How do rising interest rates help oil companies?

COP28 isn’t just hosted by an oilman who denies climate science. The interest rate increases taken by central banks around the world to cope with rapidly rising inflation will also push the Paris targets even further. This is because the rapid increase in the cost of money is making green investments more difficult around the world. And it is particularly affected by developing countries, which will soon be responsible for the bulk of global pollution.

While negotiators of various states in Dubai are trying to achieve the target that will require them to keep global warming within the critical threshold of 1.5 degrees, another development comes from the increases in interest rates; These increases have never been this strong before. in the last few months. As Politico reports, climate projects around the world are failing due to high financing costs, jeopardizing the decarbonization goals of the global economy. Fossil lobbies thank you too.

The restrictive monetary policies adopted by numerous central institutions (primarily the Federal Reserve and the ECB) in response to the rise in inflation resulted in an increase in the cost of money, resulting in a shortage of investors now willing to commit. Green transition, where projects are often capital intensive and involve long payback periods. For this reason, plans to build new offshore wind farms in various parts of the world, for example off the coast of New Jersey or in the North Sea, have been cancelled.

Therefore, one of the main themes of the near future will be the balance between environmental sustainability and financial sustainability, and the balance is now definitely tipping against the former. But if this is true for everyone, it particularly affects emerging economies that have seen the foreign capital needed to finance the phase-out of fossil fuels evaporate. According to the estimates of the International Energy Agency (IEA), these countries will account for the lion’s share of pollutant emissions in the near future. Several projects to decarbonise energy production have been shelved in South Africa and Indonesia, among others. The pace of green investment has slowed significantly in the Middle East, and onshore wind farm projects across the Asian continent are becoming similarly rare. The green revolution will also have to wait in the “first world” as the transition to hydrogen is financially unsustainable at current rates.

Thus, the goal of tripling the amount of renewable energy produced globally by 2050 is getting further away. The words of Emirati Sultan Al Jaber, minister of industry and the United Arab Emirates’ special envoy to combat change, as well as president of Cop28 and CEO of national oil company Adnoc, are particularly timely, some say. There is no scientific evidence that giving up fossil fuels is necessary to limit global warming and will take the world back to the age of caves. Moreover, in June 2023, fossil fuels still met 80% of the world’s energy needs.

As Avinash Persaud, Barbados’ ambassador to the UN climate conference, noted, these dynamics are causing a domino effect that has repercussions on the entire world economy but is particularly damaging to weaker economies that are already disadvantaged by stricter credit conditions due to their political and economic structures. economic instability. The Caribbean island’s Prime Minister Mia Mottley is working on a structural reform of international finance to enable richer states to help developing states fight climate change. Dubbed the “Bridgetown agenda” (named after the capital of Barbados), the program essentially envisaged borrowing more capital at lower costs to support developing countries in mitigation and adaptation interventions.

This is the meaning of the loss and damage repair fund, which was announced with great fanfare at the start of COP28 last November 30; This was a form of compensation for the damage these nations suffered due to climate change, but without being responsible for the pollution in the environment. produced it (and Italy promised to contribute 100 million euros to it). But all these scaffoldings are creaking under the weight of interest rates. And the results are already visible: “We have seen a decline in international capital flows, making the green transition in developing countries even more difficult,” Persaud said.

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Source: Today IT