Introducing the one trillion USD “Emerging Economies Climate Impact Transition” (EECIT) bond.
An unusual emergency justifies a proportionately unusual response.
Given the historic urgency and planetary magnitude of the climate crisis, given a 2.5 trillion USD annual SDG funding gap, and given that the most affluent parts of human civilization have a vital interest in an accelerated green transition of emerging economies, I’m wondering about the possibility of a, let’s say, one trillion USD “emerging economies climate impact transition” (EECIT) bond. The EECIT bond could be issued by the IFC/Worldbank or a newly established “World Climate Bank”, broken down into a series of 100 bn USD bonds over a period of 10 years, for example. Each bond could feature a 20-year duration and a prime credit rating, thereby meeting the low-risk/low-return requirements of risk averse investors (in particular pension funds). Given the current low-to-negative interest rate environment, capital costs of less than 1.5% p.a. wouldn’t be unthinkable. The funds raised this way would be largely deployed as patient capital within emerging economies with the purpose of rapidly accelerating (as well as effectively managing) the public commissioning of a globally diversified portfolio of hundreds of green energy infrastructure transition projects, with a clear collective outcome target: to drive down the annual volume of emerging economy’s greenhouse gas emissions to net-zero by 2050. Based on Broome and Foley, this act of “borrowing from the future” could be interpreted as a payment from future generations to the present generation, in order to compensate for and enable improvements made for in their interest, for the sake of the future.
In addition to the newly built energy infrastructure serving as collateral, the financial attractiveness of the infrastructure portfolio could be enhanced by guarantees and/or country and currency risk insurances, with philanthropists and foundations potentially playing a catalytic role. To further support the market for EECIT-like bonds, Broome and Foley suggest that they are made eligible to serve as international reserve assets, similar to the Special Drawing Rights issued by the IMF. In addition, Adam Tooze argues that central banks, as part of their mandate to ensure stability, could act as backstops to climate bond issuances. There is also a possibility that the bond issuer (in partnership with experts) could act as a risk-taker, who guarantees the full repayment of the principal at the maturity date in return for excess financial upside realized beyond a pre-defined interest rate threshold. (Note that the likely introduction of a proper price on carbon emissions among emerging economies within the next decades is set to significantly increase the probability of an attractive financial performance). To further increase the EECIT bond’s attractiveness, an additional financial upside of e.g. up to 0.5-1% interest p.a. might be offered to bondholders, proportional to the future performance in reducing annual greenhouse gas emissions — the more successful the decarbonization efforts turned out to be, the greater the additional financial upside bondholders would be eligible to.
Provided the collective political will can be mustered within this decade, the EECIT bond (or something similar) could serve as vehicle to take advantage of the current low-to-negative interest rates that are currently open only to countries with higher credit ratings, in order to mobilize trillions of underutilized assets in search of purposeful and safe allocations, while helping countries with lower credit ratings access patient green transition capital (alongside technical assistance and modern renewable energy technology).
