Category: Economics: Ch 13

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Should train companies scrap peak-time fares?

In many countries, train fares at peak times are higher than at off-peak times. This is an example of third-degree price discrimination. Assuming that peak-time travellers generally have a lower price elasticity of demand, the policy allows train companies to increase revenue and profit.

If the sole purpose of ticket sales were to maximise profits, the policy would make sense. Assuming that higher peak-time fares were carefully set, although the number travelling would be somewhat reduced, this would be more than compensated for by the higher revenue per passenger.

But there are external benefits from train travel. Compared with travel by car, there are lower carbon emissions per person travelling. Also, train travel helps to reduce road congestion. To the extent that higher peak-time fares encourage people to travel by car instead, there will be resulting environmental and congestion externalities.

The Scottish experiment with abolishing higher peak-time fares

In October 2023, the Scottish government introduced a pilot scheme abolishing peak-time fares, so that tickets were the same price at any time of the day. The idea was to encourage people, especially commuters, to adopt more sustainable means of transport. Although the price elasticity of demand for commuting is very low, the hope was that the cross-price elasticity between cars and trains would be sufficiently high to encourage many people to switch from driving to taking the train.

One concern with scrapping peak-time fares is that trains would not have the capacity to cope with the extra passengers. Indeed, one of the arguments for higher peak-time fares is to smooth out the flow of passengers during the day, encouraging those with flexibility of when to travel to use the cheaper and less crowded off-peak trains.

This may well apply to certain parts of the UK, but in the case of Scotland it was felt that there would be the capacity to cope with the extra demand at peak time. Also, in a post-COVID world, with more people working flexibly, there was less need for many people to travel at peak times than previously.

Reinstatement of peak-time fares in Scotland

It was with some dismay, therefore, especially by commuters and environmentalists, when the Scottish government decided to end the pilot at the beginning of October 2024 and reinstate peak-time fares – in many cases at nearly double the off-peak rates. For example, the return fare between Glasgow and Edinburgh rose from £16.20 to £31.40 at peak times.

The Scottish government justified the decision by claiming that passenger numbers had risen by only 6.8%, when, to be self-financing, an increase of 10% would have been required. But this begs the question of whether it was necessary to be self-financing when the justification was partly environmental. Also, the 6.8% figure is based on a number of assumptions that could be challenged (see The Conversation article linked below). A longer pilot would have helped to clarify demand.

Other schemes

A number of countries have introduced schemes to encourage greater use of the railways or other forms of public transport. One of these is the flat fare for local journeys. Provided that this is lower than previously, it can encourage people to use public transport and leave their car at home. Also, its simplicity is also likely to be attractive to passengers. For example, in England bus fares are capped at £2. Currently, the scheme is set to run until 31 December 2024.

Another scheme is the subscription model, whereby people pay a flat fee per month (or week or year, or other time period) for train or bus travel or both. Germany, for example, has a flat-rate €49 per month ‘Deutschland-Ticket‘ (rising to €58 per month in January 2025). This ticket provides unlimited access to local and regional public transport in Germany, including trains, buses, trams, metros and ferries (but not long-distance trains). This zero marginal fare cost of a journey encourages passengers to use public transport. The only marginal costs they will face will be ancillary costs, such as getting to and from the train station or bus stop and having to travel at a specific time.

Articles

Questions

  1. Identify the arguments for and against having higher rail fares at peak times than at off-peak times
  2. Why might it be a good idea to scrap higher peak-time fares in some parts of a country but not in others?
  3. Provide a critique of the Scottish government’s arguments for reintroducing higher peak-time fares.
  4. With reference to The Conversation article, why is it difficult to determine the effect on demand of the Scottish pilot of scrapping peak-time fares?
  5. What are the arguments for and against the German scheme of having a €49 per month public transport pass for local and regional transport with no further cost per journey? Should it be extended to long-distance trains and coaches?
  6. In England there is a flat £2 single fare for buses. Would it be a good idea to make bus travel completely free?
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The economics of ‘greeniums’ in sustainable finance: doing good has a price

Sustainability has become one of the most pressing issues facing society. Patterns of human production and consumption have become unsustainable. On the environmental front, climate change, land-use change, biodiversity loss and depletion of natural resource are destabilising the Earth’s eco-system.

