Michael Metcalfe

A provocative way to finance the fight against climate change

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Will we do whatever it takes to tackle climate change?


I come at this question not as a green campaigner, in fact, I confess to be rather hopeless at recycling. I come at it as a professional observer of financial policy making and someone that wonders how history will judge us.


One day, this ring that belonged to my grandfather will pass to my son, Charlie. And I wonder what his generation and perhaps the one that follows will make of the two lives this ring has worked.


My grandfather was a coal miner. In his time, burning fossil fuels for energy and for allowing economies to develop was accepted. We know now that that is not the case because of the greenhouse gases that coal produces. But today, I fear it's the industry in which I work that will be judged more harshly because of its impact on the climate — more harshly than my grandfather's industry, even.


I work, of course, in the banking industry, which will be remembered for its crisis in 2008 — a crisis that diverted the attention and finances of governments away from some really, really important promises, like promises made at the Copenhagen Climate Summit in 2009 to mobilize 100 billion dollars a year to help developing countries move away from burning fossil fuels and transition to using cleaner energy. That promise is already in jeopardy. And that's a real problem, because that transition to cleaner energy needs to happen sooner rather than later.


Firstly, because greenhouse gases, once released, stay in the atmosphere for decades. And secondly, if a developing economy builds its power grid around fossil fuels today, it's going to be way more costly to change later on. So for the climate, history may judge that the banking crisis happened at just the wrong time. The story need not be this gloomy, though.


Three years ago, I argued that governments could use the tools deployed to save the financial system to meet other global challenges. And these arguments are getting stronger, not weaker, with time. Let's take a brief reminder of what those tools looked like.


When the financial crisis hit in 2008, the central banks of the US and UK began buying bonds issued by their own governments in a policy known as "quantitative easing." Depending on what happens to those bonds when they mature, this is money printing by another name. And boy, did they print. The US alone created four trillion dollars' worth of its own currency. This was not done in isolation. In a remarkable act of cooperation, the 188 countries that make up the International Monetary Fund, the IMF, agreed to issue 250 billion dollars' worth of their own currency — the Special Drawing Right — to boost reserves around the world.


When the financial crisis moved to Europe, the European Central Bank President, Mario Draghi, promised "to do whatever it takes." And they did. The Bank of Japan repeated those words — that exact same commitment — to do "whatever it takes" to reflate their economy. In both cases, "whatever it takes" meant trillions of dollars more in money-printing policies that continue today. What this shows is that when faced with some global challenges, policy makers are able to act collectively, with urgency, and run the risks of unconventional policies like money printing.


So, let's go back to that original question: Can we print money for climate finance? Three years ago, the idea of using money in this way was something of a taboo. Once you break down and dismantle the idea that money is a finite resource, governments can quickly get overwhelmed by demands from their people to print more and more money for other causes: education, health care, welfare — even defense.


And there are some truly terrible historical examples of money printing — uncontrolled money printing — leading to hyperinflation. Think: Weimar Republic in 1930; Zimbabwe more recently, in 2008, when the prices of basic goods like bread are doubling every day. But all of this is moving the public debate forward, so much so, that money printing for the people is now discussed openly in the financial media, and even in some political manifestos.


But it's important the debate doesn't stop here, with printing national currencies. Because climate change is a shared global problem, there are some really compelling reasons why we should be printing that international currency that's issued by the IMF, to fund it. The Special Drawing Right, or SDR, is the IMF's electronic unit of account that governments use to transfer funds amongst each other. Think of it as a peer-to-peer payment network, like Bitcoin, but for governments.


And it's truly global. Each of the 188 members of the IMF hold SDR quotas as part of their foreign exchange reserves. These are national stores of wealth that countries keep to protect themselves against currency crises. And that global nature is why, at the height of the financial crisis in 2009, the IMF issued those extra 250 billion dollars — because it served as a collective global action that safeguarded countries large and small in one fell swoop.


But here — here's the intriguing part. More than half of those extra SDRs that were printed in 2009 — 150 billion dollars' worth — went to developed market countries who, for the most part, have a modest need for these foreign exchange reserves, because they have flexible exchange rates. So those extra reserves that were printed in 2009, in the end, for developed market countries at least, weren't really needed. And they remain unused today.


So here's an idea. As a first step, why don't we start spending those unused, those extra SDRs that were printed in 2009, to combat climate change?


They could, for example, be used to buy bonds issued by the UN's Green Climate Fund. This was a fund created in 2009, following that climate agreement in Copenhagen. And it was designed to channel funds towards developing countries to meet their climate projects. It's been one of the most successful funds of its type, raising almost 10 billion dollars. But if we use those extra SDRs that were issued, it helps governments get back on track, to meet that promise of 100 billion dollars a year that was derailed by the financial crisis.


It could also — it could also serve as a test case. If the inflationary consequences of using SDRs in this way are benign, it could be used to justify the additional, extra issuance of SDRs, say, every five years, again, with the commitment that developed-market countries would direct their share of the new reserves to the Green Climate Fund.


Printing international money in this way has several advantages over printing national currencies. The first is it's really easy to argue that spending money to mitigate climate change benefits everyone. No one section of society benefits from the printing press over another. That problem of competing claims is mitigated. It's also fair to say that because it takes so many countries to agree to issue these extra SDRs, it's highly unlikely that money printing would get out of control. What you end up with is a collective, global action aimed — and it's controlled global action — aimed at a global good. And, as we've learned with the money-printing schemes, whatever concerns we have can be allayed by rules.


So, for example, the issuance of these extra SDRs every five years could be capped, such that this international currency is never more than five percent of global foreign exchange reserves. That's important because it would allay well, let's say, the ridiculous concerns that the US might have that the SDR could ever challenge the dollar's dominant role in international finance. And in fact, I think the only thing that the SDR would likely steal from the dollar under this scheme is its nickname, the "greenback." Because even with that cap in place, the IMF could have followed up its issuance — its massive issuance of SDRs in 2009 — with a further 200 billion dollars of SDRs in 2014.


So hypothetically, that would mean that developed countries could have contributed up to 300 billion dollars' worth of SDRs to the Green Climate Fund. That's 30 times what it has today. And you know, as spectacular as that sounds, it's only just beginning to look like "whatever it takes."


And just to think what amazing things could be done with that money, consider this: in 2009, Norway promised one billion dollars of its reserves to Brazil if they followed through on their goals on deforestation. That program has since delivered a 70 percent reduction in deforestation in the past decade. That's saving 3.2 billion tons of carbon dioxide emissions, which is the equivalent of taking all American cars off the roads for three whole years. So what could we do with 300 other pay-for-performance climate projects like that, organized on a global scale? We could take cars off the roads for a generation.


So, let's not quibble about whether we can afford to fund climate change. The real question is: Do we care enough about future generations to take the very same policy risks we took to save the financial system? After all, we could do it, we did do it and we are doing it today.


We must, must, must do "whatever it takes."


Thank you.



Will we do whatever it takes to fight climate change? Back in 2008, following the global financial crisis, governments across the world adopted a "whatever it takes" commitment to monetary recovery, issuing $250 billion worth of international currency to stem the collapse of the economy. In this delightfully wonky talk, financial expert Michael Metcalfe suggests we can use that very same unconventional monetary tool to fund a global commitment to a green future.

About the speaker
Michael Metcalfe · Financial expert

A senior managing director and head of global macro strategy at State Street Global Markets, Michael Metcalfe provides high quality capital flow research.

A senior managing director and head of global macro strategy at State Street Global Markets, Michael Metcalfe provides high quality capital flow research.