climate

(Jonathan Kemper, Unsplash)

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum. Author: Henry Boucher, Partner and Deputy Chief Investment Officer, Sarasin & Partners
Just under a quarter of all man-made greenhouse gas emissions come from our use of the land for things such as farming and forestry.
Policymakers have a historic opportunity to initiate massive change to land use at a time when a set of other circumstances may help with implementing it; a new public environmental awareness, changing technology and record low bond yields. And there is a way to direct finance into projects that protect, rather than degrade, nature, and reduce emissions.
 
To date, economic structures have encouraged the conversion of natural capital into financial capital. The result has been that a high proportion of viable land has been cleared for agriculture.
While much of this has been rationalised by the need to create food security and keep food prices low, the reality is that the supply of grains now greatly exceeds our natural food demand. Over the course of the 20th century, mechanisation, hybrid seeds and intensive chemical use have boosted crop yields by three or four times.
However, over the last 20 years, policies on biofuels have compounded ecological damage. By subsidising and mandating the use of crops to make fuel, governments hoped to create additional demand in an attempt to support agricultural crop prices, which have struggled to keep up with inflation.
Biofuels have contributed to land-use change. Previously unspoilt forests and grasslands have been cleared to grow them or to replace the food crops that were diverted for biofuel production elsewhere.
The lack of environmental logic inherent in biofuel policies that contribute to land-use change would appear to make them an easy first step for reform. But there is a risk that removing these and other agricultural subsidies would have a significant impact on rural economies. Grain prices would almost certainly drop and so would land prices. Perhaps the answer is instead to use policymaking to support the rural population in other ways.
The UK is among several governments contemplating paying subsidies for ‘public goods’ such as environmental enhancement, rather than for the over-production of crops. This could be taken a step further to include explicit control of land supply. If governments were to buy agricultural land from farmers at a set price, it could be retired from agricultural use and rewilded to provide the environmental public goods required. From the farmer’s perspective, the capital would allow the repayment of loans and support the injection of capital into rural economies, helping to buffer the loss of income from lower crop prices as price support mechanisms are withdrawn.
What would governments then do with the land? This is where creative thinking is required. At the same time as society begins to recognise the environmental crisis it faces, in the financial world interest rates have plunged close to zero. Indeed, trillions of dollars’ worth of government bonds now offer negative yields. This leaves long-term savings institutions such as pension funds, insurance companies and endowments with nowhere to invest safely and earn even a small return. There could potentially be huge demand for a secure asset that can provide a better-yielding substitute to conventional government bonds, particularly in Europe and Japan.

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The green bond market is already established – as of October 2019, several tens of billions of dollars of green bonds have been issued, with a range of environmental projects financed by the proceeds. But only a small proportion relate to land use, and this is just one leaf in the forest compared with the true scale required.
‘Eden bonds’ would be a new class of government bonds with the ability to revert land to a natural state. They would be issued to investors on a long-term basis, but structured as a lease on a parcel of rewilded land. That land would then be repurchased by the government at a ‘gilt-edged’ fixed price in, say, 50 years. In the meantime, the government pays a small interest rate for the guarantee that the land remains uncultivated and that a local workforce is employed to manage the transition back to the wild and to police it. The holder of these ‘Eden bonds’ could even earn additional income by selling carbon credits and credits for providing other public goods, including the restoration of populations of endangered species. The holder of an Eden bond would have to work harder for their return, but it would be a higher return than on a conventional government bond.
The Paris Climate Agreement of 2015 set out three long-term goals: the first is to limit global average temperature rise, and the second is to increase our ability to adapt to climate impacts. The IPCC Land report highlights that without extraordinary changes to the way in which land is utilised, neither of those first two goals will be met.
What is also clear is that changes to the way in which land is utilised will only come if the third (and oft-overlooked) long-term goal is met. The Paris Agreement also committed to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”. Given the high demand for secure, positive-yielding assets, policymakers now have the opportunity to transform our approach to land use by aligning financial flows with urgently needed climate stabilisation objectives.