Furthermore, data on poverty, hunger and lack of healthcare show that many people live below minimum social standards. This has led to greater emphasis being placed on sustainable development: ‘development that meets the needs of the present without compromising the ability of future generations to meet their own needs’ (The Brundtland Report, 1987: Ch.2, para. 1).

The financial system has an important role to play in channelling capital in a more sustainable way. Since current models of finance do not consider the welfare of future generations in investment decisions, sustainable finance has been developed to analyse how investment and lending decisions can manage the trade-off inherent in sustainable development: sacrificing return today to enhance the welfare of future generations.

However, some commentators argue that such trade-offs are not required. They suggest that investors can ‘do well by doing good’. In this blog, I will use ‘green’ bonds (debt instruments which finance projects or activities with positive environmental and social impacts) to explain the economics underpinning sustainable finance and show that doing good has a price that sustainable investors need to be prepared to pay.

I will analyse why investors might not be doing so and point to changes which may be required to ensure financial markets channel capital in a way consistent with sustainable development.

The growth of sustainable finance

Sustainable finance has grown rapidly over the past decade as concerns about climate change have intensified. A significant element of this growth has been in global debt markets.

Figure 1 illustrates the rapid growth in the issuance of sustainability-linked debt instruments since 2012. While issuance fell in 2022 due to concerns about rising inflation and interest rates reducing the real return of fixed-income debt securities, it rebounded in 2023 and is on course for record levels in 2024. (Click here for a PowerPoint.)

Green bonds are an asset class within sustainability-linked debt. Such bonds focus on financing projects or activities with positive environmental and social impacts. They are typically classified as ‘use-of-proceeds’ or asset-linked bonds, meaning that the proceeds raised from their issuance are earmarked for green projects, such as renewable energy, clean transportation, and sustainable agriculture. Such bonds should be attractive to investors who want a financial return but also want to finance investments with a positive environmental and/or social impact.

One common complaint from commentators and investors is the ‘greenium’ – the price premium investors pay for green bonds over conventional ones. This premium reduces the borrowing costs of the issuers (the ‘counterparties’) compared to those of conventional counterparties. This produces a yield advantage for issuers of green bonds (price and yield have a negative relationship), reducing their borrowing costs compared to issuers of conventional bonds.

An analysis by Amundi in 2023 using data from Bloomberg estimated that the average difference in yield in developed markets was –2.2 basis points (–0.022 percentage points) and the average in emerging markets was –5.6 basis points (–0.056 percentage points). Commentators and investors suggest that the premium is a scarcity issue and once there are sufficient green bonds, the premium over non-sustainable bonds should disappear.

However, from an economics perspective, such interpretations of the greenium ignore some fundamentals of economic valuation and the incentives and penalties through which financial markets will help facilitate more sustainable development. Without the price premium, investors could buy sustainable debt at the same price as unsustainable debt, earn the same financial return (yield) but also achieve environmental and social benefits for future generations too. Re-read that sentence and if it sounds too good to be true, it’s because it is too good to be true.

‘There is no such thing as a free lunch’

In theory, markets are institutional arrangements where demand and supply decisions produce price signals which show where resources are used most productively. Financial markets involve the allocation of financial capital. Traditional economic models of finance ignore sustainability when appraising investment decisions around the allocation of capital. Consequently, such allocations do not tend to be consistent with sustainable development.

In contrast, economic models of sustainable finance do incorporate such impacts of investment decisions and they will be reflected in the valuation, and hence pricing, of financial instruments. Investors, responding to the pricing signals will reallocate capital in a more sustainable manner.

Let’s trace the process. In models of sustainable finance, financial instruments such as green bonds funding investments with positive environmental impacts (such as renewable energy) should be valued more, while instruments funding investments with negative environmental impacts (such as fossil fuels) should be valued less. The prices of the green bonds financing renewable energy projects should rise while the prices of conventional bonds financing fossil-fuel companies should fall.

As this happens, the yield on the green bonds falls, lowering the cost of capital for renewable-energy projects, while yields on the bonds financing fossil-fuel projects rise, ceteris paribus. As with any market, these differential prices act as signals as to where resources should be allocated. In this case, the signals should result in an allocation consistent with sustainable development.

