Energy: Green bonds, bubbles and torrents

Sarah Bracking
By Sarah Bracking

Professor Sarah Bracking is the current holder of the South African Research Chair in Applied Poverty Reduction Assessment at the University of KwaZulu-Natal and Research Director of the Leverhulme Centre for the Study of Value, University of Manchester. She is editor of Corruption and Development (Palgrave, 2007), author of Money and Power (Pluto, 2009) and The Financialisation of Power in Africa (Routledge, 2012).

Posted on Friday, 13 February 2015 14:38

Mineral fuels, including oil, coal, gas, and refined products make up 14.8% of all global trade and the companies who control these commodities have successful captured the UNFCCC process to arrest climate change with talk of a ‘green economy’ where dirty industry itself orchestrates a too slow response to climate change that diverts public money into their own balance sheets for less than impressive little projects in greenness.

This is in the context of a global economy in which there is a huge over supply of money. Index Mundi summarise:

“Financial stabilization and stimulus programs that started in 2009-11, combined with lower tax revenues in 2009-10, required most countries to run large budget deficits. Treasuries issued new public debt – totaling $9.1 trillion since 2008 – to pay for the additional expenditures. To keep interest rates low, most central banks monetized that debt, injecting large sums of money into their economies – between December 2008 and December 2013 the global money supply increased by more than 35%.”

So the owners of the big dirty corporates are spotting an opportunity. They are diverting the huge bubble in the global broad money supply, into a new ‘green bonds economy’, rather than into very many actual investments in renewables.

These bonds are subject to the usual futures, derivatives and speculative trading. It looks a bit like a highjack of the money required, and potentially available, for a new type of energy system that the globe desperately needs.

But there are a number of problems with this market-based approach to managing ecology.

First – it’s too slow, and probably won’t work. There are literally thousands of natural and social scientists and specialists in environment and climate change who I could cite here.

when the price of oil declines, the benefits of low-carbon substitutes begin to dissipate

Second, there is no actual definition, legal or otherwise, of what ‘climate finance’ is, or what ‘green bonds’ can, or can’t, invest in. In fact many of them invest in fossil fuels and oil in order to fund ‘improvements’ to plant and equipment.

Sometimes these are improvements that environmental law had mandated in any case.

In the category ‘public transport’ you can add infrastructure ETFs (exchange traded funds) who build toll roads and ports, and put these in Green Bond fund-of-funds. We desperately need a legal category of ‘climate finance’.

As reported in Environmental Finance, “there is still no standard definition of ‘green’. This continues to be a major point of discussion in the market, as does agreeing standards for green bonds. However, no resolution is expected any time soon”.

However, “The value of issuance in the green bond market has grown from $11 billion in 2013 to $34.2 billion in the year to 20 November [2014]” According to Environmental Finance, while “CBI’s Kidney believes the market can grow to $300 billion by 2018”.

Thus, despite a predicted market of $100 billion per year, trading standards are only in the early processes of being developed. But rest assured, global bankers can be trusted with $100 billion because the Green Bond Principles have received 70 signatures and are in the process of being redrafted!

But anything can look green to an industry that promotes image and spectacle over transparency in their portfolios.

Thus in the HSBC Global Climate change Index (CCI), there are ‘pure play’ companies,, which are “those deriving more than half their revenues from climate-related activities” and “non-pure plays” which have presumably less, although down to what benchmark remains unknown.

But remember GDF Suez’s bond that financed the controversial Jirau Dam in Brazil?

A Environmental Finance report, who have some commitment to keeping the ‘brand’ and green bond industry ‘clean’, note that the dam, and its neighbour Santo Antônio Dam, both on the Madeira River, the largest tributary of the Amazon, had “serious and perhaps irreversible impacts on freshwater ecology and nearby communities”.

It threatens the survival of migratory fish, some indigenous communities in the area were not even contacted, there are toxic effects on the river, and flooding has been exacerbated displacing thousands.

Meanwhile, Unilever’s $400 million green bond was even omitted by Barclays/MSCI from its green bond index. There are more than a few bad players.

But is the problem of financialising environmental care a systemic problem? I would argue yes.

Apart from not knowing exactly what is being invested in, what is being traded, or how to judge quality, there is another third problem: Green Bonds only do well when the oil price is high!

Indeed profitability relies on a high oil price.

In the CCI Index the non-pure plays largely caused underperformance from June to October because of the index’s sensitivity to the oil price, which has fallen sharply by 40 per cent to December 2014.

Apparently, because some of the business of the companies in the index is to produce substitutes for fossil fuels, “as the price of oil rises, we see a decrease in the cost differential between energy produced through the burning of fossil fuels and energy generated from low-carbon technologies…[conversely] when the price of oil declines, the benefits of low-carbon substitutes begin to dissipate”.

Weird, so the development of substitutes for fossil fuels is locked to high oil prices? But then surely the producers of oil will have no incentive to stop drilling it?

Apparently transport efficiency stock – including electric and hybrid vehicle development and public transport have a “72% correlation to the price of oil” such that a 1 per cent increase in the oil price leads to a 42% rise in the price of the transport efficiency index.

So we need a high oil price to incentivise electric cars which won’t be using oil. Unless oil supply is strictly capped I can’t see this going very far.

And where have petrol prices fallen? Retail customers are still paying high prices for refined product yet oil prices are low.

Meanwhile, the big energy companies are dabbling with green bonds and exchange traded funds, the profits are mostly offshore, and global emitted CO2 just keeps on rising.

I am reminded of Antonio Gramsci when he stated that “A crisis consists precisely in the fact that the old is dying and the new cannot be born: in the interregnum, a great variety of morbid symptoms appear”.

Indeed, and all in the context of bubbles.

The bubble of the global money supply looks big, especially in Asia, and green bonds look big, but not as big as the torrents of methane bubbling up from defrosting Arctic tundra, or as big as the new seas growing in the Arctic.

So by all means, for those who can, turn down the bubbling of the pool pumps (see last column), but stay alert to the financial bubble that warns of eco-disaster.

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