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Green Bonds: A New Path to Curb Climate Change

By John Chiang
California State Treasurer

There is no better time than now to talk about climate change and what we can do to head off an onrushing existential disaster.

It has been a decade since Al Gore’s "An Inconvenient Truth" stirred a generation.

It has been just over a year since 195 nations hammered out the Paris Agreement.

It has been nearly a month since President Donald Trump and the arrival of an administration that threatens our efforts to preserve our planet for our children and grandchildren.

The new president and his top appointees have a record of dismissing and denying the sound science and factual evidence for climate change.

Within just an hour of Trump’s inauguration, the new White House announced a policy of retrenchment that ensures continued dependence on fossil fuels. The presidential website called for elimination of our nation’s Climate Action Plan followed by regulations protecting our rivers and streams.

We have some rough days ahead.

In the last decade, global sea levels have risen at an alarming pace, with the rate nearly doubling over the last century. The waters threaten to eventually swamp low-lying countries and coastal areas of the United States – from the bayous of Louisiana to the emerald waters of the Puget Sound.

Yet, Rick Perry, Trump’s nominee to lead the Department of Energy, sued the Environmental Protection Agency while governor of Texas to block efforts to reduce global greenhouse gases. He accused the agency’s scientists of "hysteria" over global warming and its "contrived phoniness."

Of the 17 hottest years on record, 16 have now occurred since 2000, with 2016 being the hottest.

Yet, Scott Pruitt, nominated by Trump to head the EPA, is a self-described "leading advocate against the agency’s activist agenda." As Oklahoma’s attorney general he created a "federalism" unit to file legal challenges against the EPA and just recently suggested "climate alarmists" could be charged with fraud.

Air pollution, a primary cause of climate change, kills 18,000 people every single day. Yet, Trump’s pick for Interior Secretary, Ryan Zinke, has consistently voted in favor of oil and gas drilling projects on federal lands. He, too, called climate change unproven.
Trump may believe global warming was "created by and for the Chinese in order to make U.S. manufacturing non-competitive." But we Californians stand with the scientific community and the 195 nations that have declared "climate change is an urgent and potentially irreversible threat to human societies and the planet."

For Californians, the debate is no longer focused on whether climate change is fact or fiction but on how to generate the hundreds of billions of dollars necessary to fund our transition to a sustainable future.

The signatories of the Paris Agreement committed themselves to replacing infrastructure powered by fossil fuels with low-carbon alternatives. Worldwide, the price tag for this conversion is pegged at $93 trillion, including an estimated $8 trillion for the United States alone. To put the enormity of these numbers in perspective, understand that the national debt accumulated since the birth of this nation is slightly less than 20 trillion dollars.

Paying for these investments is a challenge of the first order. So it is time for thinking that goes beyond the traditional approaches for financing our critical public works. 

I believe the bond markets – and specifically "green bonds" – are an essential tool in raising the capital necessary to finance our transition to a low-carbon economy.

Likewise, the same tool may provide hope for our country’s chronic underinvestment in infrastructure that leaves our roads dilapidated, our bridges at risk of collapse and many communities without safe, reliable drinking water.

Some $3.6 trillion must be spent by 2020 on transportation, energy, schools, water and other facilities to bring the nation’s infrastructure up to acceptable standards.

The Golden State alone faces a funding gap of $359 billion over the next 10 years in meeting its public infrastructure needs.

So, what are green bonds?

Green bonds are debt issued by either corporations or public agencies to finance climate-friendly or other environmental projects.

Since the World Bank first issued green bonds in 2008, among other things, they have been used to generate solar and wind power, reduce methane emissions, build more efficient transportation, protect against floods, and provide clean drinking water.

Green bond issuances are booming worldwide. In the last eight years since the World Bank issued that first green bond, the market has grown to $118 billion in outstanding securities labeled "green".

Despite this impressive progress, green bonds still represent less than 1 percent of the worldwide bond market.

Closer to home, here in the United States, green bonds comprise less than one-tenth of one percent of all outstanding debt, a significantly lower percentage than even India and South Africa. And we are not even in the same ballpark as European countries like Germany, the Netherlands and France.

Meanwhile, China – where visibility is measured in yards, not miles, because of pollution -- has overtaken the United States as the top issuer of green bonds. In 2016, China accounted for more than one-third of all green bonds issued worldwide.

Unlike Trump, the only war I am interested in pursuing with China is over who can raise the most green capital to promote environmental protection, build clean infrastructure, and improve living standards for people.

