Week 4, January 27: Our Climate Investments

This is one of the 26 segments of Guy Dauncey’s Climate Emergency: A 26-Week Transition Program for Canada. Excerpted by permission.

To address the climate and ecological emergencies and to support Canada’s transition to renewable energy and ecologically-managed forestry, farming and fisheries, in addition to large private sector investments, the Bank of Canada, new public banks, utilities, municipalities and citizens will collectively invest $62.7 billion a year, representing 3.6% of Canada’s estimated $1,735 billion GDP in 2020.

Canada’s money supply is created by its private banks whenever someone takes out a loan. The money does not pre-exist in a bank’s accounts: the bank creates the money out of thin air, limited only by banking regulations which determine how much it must keep in reserves, and by trust in the lender, backed by collateral. The determining purpose of a private bank is to make profits for its owners and shareholders, which it does by charging interest on its loans and charging fees. A public bank can support its operations on fees alone, and it may but does not need to charge interest on its loans. It is managed by professional bankers for the public benefit.

Public banks all over the world are creating money for social purpose, guided by their city, regional or national governments. In Germany, Sweden, Denmark, Italy, Spain and France community and state-owned banks serve as much as 64% of the banking market. Germany’s public Sparkassen banks, with 15,600 branches and offices, have a return on capital that is several times greater than Germany’s private bank sector. As well as providing for the financial needs of Germany’s small and medium-sized businesses, they have provided 72% of the financing for Germany’s solar and wind installations. In Bangladesh, the publicly-owned Infrastructure Development Company provided the capital needed to install more than three million solar panels in rural areas between 2003 and 2014.

In Germany, the publicly-owned Kreditanstalt fur Wiederaufbau (KfW) has been the main source of financing for building retrofits to tackle the climate crisis. Between 2006 and 2009 it issued 27 billion Euros in loans and grants, triggered 54 billion Euros in further investment and rehabilitated 9 million housing units to a high energy standards, saving a billion Euros a year in heating costs and generating 894,000 jobs that lasted for at least a year. In 2016 KfW also provided €3.5 billion in below market rate loans for energy efficiency in small and medium-sized manufacturers.

Public banks can also serve their governments by storing government revenues, instead of these being held in a private bank, and they can issue loans for farmers, small businesses, students, and other chosen objectives. They can either issue these loans directly, or channel their lending through existing credit unions and community banks.

To enable Canadians to benefit from the money-creating powers inherent to banking we will work with the provinces and professional bankers to establish a Network of Public Banks across Canada, one for each province and one for Yukon, Nunavut and the Northwest Territories. To enable this work to proceed immediately, we will provide $1 million for development costs, funded directly by the Treasury Board.

Central banks also have the power to create money, which they can use directly, as they did after the 2008 financial crisis, or indirectly, by underwriting other loans. In a July 2019 article in Foreign Policy titled Why Central Banks Need to Step Up on Global Warming, the economic historian Adam Tooze, Director of the European Institute at Columbia University and the author of Crashed: How a Decade of Financial Crises Change the World, argued that accomplishing the transformation needed to tackle the climate emergency will require a huge redirection and increase in public spending, and that given the long-term nature of these investments, there is a strong case for funding a large part of the decarbonization drive through the issuance of long-term debt by public investment banks or directly by national governments, and that it should be the job of the central banks to support this push by acting as buyer of last resort for these long-term debts. This may raise fears of inflation, he wrote, but as advanced economies age, central bankers are struggling not to tame inflation but to ensure that it remains at 2% per year.

The Bank of Canada is wholly owned by the people of Canada, enabling the government to work with the Bank to maximize its potential to assist with the investments needed to tackle the climate crisis and achieve the transition to 100% renewable energy.

The expenditures and investments needed to tackle the climate crisis through initiatives to be announced between now and the end of June come from five sources, none of which will increase taxation or public sector borrowing:

Climate Action Bonds issued by the Government of Canada and bought by the Bank of Canada using Green Quantitative Easing until inflation passes 3% (currently 1.9%). The Bank of Canada and private banks are the creators of Canada’s money. Following the 2008 financial crisis, the Bank of England injected $375 billion into Britain’s economy, the European Central Bank injected $1.34 trillion into Europe’s economy and the US Federal Reserve injected $4.3 trillion into the US economy, using quantitative easing (QE). None of these actions caused inflation to increase. In 2013, Bank of Canada’s governor Stephen Poloz said that America’s QE program of $85 billion in monthly bond purchases had helped their economy, and suggested that the Bank of Canada would have done the same had conditions worsened. Investment: $8.3 billion per year
5% Green Bonds, equivalent to War Bonds, issued by the government, offering a 5% return, guaranteed by the Bank of Canada as buyer of last resort. Investment: $13.8 billion per year
Interest-Free Public Bank Loans issued by a network of new public banks, guaranteed by the Bank of Canada as buyer of last resort. Investment: $11 billion per year
Pay-As-You-Save (PAYS) Utility Loans and Property-Assessed Clean Energy (PACE) Municipal Loans, guaranteed by the Bank of Canada as buyer of last resort. Investment: $19.5 billion per year
Fossil Fuel Subsidy Transfers. Reviews suggest that Canada offers $3 billion to companies to explore and produce oil and gas within Canada, and that Export Development Canada spent almost $12 billion in 2016 and $10 billion in 2017 on foreign oil production. The transfer of the subsidies to assist Canada’s 20-Year Energy Transition means that the funds will continue to come from existing taxation. Investment: $10 billion per year

Almost all of these investments will generate income from income tax and GST, adding to government revenues. With KfW’s home retrofit investments, for instance, for each €1 spent promoting retrofits and energy-efficient new builds the German government received €3 in tax income and savings. For a full table of our climate expenditures and investments, see Appendix 1.