Aligning finance with the green transition : From a risk-based to an allocative green credit policy regime

The green transition requires a substantive shift in financial flows that will not occur without policy interventions. We map out and critically assess the dominant, ‘risk-based’ approach which relies on changing the relative prices of green /dirty assets. Since it outsources the pace and nature of decarbonisation to private capital, the risk approach is poorly equipped to deal with the shift towards market-based finance, is vulnerable to arbitrage and regulatory capture, and is unable to deal with uncertainty or carbon lock-in dynamics. We propose an ‘allocative green credit policy’ regime that is organised around green industrial policy objectives and democratically agreed green missions. This draws on post-war credit policy regimes as it involves both quantitative and priced-based interventions in credit and institutional capital markets but also deals with the specific challenges posed by market-based finance. We discuss the implications of such a regime for central bank independence, inflation targeting and the management of stranded assets