Wednesday19 February 2020 ★ FINANCIAL TIMES 9

Opinion

If the market is expected to be strong,

the collateral value of the car can be

used to discount the effective rental

costs. Without private buyers for

former fleet vehicles, however, it’s hard

toimaginehowresidualvaluesmightbe

propped up. Resale value might have to

be determined solely by scrap value,

increasingleasingcostsallround.

Here lies the paradox for the autono-

mous market. If private ownership

becomes obsolete, fares will lose an

importantsourceofsubsidythroughthe

residualvaluechannel.Ironically,rental

rates could then rise to levels that made

private ownership seem more compel-

lingratherthanless.

Somesaythesolutionliesincollective

autonomous membership schemes,

where a one-off investment (less than

thecostofbuyingacaroutright)entitles

modelusedin retailand hospitality.

Companies are split into two entities,

with the operational side engaging in a

sale and leaseback with the property-

owning entity in a way that improves

the overall credit standing of the duo

and lowers its funding costs.The

“propco” might then be organised as a

sort of investment trust, opening the

doortolow-riskmutualisedownership.

The problem is that investors in vehi-

cle fleets would be exposed to a lot more

risk than in conventional real estate

investment trusts, because the depreci-

ation rate of autonomous vehicles is an

unknown variable in a world where pri-

vateownershiphasbeenupended.

In conventional vehicle securitisa-

tions,thecost-effectivenessofleasepay-

ments is tied to how well the cars keep

their value in the second-hand market.

burdensome and these businesses

understand that tying balance sheets up

infixedassetscanimpedegrowth.

Itcanalsoexposeownerstoallsortsof

inconvenient risks and costs, such as

accident and damage liability, mainte-

nanceandfuellingexpenses.Forprivate

owners,the utility and convenience

drawn from exclusive ownership makes

thosecostsandrisksseemworthwhile.

This has sparked speculation that the

sectormightemulatethe“opco-propco”

be little to no incentive to own a private

car at all. Instead, fleet managers or

ride-sharing networks will rent cars to

the public as and when demand

requires, undermining the opportunity

for manufacturers to increase margins

withbespokeextras.

The industry’s response is that the

shift does not have to be a problem for

profitability. People will still need cars;

business models will have to adjust.

Rather than marketing cars to individu-

als,manufacturerswillhavetobebetter

atmarketing themselvesto professional

fleetnetworksoroperators.

But this view ignores the role private

car ownership plays in pricing vehicle

transport more widely. Network opera-

tors such as Uber and Lyft don’t neces-

sarilywanttoownthevehiclestheyrent

to the public. Asset ownership can be

C

ar manufacturers don’t just

sell customers a transport

solution.Theysellanaspira-

tional lifestyle. So it should

come as no surprise that

many have started to worry about the

impact autonomous driving technology

will have on theirprofits, if and when

thoseaspirationsaremadeirrelevant.

Some industry practitioners believe

that when travelling in autonomous

vehicles becomes the norm, there will

Carmakers struggle to plan for an autonomous future

The industry’s pragmatic

response is that the shift

does not have to be a

problem for profitability

a member to ride in any available vehi-

cle. But the problem then becomes one

of liquidity management and ensuring

members don’t demand to use the

scheme’scarsatthesametime.

The only way to resolve that difficulty

is to ensure a fleet has at least one vehi-

cle per member on hand, making the

cost of membership entirely substituta-

ble with private ownership. The key

benefit then becomes the capacity to

summon a vehicle quickly, rather than

having to wait for one’s personal car to

arrivefromhalfwayacrosstown.

Whatever the industry hopes, that

benefitmightnotbeenoughtocompen-

sate for the burden of not being able to

keeppersonalitemsatthereadyinone’s

boot.Theymayneedtothinkagain.

[email protected]

Martin Wolf Economics

H

ow can we make capital

flows safer for emerging

market economies? Find-

ing the right response to

that question is critical for

financial stability, growth and jobs. The

good news is that countries are benefit-

ing from an abundance of overseas capi-

tal, which can be used to fund fresh

ideas and vital infrastructure. But they

are also facing episodes of high capital

flow volatility, which can hurt financial

stability and the prospects of businesses

andhouseholds.

Addressing volatile capital flows can

beadauntingtask,becausethereislittle

consensus on the right combination and

timing of policy measures. Consider the

2018 episode of capital outflows from

emerging markets:Braziland Malaysia

intervened in foreign exchange markets

to shore up their currencies. Colombia

and South Africa barely intervened.

Some central banks raised interest

rates, while others did not. Heavy inter-

vention often mitigated depreciation,

butnotalways.

All this raises questions, including for

the IMF. We are therefore rethinking

and updating our advice to member

countries. Our goal is to provide coun-

try-specific advice on the appropriate

mix of policies needed to preserve

growthandfinancialstability.

