“Climate disruption is a battle for our lives” – UN Secretary-General António Guterres “Money is the sinews of war” – Cicero Although Cicero and Napoleon stressed that “money is the sinews of war”, the country of the Paris accords until 2022 failed to have a trans-sector holistic plan to address the need for decarbonization. Our report “2% for 2 degrees” is the first ever country wide plan to integrate the measures, financial needs, and suggestions for financing required to reach carbon neutrality by 2050. After more than 10,000 years of relative stability, the earth’s climate is changing. As average temperatures rise, climate science finds that acute hazards such as heat waves and floods grow in frequency and severity, and chronic hazards, such as drought and rising sea levels, intensify. The Institut Rousseau leverages existing studies and national strategies to define the most relevant levers that would enable France to reduce its emissions to almost zero. Based on industry-validated figures and linked to political and social measures, our report identifies thirty-three levers to address climate change and reach carbon neutrality by 2050, across all sectors of the economy. The impact of the sector-specific «decarbonisation levers» proposed in this study would enable us to reduce greenhouse gas emissions by 87% in 2050 compared to today. The remaining 13% are covered by the development of a final negative emission sector, the carbon sinks. Reaching the objective requires to align existing finance schemes with the goal of decarbonation and unlock additional means across sectors. We show that a total investment of 182 billion euros per annum is needed to achieve the low-carbon transition of France by 2050, 125 billion of those already part of the existing schemes or their continuation. At the national level, the transition requires a thorough review of the current frameworks. At the European scale, we propose that climate-friendly investments be excluded from the calculation of the public deficit constraints, and monetary policy framework reformed as well as the introduction of moderate and targeted amount of debt-free money. The additional 57 billion per year represent 2.3% of France’s COVID-19-impacted GDP in 2021 and cover all the public and private expenditures necessary to achieve the objectives set, including investments but also subsidies, tax credits, tax breaks, incentives, and aids. The building sector benefits most (36%) from additional effort compared to the current efforts and is followed by energy production (28% of the additional efforts). Because ecological reconstruction must come with social justice, the transition requires financial and operational support for the poorest citizens and the least well-endowed companies. For this reason, we show that public authorities must bear a significant part of the additional investment of the transition (63% out of the 57 billion euros), with 36 billion euros per year. This amount is less than the first emergency budget plan put in place at the start of the pandemic in March 2020 (42 billion euros). We show that it can be financed easily over time if linked to budgetary and monetary reforms and furthermore if leveraging innovative sources of funding. We also reveal how it will prompt a virtuous circle of social and environmental impacts. The initial public funded trigger would generate considerable benefits on public finances, purchasing power of households, savings of social security and the healthcare system, as well as on the national trade balance. Besides its holistic nature, our report stands out by the vision it offers of what a multiannual framework for financing ecological reconstruction should contain, sector by sector. Every further delay activating the levers towards decarbonization will lead to an investment overload in future years. Delaying the investment in any sector will only make the ecological transition more difficult, it will also make it more expensive. The EU-wide goal of «Fit for 55» goal is already at risk. Download the executive summary (18 pages).

