Lots of opportunity for green transition in pandemic recovery: ArcTern Ventures
The engine of capitalism is unrivalled in its creative capacity to create wealth. But that capacity isn’t unbounded. Occasionally, systemic shocks test its limits. The 2008 financial crisis refuted unfettered self-regulation. COVID-19 shows only the public sector can guide behaviour and provide a foundation for recovery.
Yet some still argue a form of voluntary self-regulation – the ‘E’ in ‘ESG’ – can mitigate climate risk, the mother of systemic shocks. This is deeply misguided. Good corporate governance is a sideshow. Without strict regulations and massive public incentives the private sector will continue to merely nibble around the edges of that most existential of risks.
As countries rebuild economic foundations post-COVID, each has an unparalleled chance to reinvigorate capitalism to create long-term value, increase resilience and mitigate climate risk.
None thus far is sufficient in scope or ambition.
We’ll soon see how Canada stacks up. Early indications are promising. Chrystia Freeland’s appointment as finance minister amid comments about a green economic recovery show the government is pushing climate risk where it belong – at the center of economic activity, not the margins.
Climate capitalism is a radical, interventionist rewiring of the market economy to mitigate that risk - fast. That need not imply political radicalism: it’s a centrist notion to use our most powerful tools to solve our most wicked problems.
Climate capitalism doesn’t impede market forces or private capital: it harnesses them to the task. Capitalism isn’t monolithic. It includes Russia’s anarcho-capitalism, Indonesia’s crony capitalism and China’s state capitalism. Sweden is as much a capitalist country as America. Capitalism doesn’t imply a pre-ordained limit for the public sector: Roosevelt’s New Deal didn’t make the U.S. any less capitalist. Hard, fast action on climate builds an economy suited for 21st century risks.
Twenty years ago, the climate capitalism story would start and end here: price carbon - start low, ratchet it up slowly, keep it revenue-neutral so it’s not a government cash grab, sit back and watch the market work its magic. Economists agree it’s the optimally efficient solution.
Unfortunately, it’s too late for that soft landing. If your house is on fire you don’t care if the hose leaks, you just want lots of water. Speed matters more than efficiency. We need shortcuts to a low-carbon economy – even if they’re less efficient.
Here are some ideas:
As countries plan post-COVID stimulus, each might consider three pathways. First, build new infrastructure - charging stations and building retrofits, for example - for short-term stimulus while directly lowering emissions. Second, accelerate next-generation cleantech – battery technology and power electronics to electrify transport, for example – to create long-term export opportunities that lower the costs and increase the pace of other countries’ climate efforts. Third, reshape the global climate landscape through traditional institutions - like the World Trade Organization – to turn what was once a problem of collective action to an atmosphere of friendly competition.
Low-carbon infrastructure can be accelerated by a new kind of green bank, backed by green bonds. This is an old idea with a new twist. The government raises cheap capital with a war bond-like instrument. The private sector bids on the right to deploy it. A public mandate incents those private money managers with a single metric: maximize carbon reduction at minimum cost to Joe Public. A green bank, done right, combines the public cost of capital with the private sector’s nose for profit.
To prepare for the Vancouver Olympics, Canada developed a program called Own the Podium. We picked athletes that competed at an international level and gave them resources to train. Do the same for cleantech. Back companies with demonstrated traction in global markets with loan guarantees for production and large capital expenditure project finance. Today, old stuff gets cheap capital, new tech doesn’t – let’s flip that around. This isn’t the government picking winners, it the government backing winners - a big difference.
Teach young chief financial officers that energy costs are of strategic importance. Why? Because capital budgets are reserved for core investments - more t-shirt machines for a t-shirt company, bigger holes in the ground if you’re a miner. Energy retrofits are stuck begging for operating budgets, which means they need paybacks in a year or so. That means most efficiency fruit remains unpicked across the economy. The irony is how rare is the CFO who gets more than 15-20 per cent on capital, yet efficiency pays twice that! No policy required, just fresh thinking.
Finally, leverage the most powerful institutions we have. All countries gave up a degree of sovereignty to the WTO. It has real teeth that impinge upon national governments. Use those teeth. The WTO (and World Bank and International Monetary Fund) reflects the priorities of those who negotiated it. If U.S. President Donald Trump can upend NATO, imagine how an empowered group of national leaders might reform the WTO to level the playing field between countries by forcing climate laggards to bear carbon tariffs.
Voluntary good behaviour is a necessary part of our collective reaction to COVID. So too, good corporate governance plays a role in mitigating climate risk. But neither substitutes for the hard and fast regulatory structures only governments can put in place in the face of urgent, systemic threats.
Recent pleas by forward-thinking business leaders for green recovery plans admit exactly that: climate risk, like COVID, cannot be addressed without strong public intervention in the market.
The degree to which Canada – and its new finance minister - provide that framework will be apparent in next month’s Throne Speech.
Tom Rand is co-founder and managing partner of ArcTern Ventures. He's also a regular guest on BNN Bloomberg and author of The Case for Climate Capitalism: Economic Solutions for a Planet in Crisis