Combating climate change through green finances

What is it about?

Urgent actions are needed to mitigate the impact of climate change. Policy and infrastructure changes are needed to limit carbon emissions and achieve this target. This paper explores the role of the financial sector in mitigating climate change through detailed market studies and policy simulations. The goal is to shift brown assets from infrastructures which emit carbon to zero carbon green investments. The key is to do so without disturbing the global economy. On one hand, markets need to be developed to dissolve brown assets. On the other hand, green finance investments need to be encouraged. For this, carbon emitting systems need to be fed back into the economy as stable assets. The paper suggests that such brown assets can offer capital security to banks. As a result, banks become capable of financing green investments. This exchange of assets can be used for developing cleaner and greener activities.

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Photo by micheile henderson on Unsplash

Photo by micheile henderson on Unsplash

Why is it important?

A lockdown was imposed worldwide to limit the spread of COVID-19. This led to a sudden decrease in carbon emitting human activities. However, the decrease in pollution levels did not last long. Soon after the reopening of workplaces, the pollution returned to its earlier levels. Therefore, reducing human activities alone may not be enough to reduce carbon emissions. It is important to transform the current energy infrastructure to greener options. Such changes need monetary investments. The global financial sector plays an important role in this process. KEY TAKEAWAY: Green activities alone may not be enough to mitigate climate change. A financial system that exchanges brown assets for green investments can take us closer to the zero carbon goal. Disclaimer - This summary was prepared by Kudos Innovations Ltd and does not necessarily represent the views of International Monetary Fund (IMF).