The fundamental point in this economic valuation is that sustainable investors should accept a trade-off. They should pay a premium and receive a lower rate of financial return (yield) for green bonds compared to conventional ones. The difference in price (the greenium), and hence yield, represents the return investors are prepared to sacrifice to improve future generations’ welfare. Investors cannot expect to have the additional welfare benefit for future generations reflected in the return they receive today. That would be double counting. The benefit will accrue to future generations.

A neat way to trace the sacrifice sustainable investors are prepared to make in order to enhance the welfare of future generations is to plot the differences in yields between green bonds and their comparable conventional counterparts. The German government has issued a series of ‘twin’ bonds in recent years. These twins are identical in every respect (coupon, face value, credit risk) except that the proceeds from one will be used for ‘green’ projects only.

Figure 2 shows the difference in yields on a ‘green bond’ and its conventional counterpart, both maturing on 15/8/2050, between June 2021 and July 2024. The yield on the green bond is lower – on average about 2.2 basis points (0.022 percentage points) over the period. This represents the sacrifice in financial return that investors are prepared to trade off for higher environmental and social welfare in the future. (Click here for a PowerPoint.)

The yield spread fluctuates through time, reflecting changing perceptions of environmental concerns and hence the changing value that sustainable investors attach to future generations. The spread tends to widen when there are heightened environmental concerns and to narrow when such concerns are not in the news. For example, the spread on the twin German bonds reached a maximum of 0.045 percentage points in November 2021. This coincided with the 26th UN Climate Change Conference of the Parties (COP26) in Glasgow. The spread has narrowed significantly since early 2022 as rising interest rates and falling real rates of return on bonds in the near-term seem to have dominated investors’ concerns.

These data suggest that, rather than being too large, the greeniums are too small. The spreads suggest that markets in debt instruments do not seem to attach much value to future generations. The valuation, price and yield of green bonds are not significantly different from their conventional counterparts. This narrow gap indicates insufficient reward for better sustainability impact and little penalty for worse sustainability impact.

This pattern is repeated across financial markets and does not seem to be stimulating the necessary investment to achieve sustainable development. An estimate of the scale of the deficit in green financing is provided by Bloomberg NEF (2024). While global spending on the green energy transition reached $1.8 trillion in 2023, Bloomberg estimates that $4.8 trillion needs to be invested every year for the remainder of this decade if the world is to remain on track under the ‘net zero’ scenario. Investors do not seem to be prepared to accept the trade-off needed to provide the necessary funds.

Can financial markets deliver sustainable development?

Ultimately, the hope is that all financial instruments will be sustainable. In order to achieve that, access to finance would require all investors to incorporate the welfare of future generations in their investment decisions and accept sacrificing sufficient short-term financial return to ensure long-term sustainable development. Unfortunately, the pricing of green bonds suggests that investors are not prepared to accept the trade-off. This restricts the ability of financial markets to deliver an allocation of resources consistent with sustainable development.

There are several reasons why financial markets may not be valuing the welfare of future generations fully.

  • Bounded rationality means that it is difficult for sustainable investors to assign precise values to future and distant benefits.
  • There are no standardised sustainability metrics available. This produces great uncertainty in the valuation of future welfare.
  • Investors also exhibit cognitive biases, which means they may not value the welfare of future generations properly. These include present bias (favouring immediate rewards) and hyperbolic discounting (valuing the near future more than the distant future).
  • Economic models of financial valuation use discount rates to assess the value of future benefits. Higher discount rates reduce the perceived value of benefits occurring in the distant future. As a result, long-term impacts (such as environmental conservation) may be undervalued.
  • There may be large numbers of investors who are only interested in financial returns and so do not consider the welfare of future generations in their investment decisions.

Consequently, investors need to be educated about the extent of trade-offs required to achieve the necessary investments in sustainable development. Furthermore, practical models which better reflect the welfare of future generations in investment decisions need to be employed. However, challenges persist in fully accounting for future generations and it may need regulatory frameworks to provide appropriate incentives for effective sustainable investment.

