Macroscope | China and the art of unlocking capital for climate action
- The problem with markets in most advanced and developing economies is that they favour short-term investment, not long-term socio-economic projects
- This is why the US struggles to finance and improve transport and other infrastructure at the national level, but China doesn’t.
Since climate change does not respect national boundaries, governments and financial institutions in advanced nations, as well as the developing world, will have to bear their share of the multi-trillion-dollar burden.
However, while most advanced economies have sufficient savings, these are managed mainly by private-sector entities and are not generally at the disposal of governments, unlike in China.
Climate change is going to see the world confront this stark reality. When it comes to financing expenditure on climate change mitigation and physical infrastructure, the private sector is not always willing to risk capital up front on a sufficient scale.
In its latest Global Financial Stability Report, the International Monetary Fund observed that many emerging economies lack sufficiently developed financial markets to deliver large sums of private finance. While this is true, the way in which capital markets have developed in many advanced nations creates a similar problem there, too.
Equity market development tends to favour short-term investment in consumer goods and service production, rather than long-term capital projects of a socio-economic nature. Hence the widespread problems that are emerging now with regard to climate financing.