Our new “integrated policy frame-

work” will reassess the costs and bene-

fits of four tools — monetary policy,

macroprudential policy, exchange rate

interventionsandcapitalflowmeasures

—tohelpstabiliseeconomiesexposedto

domestic and external shocks. Impor-

tantly, the “integrated” aspect of the

new framework will capture how these

tools interact with each other and with

countrycircumstances.

The IMF’s current framework,

grounded in more conventional eco-

nomic thinking, broadly steers

members towards using the exchange

rate as a shock absorber. This approach

provides a good approximation of how

advanced economies adjust to

external shocks and exchange rate

movements. But it can miss important

characteristics of emerging markets

that alter their economies’ response to

external shocks and may call for a dif-

ferentpolicyprescription.

New researchindicates that while

emergingmarketsaredeeplyintegrated

in global trade, their trade is dispropor-

tionately invoiced in dollars and

consequently flexible exchange rates

provide limited insulation. Similarly,

while emerging markets are substan-

tially integrated in global capital

markets, their foreign debt is denomi-

nated extensively in dollars. That can

cause exchange rates to become shock

amplifiersastheycansuddenlyincrease

debtservicecostsandliabilities.

In fact, the striking diversity of

policies pursued among economies

could reflect their differing exposure to

external shocks. Emerging markets also

differ widely in the liquidity of their for-

eign exchange markets, which could

affect the range of tools available to

themforstabilisation.

While the IMF’s past policy guidance

to member countries has considered all

of the four policy tools of the integrated

policy framework, we recognise that a

deeperunderstandingofhowthesepoli-

cies work both in isolation and in co-or-

dinationwitheachotherisneeded.

For instance, if a country has used

macroprudential measures to avoid the

build-up of debt and currency mis-

matches prior to a shock, should it use

monetary policy more, or less, to

stabilise economic activity after a

shock?

Should foreign exchange intervention

be used to stabilise the exchange rate

and contain balance sheet risks for cer-

tainkindsofexternalfinancialshocks—

thus giving monetary policy greater

autonomy to focus on stabilising

domesticactivity?Howwouldthedesir-

ability and effectiveness of such a policy

mix change depending on a country’s

characteristics?

As we strive to answer these ques-

tions, the IMF’s policy guidance must be

clear that there are circumstances in

which some instruments have no role in

the optimal policy response. And, even

after we have identified the best policy

mix, our advice to countries must take

into account that some policies can lead

to undesirable side effects. Among

them: investor expectations of one-

sidedforeignexchangeinterventioncan

Our goal is to provide

help on the policies needed

to preserve growth and

financial stability

The IMF is rethinking its advice to emerging market countries

is indeed technically feasible. That does

notmeanitislikelytohappenasaresult

of purely economic forces. This is so for

two main reasons. The first is that the

cost advantages of the decarbonised

alternatives are, in many areas, at best

modest. These are not (at least not yet)

close to being dominant technologies in

all relevant areas. The second is that

there is always huge inertia in making

shifts to new technologies, especially in

areas where familiar methods and sys-

tems are to be replaced by entirely new

ones. We know very well how to run a

fossil-fuel economy reliably and at vast

scale. A reliable, entirely renewable

energy-economyisanunfamiliarbeast.

A global systems transition of this

scale will not happen by itself. It will

require large-scale policy interventions,

via a mixture of regulation, incentives

This would, however, be a revolution.

A zero-carbon economy would require

about four to five times as much elec-

tricity as our present one, all from non-

carbon-emitting sources. In running

such an economy, hydrogen (much of it

produced by electrolysis) would play an

essential role. Hydrogen consumption

mightjump11-foldby2050.

In many sectors, the costs of decar-

bonisation are (or soon will be) compet-

itive.Yetinsome,theywillnotbe.There

will need to be incentives and regula-

tions to force the shift. In order to avoid

merely moving production, in its most

emissions-intensiveforms,elsewhere,it

will be essential to impose offsetting

taxes on imports from jurisdictions that

refusetosupporttheneededchanges.

Suppose that a transition towards a

global zero-emissions economy by 2050

Commissionin a number of important

reports. The essential ideas are simple.

The core of the new energy system is

electricity generated by renewable

means (solar and wind) and nuclear

power. This needs to be backed up by a

variety of storage systems (batteries,

hydroelectricity,hydrogenand natural

gas, with carbon capture and storage).

Reductions in costs have already been

largeenoughandtechnologicalprogress

rapid enough to make thistransition

feasible,atmanageablecost.

week at the Oslo Energy Forum clarified

things for me. My principal conclusion

was that a transformation from our cur-

rent energy system to a different one is

theonlyoption.Somesuggestweshould

halt growth as well. But this would not

only be impossible, it would also not be

nearlyenough.

