Sovereign wealth funds should support efficient infrastructure

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Investment rules and restrictions are a rarely discussed barrier for financing of low-carbon projects.

For example, the largest sovereign wealth fund “cannot take a direct stake in an infrastructure project that is not listed on the stock exchange.” (Reuters)

The central bank of Norway apparently recommended in a letter to lawmakers that unlisted infrastructure projects should be eligible for investment -- but any adjustment of legislation will take time.

Rules of the game matter a tremendous deal. In a recent op-ed, Paolo Mauro recommendeds that "export credit agencies should not only stop funding new coal plants ... but also give financial incentives for choosing climate-friendly infrastructure, including in the transportation sector.”

Much of the debate is devoted to taxes and subsidies. Taxes are typically described as "desirable" or the "right tool" but "unrealistic". Even with substantial energy devoted to the climate-related negotiations, noting like a global carbon tax is not the horizon.

Subsidies are viewed as a flawed and unreliable tool[1] -- but one that is popular enough, despite the high costs.

Approaches beyond explicit "fiscal" tools are often overlooked, but they can certainly do their part in pushing for more efficient technologies.

(In related news: The Financial Stability Board is establishing a task force on climate-related financial risks; and OECD countries have agreed to cut export subsidies for coal plants.)

  1. In a recent paper, John Hassler, Per Krusell, and Jonas Nycanderz summarize the issues as follows: "One problem is that the implementation of green subsidies can be mismanaged. Suppose, for example, that the setup is one where politicians try to identify the best green technologies for the future and thus direct subsidies only to selected companies/technologies. Not only may politicians not be well equipped to identify which technologies are most promising, but there are strong incentives for private actors to misrepresent the cost and technology structures. The research area is indeed typically fraught with informational asymmetries and contracting problems. The Swedish system with so-called green certificates, giving subsidies to any non-fossil based energy, is one promising way forward where no judgment calls are necessary." ↩︎

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