Par Institut Rousseau

18 septembre 2022

1. Financialization and the rise of systemic risks It is now established that the increasing financialization of the global economy is facilitating the acceleration of our planet’s destabilization. As shown in Figure 1, a simple linear regression between global financial development (measured by the M2/GDP ratio) and kilotons of CO2 emissions displays a correlation coefficient of 0.953. Similarly, a linear regression between global stock market capitalization and CO2 emissions displays a correlation coefficient of 0.9605. These results should be interpreted in the broader context of the joint evolution of socioeconomic and bio-geophysical indicators and the disruption of the Earth System caused by the Great Industrial Acceleration (Steffen et.al, 2015). Figure 1. atmospheric CO2 emissions and global financial development, 1960-2019 (p-value 0.000) Data: World Bank, calculation by Lagoarde-Segot & Martinez (2021) Despite the climate emergency, the monetary and prudential policies followed by most Central Banks in recent years have contributed to increasing, rather than reversing, this systemic disruption dynamic. Since the 2008 financial crisis, central banks have issued reserve money (also called M0 or « monetary base ») to finance governments, companies and banks in the Eurozone, where monetary financing of States is prohibited by the ECB’s mandate. The ECB has thus allowed « zombie » companies and banks to survive; massively buying up private debts, and in the process saving investors by pooling their losses. Supporting the real economy – through credit to businesses – has been the main justification for these « quantitative easing » policies. However, the money used in economic transactions nowadays mainly takes the form of bank deposits; and as the Bank of England (2014) and the majority of money specialists point out, these bank deposits, convertible on demand into cash, are overwhelmingly created through the bank credit channel. Banks do not need initial reserves to lend to the public, since the monetary system allows them continuous access to reserve money (via the interbank market or the Central Bank’s lending facility). Under these conditions, it is not surprising to note, as Figure 1 shows, that the trillions of reserve money injected into the financial system have fueled the development of speculative bubbles, both in equities and in real estate. And even if there were a demand for financing viable projects that would allow for a compatible transition in accordance with the Paris Climate Agreement, there is nothing today to compel banks to fund those. Figure 1 Monetary basis This monetary and financial dynamic is accompanied by a sharp increase in income inequalities (e.g. poor housing for some, real estate gains for others), which has as its backdrop a rise in private debt and massive deindustrialization in many European countries. In this context of rising risks that could, in the worst case scenario, lead to the collapse of some European countries7, we call for a series of strong measures adapted to the urgency of the situation. It is a question of rapidly planning the financing of energy, health and agricultural transitions, as well as access to care and medicine, in order to rapidly reach a minimum local production for the survival of populations in these areas, and to allow the resilience of society in the face of shocks. The technical solutions most often put forward to finance this « war effort » are known. It would be necessary either to redirect savings, to direct a special « transition » money creation, to increase taxes for grey sectors, or to increase the state deficit. The ideal solution would of course be a combination of all four. In this note, however, we present a fifth avenue, discussed in detail by Lagoarde-Segot (2020). This consists of an ambitious overhaul of credit policy at the European level, based on the reintroduction of measures that have already worked in the past in a similar context, or are currently in place in other countries. Before detailing the proposed mechanisms, however, it should be emphasized that the success of any policy of ecological reconstruction is conditional on the establishment of a robust taxonomy between the « brown » sector and the « SDG-compatible » sector. In this respect, the EU taxonomy for sustainable activities, a standard developed in the framework of the European Green Deal in relation to the commitments of the 2030 Agenda, is still largely insufficient, for four main reasons. Firstly, it does not define the world and the forms of production, particularly agricultural, towards which we should aim outside of energy, transport and construction. Second, and contrary to the commitments of the 2030 Agenda, it does not take into account the social costs of the green transition, and does not give any specific interest to the most marginalized territories and populations. Thirdly, it leaves SMEs outside the scope of analysis despite their crucial role in the functioning of the European economy. Finally, it is based on concepts and legal standards that are disconnected from any scientific data. 2. New credit management indicators Assuming that a robust taxonomy has been established, Table 1 presents two simple indicators that the European Central Bank could use to redirect credit in the euro area. Table 1. Credit Framework Indicators Central Bank   The first indicator measures the flow of credit to the SDG-compatible sector as a proportion of total credit. It is therefore a ratio of « green » money to « brown » money created by commercial banksannually. We propose that the value of this indicator be quickly set at 4. Thus, for a given year, banks should issue four times more credit to finance ecological and social reconstruction than to finance the actors of the « brown » sector. The second indicator measures the share of « SDG-compatible » assets (including loans issued to finance reconstruction) in banks’ balance sheets. We propose to set the value of this ratio at 4. In order to reach this target value, banks will be forced to sharply reduce financing costs for the SDG-compatible sector and increase financing costs for brown sector assets. This ambitious European credit policy would enable the production structures of the economy to be aligned with the objectives of sustainability and

Par Dupré D., Lagoarde-Segot T.

3 mai 2021