Articles

Report

Data

Questions

  1. Using demand and supply analysis, illustrate and explain the impact of sustainable investing on the markets for (i) green bonds and (ii) conventional bonds. Highlight how this should produce an allocation of finance capital consistent with sustainable development.
  2. Research the yields on the twin bonds issued by Germany since this blog was published. Can you identify any association between heightened environmental concerns and the spread between the ‘green’ and conventional bond?
  3. Analyse the issues which prevent financial markets from producing the pricing signals which produce an allocation of resources consistent with sustainable development.
  4. Research some potential regulatory policies which may provide appropriate incentives for sustainable investment.
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Navigating the storm: understanding the socioeconomic impacts of climate change



Climate change is not just an environmental challenge: its socioeconomic impacts are profound and far-reaching, touching every aspect of society. From agriculture to health, from urban infrastructure to coastal communities, the effects of climate change are evident and escalating.

The far-reaching effects

In agriculture, rising temperatures, more intense and frequent heatwaves and changing precipitation patterns pose significant threats to food security.1, 2 Crop yields decline as extreme weather events become more frequent and unpredictable, leading to increased food prices and economic instability. Smallholder farmers, who often lack the resources to adapt, are particularly vulnerable, exacerbating rural poverty and food insecurity.3

Coastal communities face the dual threats of sea-level rise and more intense storms.4 Erosion and inundation damage homes, infrastructure and livelihoods, displacing populations and disrupting local economies. The loss of coastal ecosystems further compounds these challenges, reducing natural defences against storm surges and exacerbating the impacts of climate-related disasters.

Health systems strain under the burden of climate-change-induced heatwaves, air pollution and the spread of vector-borne diseases.5, 6 Heat-related illnesses increase as temperatures rise, particularly affecting vulnerable populations such as the elderly and outdoor workers. Air pollution exacerbates respiratory conditions, leading to higher healthcare costs and decreased productivity. Vector-borne diseases, such as malaria and dengue fever, expand into new regions, placing additional strain on already overburdened health systems.

Displacement due to climate-related disasters amplifies social inequalities and challenges urban planning and infrastructure.7 Vulnerable communities, often located in low-lying areas or informal settlements, bear the brunt of climate impacts, facing the loss of homes, livelihoods and community cohesion. Inadequate housing and infrastructure increase the risks associated with extreme weather events, perpetuating cycles of poverty and vulnerability.

Furthermore, climate change exacerbates existing socioeconomic disparities, disproportionately affecting marginalised and vulnerable populations. Indigenous communities, women, children and people living in poverty are often the hardest hit, lacking access to resources, information, and adaptive capacity.8

Policy responses

Addressing the socioeconomic impacts of climate change requires co-ordinated action across sectors and scales. Policy interventions, such as investment in climate-resilient infrastructure and the promotion of sustainable agriculture practices, are essential for building resilience and reducing vulnerability. Community-led initiatives that prioritise local knowledge and empower marginalised groups are also critical for fostering adaptive capacity and promoting social equity.

To address these challenges, projects like CROSSEU, the new €5 million Horizon Europe project (that I have the pleasure to be part of), play a crucial role in enhancing our understanding of these impacts and developing actionable strategies for resilience and adaptation. One of the key contributions of CROSSEU lies in its development of a Decision Support System (DSS) that integrates tools, measures, and policy options to address these risks in a cross-sectoral and cross-regional perspective. This DSS will support (and hopefully improve) decision-making processes at various levels, from local to EU-wide, and facilitate the adoption of evidence-based policies and measures to enhance resilience and mitigate the impacts of climate change.

Would you like to know more about CROSSEU? Follow our journey and be informed of our publications and events in our new webpage: https://crosseu.eu/9

Articles/References

  1. Global food security under climate change
    Proceedings of the National Academy of Sciences, Josef Schmidhuber and Francesco N Tubiello (11/12/2007)

  2. Reducing risks to food security from climate change
    Global Food Security, Bruce M Campbell et al. (2016: 11, pp 34–43)

  3. The value-add of tailored seasonal forecast information for industry decision making
    Climate, Clare Mary Goodess et al (16/10/2022)

  4. Assessing climate change impacts, sea level rise and storm surge risk in port cities: a case study on Copenhagen
    Climatic change, Stéphane Hallegatte, Nicola Ranger, Olivier Mestre, Patrice Dumas, Jan Corfee-Morlot, Celine Herweijer and Robert Muir Wood (7/12/2010)

