John Fullerton, Founder and President, Capital Institute
As John Fullerton sees it, any attempt to explain how enough money will be mobilized to fund the low-carbon transition must address three questions:
1) How can very large sums of capital flow to real-world projects?
“We need to recognize that the global banking system, particularly now after the banking crisis, simply doesn’t have the balance sheet and risk appetite to do the project financing that is going to need to accompany the $40 trillion of energy infrastructure investment,” he says. “The capital requirements and liquidity requirements make that kind of activity unattractive to banks.”
2) How should the short-termism of public corporations be addressed?
At the conference, Fullerton planned to present what he calls more “radical” alternatives, including evergreen direct investing, “to tackle the short-termism problem that will enable big public companies to actually make the business model transformation that they know they need to make but are constrained from making because of Wall Street’s quarterly earnings mentality.”
3) What can be done to overcome austerity-constrained state balance sheets? With many economies around the world still recovering from the Great Recession, politicians are wary of boosting public spending.
Policy changes from governments will be necessary to help to remove these barriers, said Fullerton. “The most important thing the public sector can do is to stack the deck or define the playing field such that these investments are profitable,” he said. “And the first thing we need to do is take the subsidies out of the fossil fuel economy because those are, obviously, pushing us in the wrong direction.” A nudge in the right direction demands that fossil fuel prices reflect their negative environmental costs. “Until we put a price on the externality of climate change,” he said, “the market system can’t lead us where we need it to go.” Here, Fullerton advocates for “a simple and accelerating but uniformly applied tax on carbon.”
One of the key themes Fullerton planned to stress at the conference is the enormity of the scale of capital required to fund the low-carbon transition. He noted that the International Energy Agency (IEA) estimates it will cost $44 trillion through 2050 to decarbonize the energy sector. “I contrast that with the entire market capitalization of all public companies on planet Earth — and this was before the recent sell-off, so it’s actually worse — it’s $60 trillion.” He added, “We don’t understand what $40 trillion means. It’s just a gigantic number. And it’s not trading of securities; it’s real-life projects that require bulldozers and cement and trucks. We haven’t woken up to the enormity of what we’re looking at.”