This all speaks to the great latent potential in this young market and its potential to release a torrent of new and affordable capital for the U.S. to meet its infrastructure and climate change needs for decades to come.

Over the past year, I have searched for ways to hasten the maturing of our green bond marketplace, conducting a five-city national listening tour during which I met with three dozen of the nation’s most influential investors.

Together, these investors control more than a $1 trillion in investable funds. They told me, repeatedly, that there are numerous barriers to shifting more of the funds they control to environmentally-friendly projects.

They also insisted these barriers are not insurmountable. A vibrant green bond market is within reach, they shared with me. 

And there is more good news. They left us with a fresh trail of bread crumbs showing the way to a U.S. market that can operate at the same velocity and with the same vigor as its counterparts around the world.

Those hours of wide-ranging discussion and probing questions have been distilled into a green bonds report that I released just a few weeks ago.

This report covers a number of issues, ranging from the culture wars over the legitimacy of climate change to the hyper-technical disagreements impeding market development.

Here is a highlight of three problems:

The U.S. muni market is supported primarily by investors who agree to accept lower yields in exchange for tax-free investment income. This constrains the growth of the United States green bond market because only investors who owe taxes are willing to accept those lower yields.

Thus the United States green bond market has cut itself off from a broader investor base, such as pension funds, sovereign wealth funds, foreign insurance companies, tax-protected IRAs and, in general, investors who do not owe U.S. taxes.

Outside the U.S., municipal debt is not tax exempt. Therefore, government issuers, including green bond issuers, must offer competitive yields in lieu of a tax benefit.

This is why foreign markets attract a broader range of investors than the U.S. currently can.

We also have a chicken and an egg problem. Issuers claim there is not enough reliable demand for green bonds while investors complain that supply is lacking.

What our listening tour participants could agree on is that this market has not reached a point of maturity where investors can build a portfolio comprised solely of green bonds.

They tell us that in order to make the market work, we need to address the lack of standardization, the infrequent secondary market trades, and the pricing concerns that perpetuate the myth that green bonds are exotic, expensive, and illiquid.

Maybe the most disturbing and difficult barrier to my goal of turbocharging this marketplace is that in the United States there is no policy consensus on climate change. A significant share of our political leadership questions whether human-caused climate change is a problem or even real.

According to participants on my listening tour, our European counterparts are as much as 15 years ahead of us in their use of green bonds to finance their infrastructure and climate change needs.

When asked why, the most common answer was that while the United States continues to debate climate change, European leaders have long ago answered that question and moved on to forge the solutions necessary to build a more sustainable future. 

My report contains insights and wisdom gained from a listening tour that may mark the first time the investment community has been so systematically canvassed on the state of the market in order to identify barriers to development. I sought the perspectives of those investors and underwriters because they hold the purse strings that control how billions of dollars of investable funds are allocated.

With the problem definition now in hand, I am turning my attention to the fall when I plan to host a symposium to convene experts in finance, public policy, and climate change to break down each of the barriers outlined in the report.

Green bonds offer an actionable solution for financing a healthy, prosperous, and enduring future.

As the Irish statesman and philosopher Edmund Burke once wrote, "The only thing necessary for the triumph of evil is for good people to do nothing."

The fate of our planet and mankind hangs in the balance of a degree or two Celsius. We must muster both the will and the way to shift from a fossil-fuel economy to a carbon-free one.

More than a decade ago, when the existential threat of climate change first entered the public mainstream, skeptics contested the science and argued nothing should be done. 

When the scientific community reached consensus that climate change is to blame for rising sea levels, warming global temperatures, and extreme weather patterns, the skeptics argued that humans were not the cause. Again, it was argued that nothing should be done.

Today, the overwhelming body of scientific research has established an irrefutable link between global warming and human activity. Still the skeptics argue that nothing should be done because it is "too costly", "too disruptive," or "too soon."

The skeptics and deniers are wrong. And they always have been. It is up to good people to act now. California is committed to moving forward and I am committed to finding a way to pay for it.

I invite innovators and thought leaders to join me in this next step.  Together, we can harness the awesome potential in this young and exciting marketplace.

Green bonds may sound boring. But at a time when the White House is doubling down on 20th Century energy policies, green bonds are emerging as a way to empower ordinary people to use the marketplace to serve the public good. We are creating an opportunity for Americans, who care deeply about drinkable water, breathable air, and clean transportation, to invest in that very future.

And Washington can’t stop us.

The excerpt above is from Treasurer John Chiang’s keynote address delivered Jan. 23, 2017 at the CleanTech Forum in San Francisco.