Solar panels in Murcia, Spain © Richard Brown / Alamy Stock photo

Green Transition finance

The Green Transition, as a large-scale transformation of nations’ capital stock, has long been perceived through the lens of the market failure paradigm as a process that can be brough about with mere price adjustments.

However, that paradigm has been shifting. Many see an indispensable role for states in financing such large-scale transformation. Some call for an expansion of states’ fiscal capacity via general taxation or a dedicated carbon tax to pay for the Green Transition. Others favor treasury borrowing to raise more capital, or issuing green sovereign bonds earmarked for projects with clearly defined environmental benefits. There are suggestions to use the central bank for active money creation through Green Quantitative Easing, to give preferential lender of last resort access to banks funding Green investment, or to change central banks’ collateral framework to support Green securities and push down their interest rates, making it cheaper for companies to fund climate-friendly projects.

We focus our analysis on finding a way for the effective and targeted systemic financing of the Green Transition independent of whether market failures generated by carbon emissions can be fixed in a timely manner. We also seek to go beyond the triad paradigm and take into account the specific conditions of today’s monetary architecture. This will result in the development of a policy-oriented proposal for using OBFAs to finance the Green Transition. We also cross-check the proposal and assess its feasibility for implementation by engaging with stakeholders of political parties, relevant institutions such as OBFAs, treasuries, central banks, and private sector firms in the EU.