A call for clean energy defense bonds

The recent news in the financial press highlights the threat of a recession. This recession would be the consequence of the ongoing efforts of the central banks to limit inflation by increasing interest rates. With more than 8% per year, inflation is at the highest in 40 years.?

The central banks are returning to more rigorous management after printing money extensively during the Covid-19 crisis to support the economy. They aim now to reduce their balance sheet (quantitative tightening) while reducing their debt ratio by maintaining inflation at 2% for the next decade.?

Reducing an all-time-high sovereign debt seems the right thing to do. We do not want to leave an awful financial situation to the next generations that could jeopardize the financial stability of our nations, and we want to cater to the next crisis.??

But the economy is a living animal and has its dynamic and behavior. It means central banks must react and adjust their plans continuously based on reality and avoid any new significant financial crisis.?The skyrocketing inflation may force the hands of the central banks and their work is more complicated than ever due to the two ongoing crises they have to deal with:?

• Climate change: this crisis requires immediate and decisive actions to phase out fossil fuels and prevent a catastrophic chain of events that could jeopardize thousands of years of global progress and infrastructure development.
• Ukraine conflict: this war changed the geopolitical situation of the world as well as some of the most critical commodity markets (food and energy). It needs to be dealt with with strength but without an escalation to what could be the next global conflict.

Financial leaders of the world face plenty of catch-22 in these crises.?Nevertheless, I believe there is an overlooked option that central banks could leverage in this historical moment.?

The central banks could initiate a "selective quantitive easing" policy aligned with the European Climate Bank roadmap while executing their planned quantitative tightening.?

The central banks would then move forward with their monetary policy tightening while creating an exception?only for clean energy assets?able to mitigate the two current crises. This strategy would support the main goals of our western economies for the following reasons.?

Fight inflation:?the main driver for the very high inflation is mainly the increased price of the following energy commodities: coal, gas, and oil. These commodities' prices impact the cost structure of all products and services. Governments want now to reduce their dependency on these energy sources by accelerating the development of clean energy alternatives. Solar and wind energy have become the cheapest power sources in the world. These technologies are highly CAPEX intensive, so their business cases are more sensitive to interest rates than fossil fuels.?For these projects, all investments take place up front, and there are only limited operational expenditures over the lifetime. Solar, wind, and energy storage projects have reached extremely low-cost thanks to very high leverage (debt to equity ratio of 90% to 95%) and low cost of capital. By offering zero or negative interest rates for these assets, the central bank can ensure enough money remains available to finance these strategic assets and fight inflation by replacing fossil fuels with low-cost, low-carbon electricity.?

Increase Energy security:?We pay Russia 600 million euros daily for fossil fuels, and time has shown that Russia has the upper hand in this matter. This outrageous number reflects Europe's past mistakes in developing its energy strategy. This dependency concerns all fossil fuels (coal, oil, and gas). Central banks can support the development of locally produced alternative energy sources by maintaining favorable financial conditions to clean energy assets during their quantitative tightening program. Once these clean infrastructures are operational, governments can import fewer fossil fuels and are less dependent on external suppliers. They also reduce their trade deficit.?

Limit Climate Change:?Phasing out fossil fuels is at the core of climate change mitigation. To keep our societies on track with the Paris Agreements, we need to accelerate drastically (x6) the development of solar, wind, and energy storage solutions (batteries first and later green hydrogen). We also need to accelerate the electrification of our cars/trucks and our buildings' heating/cooling systems. All this required a considerable amount of capital. Central banks can attract more private equity investors to clean energy asset projects by providing low-cost debt instruments. Private investors will see value in these deals' attractive yields and low risks profile. I believe the following types of loans shall benefit from continuous support from the central banks: debt instruments for project finance of clean energy infrastructure, loans for electric cars and trucks, loans for energy/carbon efficiency projects, loans for heat pumps, loans for solar rooftops, loans for behind the meter energy storage, etc.

Prepare for a strong recovery. The handling of the current crises shall not be the birth certificate of our tomorrow's troubles. However, the recent rush for new fossil fuel investments put us on track for two new dangerous developments. On the one hand, we keep depleting our carbon budget at the same unsustainable pace (even faster if we shift from gas to coal or fuel). On the other hand, we are further inflating the bubble of fossil fuel assets. Today, 50% of the global fossil fuel assets are stranded when our societies meet the Paris Agreement. It is potentially a significant financial stability risk for our economies. Indeed, when these fossil fuel companies will go bankrupt, we risk a domino effect that could take some major financial institutions down and potentially generates a significant economic crisis again. The alternative solution to the current situation, based on a drastic acceleration of the energy transition, is much more attractive. With a "selective quantitative easing," the central banks support the green jobs and infrastructures we need and reduce our energy costs by fighting inflation at its core.??The payback time for these clean energy projects is often between 2 and 6 years. That means our economies could, by 2030 in a much stronger position than today with an abundance of low-cost clean energy.

We are at war against climate change, Ukraine is at war against Russia, and we are at war against uncontrolled inflation. Now more than ever, we need a massive call for?"clean energy defense bonds"?supported by the most prominent financial institutions (FED, ECB, World Bank, IEA).?

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