Policy Research in Macroeconomics

‘Green QE’ is possible – says the governor of the Bank of England

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In response to a letter from MP Caroline Lucas, Bank of England governor Mark Carney hinted in the Financial times today that the Bank of England could potentially invest in a programme of ‘Green Quantitative Easing’.

The idea of ‘Green QE’ is that the Bank of England would – with the agreement of the government – buy bonds from e.g. the Green Investment Bank, which could then use the financing to subsidise low carbon projects.

With this move Carney confirms that the “Green New Deal” is technically possible. Caroline Lucas MP and members of the Green New Deal Group (including PRIME director Ann Pettifor) made ‘Green QE’ part of a larger set of policy recommendations for tackling the triple crunch of the financial crisis, climate change and insecure energy supplies.

Ann Pettifor in her post below, argues that the Ukraine crisis demonstrates how much Britain’s security is   vulnerable to political as well as economic risks beyond its control.

‘Green QE’ would help finance a programme of clean energy self-sufficiency and efficiency, reducing energy costs, and providing households and firms with more security. Additionally, alternative sources of energy could help reduce Britain’s carbon emissions. The outcome of this environmentally friendly investment would lead to the creation of local, skilled, and higher-paid jobs. Those jobs are desperately needed in a country where job growth does not translate into higher standards of living.

Ms Lucas is cited by the Financial Times as saying that ‘Green QE’ could additionally be used “to help make the country more resilient to flooding, and reduce the threat of climate change.”

Globally, the green bond market is growing. According to Climate Bonds, more than $4bn of labelled “green bonds” have been issued in 2014. The European Investment Bank for example issued a 25-year Green Samuri bond and tapped its 2013 six-year Climate Awareness Bond for another €250bn.

The technical feasibility of ‘Green QE’ has now been clarified at the highest level. Now it´s a question of mobilising political will.

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4 Responses

  1. There is a big flaw in the idea that QE should be tied to green investment, infrastructure investment or any other specific type of spending. It’s that QE is a stimulatory measure, and the amount of stimulus the economy needs varies hugely from one year to the next. Indeed, when irrational exuberance takes hold, a dose of “anti-stimulus” (i.e. a surplus rather than a deficit) can be in order.
    Thus if any type of spending is tied to QE, then the total amount of that type of spending will gyrate to an extent that brings big inefficiencies.

  2. It is perhaps time to understand what Marinner Eccles understood and cut out the middleman.
    ” it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing. Or that the market controls the interest rate. Neither is true.”

    There is no need for any of this messing around. If we need this technology, then government should just spend what is required to bring it about, and where necessary tax to release the real resources to bring it about.

    Time to be honest.

  3. In my view, this could turn out to be a viable way of making green projects “sexier” for investors in liberal-market economies such as the UK. The same goal is being achieved in coordinated market economies via extensive feed-in tariffs and publicly funded green R&D. Whether or not Green QE will work (and survive) in practice depends not only on the political will, but even more so on the impact it will have on the City – will it eventually benefit them or make their money more expensive? From the outset, it is at least doubtful whether or not this is indeed a job for the central bank. Climate policy has thus far influenced fiscal policy, industrial policy and foreign policy, but for it to become directly linked to monetary policy is peculiar and controversial to say the least.
    However this turns out, it is important to keep in mind that all such policies (which aim to influence investors’ rate of return and thus stimulate green investment) are only worth the effort as long as they serve as complementary to a functioning emissions trading scheme or a carbon tax. These have turned out to be – especially in liberal market economies – the only policies that can effectively curb GHG emissions, as they make the polluter pay, thus making “dirty” products more expensive, but also creating new revenue that can be further channeled into supply-side policies.

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