  5. Health risks of climate change: An assessment of uncertainties and its implications for adaptation policies
    Environmental Health, J Arjan Wardekker, Arie de Jong, Leendert van Bree, Wim C Turkenburg and Jeroen P van der Sluijs (19/9/2012)

  6. Climate Change and Temperature-related Mortality: Implications for Health-related Climate Policy
    Biomedical and Environmental Sciences, Tong Shi Lu, Jorn Olsen and Patrick L Kinney (2021: 34(5) pp 379–86 )

  7. Climate Change, Inequality, and Human Migration
    IZA Discussion Paper No. 12623, Michał Burzyński, Christoph Deuster, Frédéric Docquier and Jaime de Melo (23/9/2019)

  8. The trap of climate change-induced “natural” disasters and inequality
    Global Environmental Change, Federica Cappelli, Valeria Costantini and Davide Consoli (30/7/2021)

  9. Cross-sectoral Framework for Socio-Economic Resilience to Climate Change and Extreme Events in Europe
    UEA Research Project, Nicholas Vasilakos, Katie Jenkins and Rachel Warren

Questions

  1. How do the socioeconomic impacts of climate change differ between rural and urban communities? What factors contribute to these disparities, and how can policies address them effectively?
  2. In what ways do vulnerable populations, such as indigenous communities and those living in poverty, bear the brunt of climate change impacts? How can we ensure that climate adaptation strategies prioritise their needs and promote social equity?
  3. The blog mentions the importance of community-led initiatives in building resilience to climate change. What examples of successful community-based adaptation projects can you identify, and what lessons can be learned from their implementation?
  4. How can governments and organisations collaborate to address the socioeconomic impacts of climate change while also promoting economic growth and development? What role do cross-sectoral partnerships play in building resilience and fostering sustainable practices?
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A body blow to Body Shop?

On 12 February, it was announced that The Body Shop UK was entering administration. With 199 shops across the country, if this leads to the collapse of the business, some 2000 jobs will be lost. The business has been struggling since 2020 and poor sales this last Christmas led the new owners, the pan-European alternative investment firm, Aurelius, to appoint administrators.

This could potentially begin an insolvency process that could result in the closure of some or all of the shops. This would spell the end of an iconic brand that, since its founding in 1976, has been associated with natural, ethically sourced and environmentally friendly products. Aurelius has already sold The Body Shop business in most of mainland Europe and in parts of Asia to an unnamed buyer. It is unclear what will happen to the approximately 2800 stores and 8000 employees in 70 countries outside the UK.

Origins of The Body Shop1

The Body Shop was founded in 1976 and shot to fame in the 1980s. It stood for environmental awareness and an ethical approach to business. But its success had as much to do with what it sold as what it stood for. It sold natural cosmetics – Raspberry Ripple Bathing Bubbles and Camomile Shampoo – products that proved immensely popular with consumers.

Its profits increased from a little over £1m in 1985 (€1.7m) to approximately £65m (€77.5m) in 2012. Although profits then slipped, falling to €65.3m in 2014 and €54.8m in 2015, its profit growth in new markets over that same period was 12.4%.

Sales revenue, meanwhile, grew even more dramatically, from £4.9m in 1985 to approximately €967.2m in 2015. By 2015, Body Shop International had over 3100 stores, operating in 61 countries.

What made this success so remarkable is that The Body Shop did virtually no advertising. Its promotion stemmed largely from the activities and environmental campaigning of its founder, Anita Roddick, and the company’s uncompromising claim that it sold only ‘green’ products and conducted its business operations with high ethical standards. It actively supported green causes such as saving whales and protecting rainforests, and it refused to allow its products to be tested on animals. Perhaps most surprising in the world of big business at the time was its high-profile initiative ‘trade not aid’, whereby it claimed to pay ‘fair’ prices for its ingredients, especially those supplied by people in developing countries who were open to exploitation by large companies.

The growth strategy of The Body Shop focused upon developing a distinctive and highly innovative product range, and at the same time identifying these products with major social issues of the day, such as the environment and animal rights.

