COP26 should stay away from carbon shock therapy


This is Daniela Gabor, Professor of Economics and Macrofinance at the University of Bristol, and Isabella Weber, Assistant Professor of Economics at the University of Massachusetts Amherst, and “How China A guest post by the authors of the book “Escape Shock Therapy”, in which they believe that market-based methods to reduce carbon emissions may bring more instability.

If COP26 is to make any meaningful progress, the general consensus is that it must revolve around carbon prices.Big finance think A global carbon price of US$50 per ton will be set at the meeting that ends this week. Big companies finally joined.Recent corporate lobby debate Global carbon prices will encourage energy producers, industries, consumers and financial markets to switch to low-carbon technologies and activities. The global coordination of COP26 should involve unwilling countries (especially the United States, China, and India) to ensure that everyone faces disciplinary actions in the market. COP26 is the last collective opportunity Believe The power of price signals.

Those of us who have experienced the transformation of a centrally planned economy have another name for the mantra of “the price is reasonable and the market will deliver.” We call it shock therapy. In the 1990s, Shock therapist Tell the governments of Eastern Europe and the former Soviet Union that their economies need rapid structural change.

State-owned enterprises had to make way for the large private sector. Shock therapy will subject them to market discipline by liberalizing the prices of manufactured goods previously controlled by the state and ending cheap credit, subsidies, and tax incentives. Indeed, shock therapists insist that only strong fiscal and monetary austerity measures can ultimately eliminate “soft budget constraints.” This particular socialist suffering has allowed failed state-owned enterprises to survive and invest resources in the wrong sectors. The goal is to shrink heavy industry.

The shock therapist warned that the real test for the government to raise prices is not just to stay firm when real wages fall, but to insist on tightening credit policies when the state sector goes bankrupt and increases unemployment. This is a austerity test, and even a promised government will fail when there is foreseeable social and economic turmoil in the market. But shock therapists have a powerful institutional facility to regulate reluctant governments: the International Monetary Fund and the World Bank.The former planned economy relied on the crisis support of the Bretton Woods institutions Firm believer Macro tightening policies have strengthened the power of price signals. The conservative economists of the local central bank successfully united to support their cause.

Observe carefully behind COP26’s remarks, and you will see the arrival of a carbon shock therapist. The price narrative sounds very familiar: rising carbon prices will allocate physical and financial resources to the right sectors. Macro tightening may not be in the speech, but on the menu: After nearly two years of monetary and fiscal expansion related to the pandemic, we are back to the call to shrink the public wallet.

Fiscal discipline superstitions are (still) in power, they don’t like alternatives to carbon shock therapy-large-scale green public investment Keynesian The motto “Anything we can do, we can afford it”. Just like the old shock therapists, their rejection is a political choice: state-led decarbonization will require close cooperation between the central bank and the Ministry of Finance and Industry nearly 40 years later. Separate. It will allow the central bank to actively participate Redirect Private capital flows from investment in dirty activities to low-carbon activities. This will mean developing the capacity of public institutions to quickly guide the private sector to carry out low-carbon activities and respond dynamically to obstacles and unintended consequences of rising carbon prices.

It’s kind of like How did China escape Shock therapy: The central planning agency maintains control over the strategic aspects of the economic system, while creating new market dynamics in an experimental and gradual manner. China uses market signals but does not allow them to determine the pace and direction of transformation.

Carbon shock therapy will not be everywhere. Although the global momentum is ostensibly about high-income countries and historical polluters, the institutional mechanisms for carbon shock therapy are rapidly taking shape to target middle-income and poor countries. Again, the country most vulnerable to climate events and least responsible for the climate crisis will be the laboratory. After the pandemic, with high foreign debt and limited access to vaccines, they will have to seek financial support from the International Monetary Fund and the World Bank.

The IMF has always been an early advocate of global carbon pricing.its New climate change dashboard The transition from tax losses and the “social efficiency” level of fossil fuel emissions pricing will reduce pollution and increase consumption tax revenue. However, it did not calculate the damage to local companies or the impact on employment and growth of rising carbon prices.IMF’s new Climate strategyReleased in July 2021, carbon pricing is the only viable transformation strategy. On page 42, it mentioned carbon pricing 23 times, green industrial policy once, and never mentioned green public investment. The shift to carbon shock therapy is clarified in its “green” conditional loan program: IMF loans to countries in need will expand experiments (fuel and energy) subsidy reduction, carbon pricing, and financial resilience building.

The emphasis on carbon pricing further establishes the central bank as an important local ally, recreating the institutional politics of shock therapy. Like its predecessor, carbon shock therapy is essentially inflationary. Then, countries promised that a freely floating exchange rate would strengthen the price signal, but what they got was that a weak currency led to an increase in inflation, which prompted the central bank to further adopt monetary tightening policies. Now, even if the central bank refuses to selectively increase the cost of dirty credit (for high-carbon industries), monetary tightening may be necessary to combat inflation caused by carbon pricing.

Carbon shock therapists may not support green public investment, but they have reassuring climate financing information. Country can mobilization Global institutional investors such as BlackRock are keen to invest trillions of dollars in the transition to low carbon. These investors did not appear on a large scale because the risks of climate investment in poor countries are too high relative to returns.In addition to regulatory reforms, the key to opening up private finance Financial risk: It is expected that countries will find financial resources to guarantee the return of private investors, including the return of official development assistance.

The IMF’s new resilience and sustainability trust funds may also be required to redistribute newly created special drawing rights from high-income countries to global institutional investors, all in the name of reducing the risks of green private investment.The only sector not affected by carbon shock therapy is Private financingAlthough it has made a devastating contribution to the climate crisis through credit to polluters and greenwashing, Well known.

It is easy to view the growing call for carbon pricing as empty gestures from entrenched interests that are betting on a continued lack of political will. But poor and middle-income countries seem to be forced to plunge their economies into chaotic structural transformation again.What they really need is well-designed Macro financial policy Adjust the production structure.



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