Feature: Our misunderstanding of public money may result in environmental catastrophe

Jason Chamberlain partner at international law firm Bryan Cave Leighton Paisner, explains why we need a war-like effort to combat climate change and how our misunderstanding of public money may result in environmental catastrophe.

Not long after the evacuation from Dunkirk, Churchill gave his famous ‘We shall fight on the beaches’ speech.

Before he got to his list of all the places we would fight, including the beaches, he said, ‘…we shall defend our Island whatever the cost may be…’

On the eve of COP26, we need a similar mindset to fight climate change.

It is too late to avoid its effects now. It is just about mitigation from this point. Instead of the all-out effort for guns and butter, this time we need total mobilisation to avoid environmental catastrophe. And like then, we must do so whatever the cost may be.

But the misinformation about, causing our misunderstanding of, how public money works, may just mean we tragically end up putting the financial costs of doing enough before the environmental costs of not doing enough.

The clock is ticking, but we aren’t doing enough

Earth Overshoot Day is a calculation of the day in each calendar year by which humanity consumes all the resources that the planet can produce over that calendar year. In other words, the extent to which Earth’s biocapacity can cope with the demands we place on it.

Overshoot Day was 30 December for 1970. In 1997, when the Kyoto Protocol was signed, it was 28 September. In 2015, with the commitment to the Paris Agreement to keep by 2050 global temperatures ‘well below’ 2.0℃ above pre-industrial times and ‘endeavour to limit’ them to 1.5℃, Overshoot Day was 3 August.

This year, after a brief respite due to Covid, Overshoot Day was 29 July.

The day keeps getting earlier because the demand we place on the planet keeps going up, despite all the technological advances, renewable energy sources and rhetoric.

According to Climate Action Tracker, if all government climate promises are kept, we might keep global temperatures to 2.9℃ above pre-industrial levels by 2100.

But unfortunately, the promises the UK made that got us the leadership role at COP26 (like achieving net zero), are not being met. The independent Climate Change Committee’s (CCC) progress report in June 2021 said the UK government had failed to come forward with sufficient policies to meet its own climate change goals.

The CCC said there were gaps and ambiguities in the Government’s approach and that we continued to ‘blunder into high-carbon choices’.

It concluded that only four of 21 key decarbonisation areas had seen sufficient ambition and only two had adequate policies in place for cutting emissions. Ironically then, the progress report observed a disappointing lack of progress.

The CCC was particularly concerned that the Treasury was late with its review as to how net-zero will be funded and where the costs will fall, describing its silence as ‘really noticeable’.

If only silence was the problem. The WWF recently said we are spending just 0.01% of GDP on fighting climate change in this current budget, while policies in that same budget that actually increase emissions equate to 2.1% of GDP.

After Covid, it seems the Treasury is preoccupied with numbers, but only it seems, those relating to the financial costs of combating climate change, and not the financial benefits, or more significantly, the real-world costs of not doing so.

Understanding public money may be the key to combating climate change

We misunderstand where public money comes from and how much there is available to spend as a result. That misunderstanding drives political, media and public choices about spending that are as artificial as money itself.

Unthinkingly, we go along with the narrative that government has to budget like you or I. It can’t spend what it doesn’t have. And if it borrows to make up the deficit, the burden falls on today’s taxpayers or later generations.

It starts with tax. We are fed the notion that the government taxes us so that it can spend. Parliament’s website says, ‘Without [taxes] it would be impossible to pay for the country’s defence services, its health, welfare and social services, its schools and universities, and its transport systems.’

The first question any politician is asked whenever they suggest public spending is, ‘How are you going to pay for it?’. Meaning, ‘What tax increases are you going to introduce to pay for it?’ And we all seem to accept that tax increases are inevitable in order to pay for Covid.

But take the furlough scheme as something that belies these misapprehensions. The Government spent public money subsidising people’s wages to keep them in employment, without tax increases to pay for that or indeed anything else Covid-related, so any tax increases now would be after the fact. The spending came first.

So how did the Government pay for it? Conventional thinking dictates that if a government is unable to pay for things from taxation, it must borrow.

Go to the national debt clock website. It shows a pound sign followed by 15 numbers (a trillion in other words). In fact, when you add everything up, it’s pushing £5 trillion. It ticks up at extraordinary speed – £5,170 per second. It looks scary. In fact, it is meant to scare you, explaining as it does, that every man, woman and child in the country is each somehow responsible for £78,000 of that debt.

The most common way in which a government is said to borrow is by issuing bonds, or gilts.

When a government issues a bond, it makes a promise to the purchaser to pay an agreed rate of interest over its term, plus, upon its maturity, the original bond value. In that sense, it looks like a loan. But this is not what is happening when a government issues a bond.

