessary. The UK, unlike a household, has a Central Bank to create and control the supply of money.

Mitigation

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.

Take, for example, the Green Homes Grant. As of February this year it had paid out less than five percent of its £2 billion, and looks set to lose much of what remains.

This lack of vision allows the government to provide more than £5 billion in pandemic-related support to airlines, but offer nothing to the lower-carbon Eurostar train service. 

It’s also what allows this government to claim some kind of climate leadership while simultaneously pursuing a £27 billion road programme against the advice of its own officials.

This government has also created another roadblock to climate mitigation. Since 2016 pollution from cards have been rising as car manufacturers build and promote bigger, more polluting SUVs, unhindered by any tax instruments or other regulation.

Interest

These glaring gaps in action on climate - alongside the undervaluing of socially useful work - get completely lost in all the misleading talk and mixed metaphors of national gaps between spending and earning.

We’ve long known that we can afford necessary action to prevent climate breakdown. But to reengineer the economy it is going to take more than a few new policies and slight shifts in spending priorities.

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 operates in such a way that it helps 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.

Circulation

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 policy makers, interest rates tend only to capture the attention of the wider public if they have savings or a mortgage. But, if you take even a passing interest in life’s ecological foundations we should be talking about having an ecological interest rate.

Globally, the economy has outgrown the carrying capacity of the biosphere, as even a conservative, annual assessment of ecological overshoot makes clear.  It is as if we are trying to shove size 10 economic feet into size six planetary shoes.

The size of the economy, in turn, 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.

Emissions

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. And growth, as it is, is reliant on an extractive model that exploits the biosphere and human labour.

We know that the economy’s footprint is already too big.

The UN Environment Programme’s International Resource Panel (IRP) Report, Resource Efficiency and Climate Change: Material Efficiency Strategies for a Low-Carbon Future, 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.

Warming

In 2020 it was reported that for the first time consumption of resources passed the 100 billion tonnes mark, and global material use is projected to rise dramatically on current trends to 170-184 billion 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 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".

Community-owned

Immediate and profound intervention is needed to influence energy investment patterns and carbon ‘lock-in’.

And so we return to the question, 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?

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. 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.

Banks

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 environmental, social and governance (ESG) factors, 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 zero percent (not at all risky) t0 150 percent (very risky).

Renewables

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 he 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.

Because the system is already set up, and because big companies are already pre-categorised for their type of activity under a system of standard industrial classification, by things like their listing on exchanges such as the FTSE, it could be changed automatically.

Hence renewables might, for example, attract a risk weighting of 20 percent or less - possibly aided by government guarantees as essential support for a green industrial policy. Fossil fuels would have a new higher rate of, say, 200 percent.

This would mean that when Company Green – focused on renewables – goes to the bank, it will pay a much lower rate of interest compared to Company Brown, working in the fossil fuel sector.

Petrol

A modest interest rate cap was introduced in the UK in 2014 at one end of the market for selling money, after outrage at the predatory pricing by so-called payday lenders. And most countries have ‘usery laws’ to control the upper limit of how much interest can be charged.

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. The highly evolved system of car finance is a major example.

But, 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 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.

Monetary

One of the other many current hidden subsidies to commercial banks in the UK is the public guarantee of individual depositors.

The state deposit guarantee scheme means that the first £85k for every saver is insured by the government. If the bank goes bust, you still get your money back. It’s a huge public underpinning of private backing.

In return – as a quid pro quo – a government that is serious about its climate policy could determine that those deposits – cheap money for the banks – could only be used for investing in the public good, and prevent them going towards high-carbon activities.

A new approach is needed for both private and public rates of interest.

Central banks and supervisory monetary authorities have as their core mandate the maintenance of financial and monetary stability.

Ecosystems

Acting to prevent the allocation of vast financial resources into climate breakdown, with its catastrophic implications for humanity and the wider economy, is therefore directly aligned with their fundamental purpose.

When recently the Treasury published The Economics of Biodiversity: The Dasgupta Review, it was lauded in some circles as official recognition of the need for economics to more fully account for its reliance on nature.

It was also condemned by others for seeming to promote the potentially destructive financialisation of ecosystems.

Both of these points of view can be true. One point it concedes clearly, however, is that large parts of nature need removing from the price-based market system altogether.

“In light of the non-linearity of ecosystems,” it observes, “quantity restrictions are a more effective policy approach than pricing mechanisms”.

Life

Quantity restrictions mean setting aside large parts of the biosphere from exploitation and hard limits on extracting from nature and pouring waste into it. Figures of between 30 percent and 40 percent of land and sea areas needing protection are mentioned.

At least three decisive shifts are needed in the financial system.

One, a cultural shift within banking, has been much discussed, partly perhaps because it is attractively easy to create an impression of action by doing so. But it is vague and its material impact hard to measure.

Second is the overdue, needed shift in policy and regulation, to immediately make bad things harder and more expensive to do, and good things easier.

The final shift acknowledges the limitations of the other two. There is a need for a fresh, new set of financial institutions – ranging from regional banks, to mutuals and a real, national green investment bank - whose primary purpose is to enable an economically beneficial and socially equitable low carbon transition.

A new language is needed to tether economics to the ’real’: the real world of soil, air, forests, oceans and - simply - life.

We also need constant, daily reminders to hold our interest. That will only happen if the measures and terms of economic debate are anchored in ecological reality.

This Author

Andrew Simms is an author, political economist and campaigner. He is co-director of the New Weather institute, co-ordinator 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.

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

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