Climate arbitrage: Cost of carbon versus capital 

News: Recently, the Reserve Bank of India (RBI) has hiked the main policy rate like the central bank of the western economies. Further, Holcim, MNC of cement making is rearranging its portfolio (sell in India) to fit its climate adaptation plan for 2025.   

Why was the policy rate hiked? 

The inflation has been at a higher level. Therefore, the central bank decided to tighten credit for the sake of price stability.  

Therefore, big investors like Indian cement-makers like Aditya Birla group etc. would find it difficult to invest in the Holcim’s assets due to dearer debt. 

Impact of the policy hike 

The cost of capital is going to increase. The local banks will have to pay 4.4% on funds taken from its repo window. Further, the lenders are expected to raise their own rates in response. Therefore, the cost of borrowings will increase in India. 

About the Climate arbitrage

There is an ongoing global reshuffle of carbon-heavy assets. Till now it was visible coal mining and oil and gas sector. But, Holcim’s rearrangement of its asset is a step in this direction in the field of cement industry. The cement making business involves dirty processes that cause carbon emissions and pollution. Therefore, corporations are setting emission caps to go green. 

What are the issues in climate arbitrage? 

This would worsen the planet’s crisis. This system will not bring emissions down. There are many buyers for high-exhaust and high-return assets. The polluting technologies remain in daily use by those companies which are under less climate pressure. 

Way Forward 

The basic problem behind climate arbitrage stems from green plans running ahead of usage reality.  

Therefore, the game theory calls for collective action with a cap-and-trade system based on carbon pricing. A global framework should be created which stop a reshuffle of assets.

Source: The post is based on an article “Climate arbitrage: Cost of carbon versus capital” published in the Live Mint on 05th May 2022.