Let’s return to Covid spending.

When the government spent that money, it ended up in the economy, specifically in private sector bank accounts. For reasons that are not important here, too much money (reserves) in the banking system will drive interest rates to zero and selling government bonds will drive those rates up.

In ordinary times, governments seek a positive interest rate. When a government sells bonds then, it is doing so simply to induce the swap of one form of money (the reserves) for another (a gilt) and thereby drain excess reserves from the banking system in pursuit of a positive interest rate.

So when in April 2020, the UK Debt Management Office (DMO) reported that it planned to issue more bonds over the next three months than it had previously planned for the full financial year, it was not, as commonly reported, doing that to finance Covid spending, but instead doing so to match the reserves the Government would be putting in bank accounts because of that spending.

Now consider who owns the national debt and you might be even less scared by that clock. The Bank of England (BoE), financial institutions and pensions funds, and international governments, each own roughly a third of the national debt.

The third held by the BoE was purchased through Quantitative Easing (QE) – where the bank buys up existing government bonds and other securities. Again, this is done for interest rate management purposes.

While this third has not been retired, the BoE carries out the QE programme entirely in coordination with the Treasury, and the bank’s Annual Report and Accounts reveal that the Treasury indemnifies all of the bank’s purchases of government debt, so it is inconceivable that the BoE will call any of it.

Of the other two thirds, for financial institutions, pension funds and international governments, gilts are simply a form of investment, not lending. For all of these investors, holding interest-bearing, tradeable gilts will be preferable to holding reserves.

Gilts are one of the safest investments out there – the DMO, proudly declares that, ‘the British Government has never failed to make interest or principal payments on gilts as they fall due.’

International governments will hold Sterling for trade purposes. For example, the recent UK-Australian trade deal may see Australia increase its Sterling holdings to be able to pay for more things in Sterling, with the UK doing the same with Australian Dollars.

There is no borrowing or lending when a government sells, and someone buys, a government bond. What the active part of the national debt clock really shows us then, is not the extent of government borrowing, but the extent of savings with the government!

The government is not like you or I

So how does a government pay for things if it does not do so using tax revenues or borrowing?

The answer to that question lies in asking yourself another: what government that has the power to issue its own currency (as ours does) needs to either tax or borrow that currency from its citizens to pay for anything? The realisation is so profound, like the air in our cities all too often, it takes your breath away.

We are trained to believe the government is like you or I. It is not. Where the government is a currency issuer, we are currency users.

The government can print that currency, or in today’s modern world, achieve the same by entering keystrokes on a keyboard. We cannot. The government can never run out of money. We can.

Tax and bond receipts do not sit in a vault somewhere or even on a computer, waiting to be spent by the government. For all practical purposes, the receipts are extinguished at the point they are paid – not recycled by the government to spend. Any government spending is made using new money. That’s how the Government paid for Covid, how the DMO can boast about never defaulting on a bond, and how we can pay to tackle climate change.

The constraint on public spending then is not affordability. The money will always be there.

A £1 million potato

If a public spending discussion can get beyond the affordability question, it then pivots to the spectre of inflation. Those who watch the national debt clock like a clock, wheel out the Weimar Republic, Venezuela and Zimbabwe like clockwork as portents of hyperinflation.

They are false equivalents. Germany, already recoiling from losing the Great War, struggled to pay enormous war debts and reparations in gold-backed denominations.

Venezuela’s currency tanked when demand for its oil exports (upon which the entire economy was dependent) tanked, driving up the cost of imports. Political decisions and corruption caused a capital flight and devastating food shortage in Zimbabwe. All resorted to printing extraordinary amounts of currency to compensate, making the situation worse in each case.

Many say inflation is coming, although most commentators have wrongly promised that since the financial crisis in 2008/9. There is no doubt Brexit has brought some inflationary pressures to bear on certain things. But despite Brexit and all that Covid spending, current UK inflation is just 2.5%.

The correct constraint on public spending is indeed inflation – too much in the wrong circumstances will cause inflation. But any talk of hyperinflation is not a real-world concern. Climate change however, very much is.

A really scary clock

Instead of focusing on the national debt clock, we should focus on one that is actually scary. The Climate Clock recently appeared on Glasgow’s Tolbooth Square steeple to coincide with COP26, having relocated from New York. It is a version of the Doomsday Clock and at the time of writing, it read six years, [165] days.

That is the time the world supposedly has left (to about 2028) to get to 100% renewable energy production to stay below Paris’s 1.5℃ tipping point. We are a long way from achieving that.

