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Rising interest rates only a mild snag in climate battle

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BENGALURU — Rising interest rates present no significant barrier to the world’s transition to net zero emissions by 2050 despite the high levels of investment in green energy needed, according to a strong majority of climate economists polled by Reuters.

The July 1-Sept. 13 survey’s finding goes against a widely cited concern that rising borrowing costs could discourage investment in capital-intensive clean energy projects, which for over a decade have enjoyed access to historically cheap debt.

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Multi-decade-high inflation this year has pushed nearly every central bank around the world to raise interest rates, abruptly ending a generation of easy money. Rates are set to keep rising well into next year.

But top world experts from nearly every corner of the planet in the rapidly growing field of climate economics overwhelmingly do not see this as a major barrier to progress.

Nearly three-quarters of climate economists polled – 50 of 68 – said rising borrowing costs would have a mild or very mild impact on reaching net zero carbon emissions by 2050. Seventeen said it would be severe and only one said it would have no impact.

Scientists resoundingly agree the planet must reach that milestone to limit the average rise in global temperature, already more than 1 degree Celsius above pre-industrial times, to well below 2 degrees, and preferably closer to 1.5. That will prevent even more catastrophic damage from climate change.

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These same climate economists, in a Reuters poll taken ahead of the United Nations COP26 Summit late last year, agreed that spending 2%-3% of world output per year would be the price, far less costly than doing nothing.

“Higher borrowing costs may well be temporary, and in most advanced economies, they are firmly negative in real terms,” said Brian Davidson, head of climate economics at Fathom Consulting, referring to the fact inflation is still much higher than benchmark interest rates across most economies.

“Green investment has not become any more expensive relative to investment in fossil fuels.”

While that is true, like all new technologies implemented at scale, a greener economy requires much higher initial investment.

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There have been pockets of good news on that front. The world’s largest economy and second-largest polluter passed the biggest piece of climate legislation in U.S. history last month.

According to the International Energy Agency, cumulative investment in green energy by the end of this year is expected to top $1.4 trillion since the 2015 Paris Accords.

But that is nowhere close to the near-$44 trillion that economists estimated was required to reach net zero by mid-century.

“The transition to date has benefited from historically low interest rates. Although real interest rates remain negative, the capital-intensive nature of the investing in net-zero and resilience means there are risks of added burdens,” said Nick Robins, professor in practice for sustainable finance at the London School of Economics.

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“This is something central banks should be investigating as a matter of urgency.”

The problem is central banks’ late scramble this year to fight off soaring inflation has meant the amount of time they have to spend on tackling the risks of climate change to the economy has diminished.

While some, like the European Central Bank, Bank of England and People’s Bank of China, have initiated climate stress tests and launched green bond programs, not much else has been done to make their policies greener.

While most climate experts surveyed agreed central banks could do a lot more, they were divided on what to prioritize.

Over 40% of respondents, 29 of 67, said they should focus on developing policies on green finance while 12 said they should improve data transparency to avoid “greenwashing,” where investments that aren’t green are still labeled that way.

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Nine said they should prioritize model-based assessments of the economic cost of climate change and five said it would be best to deliver reliable climate-related indicators.

Twelve respondents said central banks should prioritize other things, including some who said they should just focus on the economy.

What nearly everyone agrees on is that not enough is being done.

Nearly 90% of respondents, 62 of 69, said progress on goals agreed at COP26 has been insufficient, including 21 who said it had fallen well behind. Seven said it was broadly meeting expectations, while none said it was exceeding them.

“The process of turning targets into clear policies is the most politically difficult part of the transition – and the lack of action post-COP26 has proved this yet again,” said Jon Stenning, associate director and head of environment at Cambridge Econometrics.

(Editing by Ross Finley, Mark John and Nick Macfie)

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