Its initial expansion was based on a process of franchising, where individuals opened Body Shops which were then supplied by the company with its range of just 19 products. Then, in 1984 the company went public. Following its flotation, the share price rose from just 5p to a high of 370p in 1992.

In the 1990s, however, sales growth was less rapid. By 1998, earnings had collapsed by 90% and the share price fell to 117p. Shareholders forced Anita Roddick to step down as Chief Executive, but for a while she and her husband remained as co-chairs. In 2002, they stepped down as co-chairs, by which time profits had fallen to £20.4m. In 2003 she was awarded in knighthood and became Dame Anita Roddick. Sales then grew rapidly from 2004 to 2006 from €553m to €709m.

Acquisition of The Body Shop by L’Oréal

A dramatic event, however, occurred in 2006 when The Body Shop was sold to the French cosmetics giant, L’Oréal, which was 26% owned by Nestlé, The event resulted in the magazine Ethical Consumer downgrading The Body Shop’s ethical rating from 11 out of 20 to a mere 2.5 and calling for a boycott of the company. Three weeks after the sale, the daily BrandIndex recorded an 11 point drop in The Body Shop’s consumer satisfaction rating from 25 to 14.

There were several reasons for this. L’Oréal’s animal-testing policies conflicted with those of The Body Shop and L’Oréal was accused of being involved in price-fixing with other French perfume houses. L’Oréal’s part-owner, Nestlé, was also subject to various criticisms for ethical misconduct, including promoting formula milk rather than breast milk to mothers with babies in developing countries and using slave labour in cocoa farms in West Africa.

Anita Roddick, however, believed that, by taking over The Body Shop, L’Oréal would develop a more ethical approach to business. Indeed, it did publicly recognise that it needed to develop its ethical and environmental policies.

L’Oréal adopted a new Code of Business Ethics in 2007 and gained some external accreditation for its approach to sustainability and ethics. It was ranked as one of the world’s 100 most ethical companies by Ethisphere in 2007 and, in 2016, it was again part of this list for the seventh time.

L’Oréal set itself three targets as part of its environmental strategy (2005–15), including a 50% reduction in greenhouse gas emissions, water consumption and waste per finished product unit. It made a donation of $1.2m to the US Environment Protection Agency to help bring an end to animal testing and, in March 2013, it announced a ‘total ban on the sale in Europe of any cosmetic product that was tested on animals or containing an ingredient that was tested on animals after this date.’ It also promised that ‘By 2020, we will innovate so that 100% of products have an environmental or social benefit.’

Sadly, Anita Roddick died in 2007 and so was not able to witness these changes.

L’Oréal also looked to inject greater finance into the company aimed at improving the marketing of products. In autumn 2006 a transactional website was launched and there have been larger press marketing campaigns. Profits continued to rise in 2006 and 2007, but fell back quite dramatically from €64m in 2007 to €36m in 2008 as recession hit the high streets. They fell by a further 8% in 2009, but significant growth was seen in the following three years: 2010, up 20.3% to €65.3m; 2011, up 4.3% to €68.1m; 2012, up 13.8% to €77.5m.

From L’Oréal to Natura to Aurelius to ?

From 2013, the financial performance of The Body Shop deteriorated. Profits fell by 38% in 2016 to just €34m, with sales falling by 5%. In June 2017, L’Oréal announced that it had agreed to sell The Body Shop for €1bn (£877m) to Natura Cosmeticos, the largest Brazilian cosmetics business. Natura was awarded ‘B Corp’ status in 2014 as it met certain standards for environmental performance, accountability and transparency. In 2019, The Body Shop was separately certified as a B Corp.

Initial indications for The Body Shop under its new owners seemed good, with net revenue rising by 36% in 2018 and 6.3% in 2019. 2020 saw strong growth in sales, with a rise in online sales more than offsetting the effect of store closures during the pandemic. Its market share peaked in 2020 at 1.4%. However, with the cost-of-living crisis following the pandemic and the Russian invasion of Ukraine, many consumers switched to cheaper brands and cheaper outlets, such as Boots and Superdrug, sacrificing environmental and ethical concerns in favour of value for money. As a result, The Body Shop’s market share fell, dropping to 0.8% in 2022 and not picking up in 2023.