Except it may not even be 2028. The Climate Clock was set last year before unprecedented storms hit central Europe, the Chinese province of Henan experienced a year’s worth of rain in three days, the Arctic saw the lowest level of sea ice ever recorded, and parts of the Pacific coast of North America were on fire. And before the data showed that:

• we will likely reach the 1.5℃ increase tipping point in the next five years, with the earth retaining more than twice as much heat annually than 15 years ago;
• the Gulf Stream, the Atlantic ocean current, is at its weakest point in nearly 1,600 years and could be about to collapse;
• the stratosphere has contracted by 400m since the 1980s and will contract by another kilometre by the 2080s;
• Greenland’s ice sheet is losing over eight billion tonnes of ice per day; and
• the Amazon has ‘flipped’, meaning that it now produces more carbon than it stores.

The UN’s leaked climate report, due out next year, summed it all up by warning that parts of the Earth will now face unliveable heat, ecosystem collapse and rising tides, and the worst is yet to come.

In the normal course, just because our government can spend whatever it wants, does not mean that it should. There needs to be a reason to spend because any spending uses up real-world resources. There must be capacity in the economy. Excess inflation must be avoided.

But we are beyond these considerations as far as climate change goes. We should worry more about the actual sky falling in, instead of the economic one. We should be more inclined to risk inflation rising than sea levels.

Because, while Overshoot Day is 29 July, if everyone lived as we do in the UK, Overshoot Day would fall on May 19. Looking at it another way, we need 2.6 Earths for everyone to live as we do. And we are not the worst.

The Office for Budget Responsibility recently said that taking early action to meet the UK’s climate targets would result in a smaller net impact on the UK’s finances than Covid or the Great Recession.

The impact, however, would be twice as much if the Government delayed taking action to reduce emissions. But is the will there to do so now?

The majority of the 50% progress made on emissions since 1990 levels is due to the decarbonisation of the power sector.

The CCC report says, ‘If progress does not extend outside the power sector, the sixth carbon budget will be missed by a huge margin.’

Road pricing and fuel duty increases have been put off again.

Car manufacturers continue to sell and we continue to buy upwards of 30 SUVs for every electric battery vehicle sold/bought, and the Government wants to increase car manufacturing further as part of its levelling up agenda.

Not enough is being done, including attractive fares pricing, to encourage us back onto public transport, which will still be using fossil fuels for years after car manufacturers electrify.

On heating our homes, again, we have announced a target to replace some of our gas-fired boilers with heat pumps, but we are not currently aiming at even that limited target – there are no requirements or even incentives on the horizon to make or induce the switch. And with more extreme UK summers, we may increase home energy consumption before decreasing it, with more of us turning to air conditioning the home.

This doesn’t all fall to the government. The private sector has a significant role to play – ESG policies must be identified and implemented. Individually, we each have a significant role to play. To make the progress the CCC report calls for will now really affect our personal choices as to how we get about, heat our homes and eat.

It was all hands to the pump back in 1940. It should be all hands to the heat pump and none to the petrol pump now. It’s going to be tough, but a 3℃ hotter world will be tougher.

The money is there to do more

A rising tide lifts all boats they say. Well, in the context of the need for a global climate change effort, a rising tide avoids one. Whatever we do as a country, will count for very little if the likes of the US, China and India do not stop playing whataboutism on their climate commitments.

Three months after promising to double government investment to help poorer countries adapt to climate change, we decided to reduce the overseas aid budget ‘until the fiscal situation allows’. What price on getting a whataboutism response when we try to convince these countries at COP26 to do more?

This is maddening when you realise the fiscal situation does not require these kind of trade-offs. Imagine the leadership capital to be gained in spending significant public capital in combatting climate change. Even in a world as fractious as this one has become, it would be

difficult for other countries to resist because there is now real global public support for decisive leadership to bring about meaningful climate action.

Aside from regulating our own behaviours, we need to encourage our politicians and the media to regulate theirs when it comes to the discourse about public money. We should no longer accept affordability arguments to justify a 0.01% of GDP spending commitment. The only way politicians and the media will acknowledge that more can be done is if they are clear that we are clear their arguments will no longer wash that the government is like you I and has to budget accordingly.

If we recognise that the money is always there to meet, even surpass, our climate change targets, we could, for example, bring about the earliest possible transition:

• to more environmentally-friendly forms of home heating;-  back to public transport and out of our cars;
• from environmentally-unfriendly agricultural practices and outputs; and
• to technological solutions to combat climate change, including compensating IPR holders for sharing those technologies with the rest of the world.

If we don’t, how tragic will it be to look back (assuming we can) from a 3 degree Celsius hotter world, and realise the only reason for that outcome was because we failed to spend enough of a completely made up thing for a completely made up reason. I wish you couldn’t make it up. Thankfully, there is still time for that thought to remain made up. But only just.