Kedward, Katie; Gabor, Daniela; Ryan-Collins, Josh; (2022) Aligning finance with the green transition: From a riskbased to an allocative green credit policy regime. (Working Paper Series 2022/11). UCL Institute for Innovation and Public Purpose: London, UK.

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Abstract

The green transition requires a substantive shift in financial flows that will not occur without policy interventions. We map out and critically assess the dominant, ‘risk-based’ approach which relies on changing the relative prices of green /dirty assets. Since it outsources the pace and nature of decarbonisation to private capital, the risk approach is poorly equipped to deal with the shift towards market-based finance, is vulnerable to arbitrage and regulatory capture, and is unable to deal with uncertainty or carbon lock-in dynamics. We propose an ‘allocative green credit policy’ regime that is organised around green industrial policy objectives and democratically agreed green missions. This draws on post-war credit policy regimes as it involves both quantitative and priced-based interventions in credit and institutional capital markets but also deals with the specific challenges posed by market-based finance. We discuss the implications of such a regime for central bank independence, inflation targeting and the management of stranded assets.

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