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The Over-Representation of Carbon Intensive Sectors

The Over-Representation of Carbon Intensive Sectors

During the early stages of the Covid-19 pandemic, the Bank of England (BoE) announced special corporate bond purchase measures to support the United Kingdom’s economy during the crisis. The trouble is that now these same corporate bond purchase measures ( https://neweconomics.org/2020/08/decarbonising-the-bank-of-englands-pandemic-qe ) are misaligned with the Government’s climate goals. 
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The Corporate Bond Purchase Scheme 
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Responding to the Covid-19 pandemic ( Learn more£20bn. 
However, at present, the problem is that these same measures are misaligned with the Government’s climate goals. The key vulnerability being that these measures create better financing conditions for carbon-intensive economic activities.
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Biased Toward Carbon 
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The CBPS biases the allocation of capital toward carbon-intensive sectors. At the same time, it fails to reflect climate-related financial risks ( Learn more ). 
This means that the CBPS is at odds not only with the Government’s climate targets but also with its own previous climate commitments. 
Aligned with more warming
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By its own admission, the Bank has stated that CBPS is aligned with 3.5°C of warming by the end of the century. This, despite the fact that more than two weeks before announcing the expansion of CBPS, Governor Andrew Bailey suggested that excluding fossil fuels and realigning the corporate bond portfolio with the government’s climate goals is perfectly sensible. 
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Alternatives Possible 
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An alternative framework is not only possible, it is urgent and necessary – particularly if the Bank has plans to expand the CBPS in the future. At present, CBPS must be counted as a missed opportunity to propel sustainable investments that will support a green recovery and a transition toward a more sustainable economy that produces far less carbon.
The New Economics Foundation offers a framework that would help the CBPS to improve its carbon impact. The framework shows that carbon-intensive sectors are over-represented in the list of eligible bonds, despite contributing relatively less to UK employment. 
Two scenarios 
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The Foundation proposes either a lower-carbon pandemic QE scenario or a low-carbon pandemic QE scenario. The first would eliminate the bonds issues by the most carbon-intensive sectors and add bonds that could be conducive to a greener economy. The second would eliminate the vast majority of bonds issued by all carbon-intensive sectors, and add bonds issues by non-carbon-intensive sectors. 
However, both scenarios keep the volume of purchasable bonds at about the same level as the original CBPS list. Thus, it is possible for the Bank to promote carbon mitigation without reducing the aggregate stock of purchasable bonds. 
 

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