This prompted Natura to sell the business to Aurelius. Aurelius hoped to revitalise The Body Shop by promoting its core values and through partnerships or concessions with major retailers, such as John Lewis or Next. However, as we saw above, after a poor Christmas and a weaker capital base and higher cost commitments than initially thought by Aurelius, the new owner filed to put The Body Shop into administration.

What will come of the administration process remains to be seen. Perhaps some of the more profitable stores will be saved; perhaps there will be an expansion of the online business; perhaps partnerships will be sought with major retailers. We shall see.

1 Some of this section is based on Case Study 9.3 from Economics (11th edition).

Videos

Articles

Questions

  1. What assumptions did The Body Shop made about the ‘rational consumer’?
  2. How would you describe the aims of The Body Shop (a) in the early days under Anita Roddick; (b) under L’Oréal; (c) under Aurelius?
  3. How has The Body Shop’s economic performance been affected by its attitudes towards ethical issues?
  4. What has Lush done right that The Body Shop has not?
  5. What will the administrators seek to do?
  6. Find out what has happened to The Body Shop outlets in mainland Europe?
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Debt-for-nature swaps – some good news

A happy New Year for 2024. Let’s hope that the coming year brings some good news amidst all the the gloom of war, squeezed living standards, the effects of climate change and the rise of authoritarian regimes.

One piece of good news is the growth in environmental debt swaps in developing countries. These are known as debt-for-nature swaps (or debt-for-environment swaps or green debt swaps). As Case Study 26.16 in Economics (11th edition) and Case Study 15.19 in Essentials of Economics (9th edition) explain:

A debt-for-nature swap is where debts are cancelled in return for investment in environmental projects, including protecting biodiversity, reducing carbon emissions and mitigating the effect of climate change. There are two types of scheme: bilateral and commercial.

In a bilateral swap, a creditor country agrees to cancel debt in return for the debtor country investing a proportion of the amount in environmental projects. In a commercial swap, the debt owed to banks is sold to an international environmental agency at a substantial discount (or sometimes even given away); the agency then agrees to cancel this debt in return for the country funding the agency to carry out various environmental projects.

The first debt-for-nature swap was made as far back as 1987, when environmental NGO, Conservation International, arranged for Bolivia to be forgiven $650 000 of its debt in exchange for the establishment of three conservation areas bordering the Beni Reserve (see either of the above case studies). In the 1990s and 2000s, debt-for nature swaps became popular with creditors and by 2010, the total debt cancelled through debt-for-nature swaps was just over $1 billion.

However, the popularity waned in the 2010s and with COVID, many developing countries were diverting resources from long-term sustainability and mitigating the effects of climate change to emergency healthcare and relief.

More recently, debt-for-for nature swaps have become popular again.

In May 2023, Ecuador benefited from the biggest debt swap to that point. The agreement saw $1.6bn of its commercial debt refinanced at a discount in exchange for large-scale conservation in and around the Galápagos Islands. At least $12m per year of the money saved will be channelled into conservation in the archipelago, with its unique flora and fauna.

Such projects are set to increase, with potentially significant beneficial effects for biodiversity, climate and the environment generally. At the COP28 summit in December 2023, a task force was set up by a group of multilateral development banks to promote an increase in the size and number of debt-for-nature swaps.

According to the Organisation for Economic Co-operation and Development (OECD), developing economies will need an annual $2.4 trillion of investment in climate action in the coming years. So far, the market for debt-for-nature swaps is set to rise to around $800bn. If they are to make a significant contribution to tackling climate change and loss of biodiversity, they need to be scaled up massively, especially as the cost of servicing debt has risen with higher global interest rates.

Nevertheless, as part of a portfolio of measures to tackle debt, climate change, loss of biodiversity and damage to the environment more generally, they are making an important contribution – a contribution that is set to rise.

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Articles

Questions

  1. Identify other types of debt swap and discuss their importance.
  2. Why are debt-for-nature debt swaps in the interests of debtor countries, creditors and the world generally?
  3. What is ‘green washing’? How may debt-for-nature swaps be assessed to prevent such green washing?
  4. Why are many developing countries’ debt burdens skyrocketing?
  5. Why may a developing country’s solution to its growing debt be detrimental to the environment?
  6. Assess the Belize debt-swap deal in tackling both its debt and conservation.