OverthepastthreedecadesCO 2 emis-

sionsperunitofglobaloutputhavebeen

falling at a little below 2 per cent a year.

If this were to continue and world out-

put were to stagnate, global emissions

would fall by 40 per cent by 2050 — far

too little. Relying on actual reductions

in output, in order to cut emissions by,

say, 95 per cent, by 2050, would require

a fall in world output of roughly 90 per

cent, bringing global output per head

backto1870levels.

The conclusions are simple. We will

notstop relying on fossil fuels by choos-

ing universal impoverishment. But we

also cannot stop using them soon

enough, at our present glacial rate of

reduction in emissions per unit of out-

put. So we must massively accelerate

technological progress away from burn-

ing fossil fuels. We must move beyond

them almost completely. If we do

achieve that, the size of our economy

ceases to be the issue: however big it

becomes, it ceases to emit greenhouse

gases. But note: to achieve this by 2050,

the rate of reduction of emissions per

unitofoutputneedstojumpmassively.

Is this achievable? From a technologi-

cal point of view, it appears so. So, at

least, argues theEnergy Transitions

A

t the World Economic

Forum in Davos this year,

two people stood out: Greta

Thunberg, the 17-year-old

Swedish climate activist,

and Donald Trump, the US president. In

their messages onclimate change, these

two could not have been more opposed:

panic,confrontedwithindifference.But

one thing they share is that they are not

hypocrites: Ms Thunberg does not pre-

tend we are doing anything relevant; Mr

Trump does not pretend he cares. Most

participants in the climate debate, how-

ever, pretend to care, pretend to act, or

both. If anything is to be done, this must

change.

Ours remains what it has been since

the early 19th century: a fossil-fuel civi-

lisation. There have been two energy

revolutions in human history: the agri-

cultural revolution, which exploited far

more incident sunlight; and the indus-

trial revolution, which exploited fossil-

ised sunlight. Now we must return to

incident sunlight — solar energy and

wind — along with nuclear power, while

maintaining our high standards of

living.

The point of this latest energy revolu-

tion, however, is not to raise our stand-

ard of living directly, but to preserve the

onlyhomeweknowinthestatetowhich

life is now adapted. It is to avoid an irre-

versible experiment with the climate of

our planet. So far, however, despite dec-

ades of talk, trends in emissions remain

inthewrongdirection.(Seecharts.)

What is to be done? Discussions last

Last chance

for the climate

transition

A zero-carbon economy

would require about four

to five times as much

electricity as at present

Total CO emissions continue to rise

and emissions per head stagnate

Global annual CO emissions (billion tonnes)

Global annual per capita CO emissions (tonnes)

Sources: Global Carbon Project, Our World in Data

The needed shift to the

electricity economy

Sources: International Energy Agency; Energy Transitions Commission

The falling costs of

renewable electricity

Global average levelised costs

(Real   per MW hour)

Source: Energy Transitions Commission











     



ETC supply

decarbonisation

IEA 



IEA 

scenario



ETC supply-side

 eiciency

decarbonisation



Coal Other

Biomass and waste Natural gas

Direct zero-carbon electricity generation

(solar, wind, hydro, nuclear ...)

Oil

Primary energy demand in a zero-carbon

economy (exajoules per year)







    







Solar (utility PV), no tracking

Oshore wind

Onshore wind

Solar

(utility PV), tracking

inhibit the long-term development of

foreign exchange markets and lead to

excessive foreign-currency debt.

Finally, our new guidance should

account for the significant communica-

tion challenges and credibility issues

that may arise when central banks use

multipleinstruments.

In advancing our thinking, in close

consultation with our executive board

and country authorities, we are mindful

that an improved framework should be

sufficiently flexible to address a diverse

rangeofobjectives.

Moreover, while our current focus is

on policy tools that can be rapidly

deployed to handle external shocks, we

will eventually expand the framework

toincludefiscalpolicy.

As always, we at the IMF are striving

to provide our member countries with

the best available policy guidance to

pursue their growth and stability

objectives.

The writer is managing director of the IMF

and government-supported research

and development. It will require global

co-operationand clear recognition of

the very different positions — in terms

ofpastbehaviour,presentresponsibility

and future needs — of the countries of

the world. It will take changes in finance

and accounting. It will, in short, take a

historic global effort of a kind we have

never seen before to avoid a danger that

still seems remote to the vast bulk of

humanbeings.

This does need to be done. But will it

be? Ms Thunberg fears our inaction. Mr

Trump is one of the reasons why she is

right to do so. We have so much to do

and so little time. If we are to succeed in

halting climate change, we have to

changecoursenow.

[email protected]

Becoming a civilisation that is no

longer reliant on fossil fuels requires

unprecedented global co-operation

Kristalina

Georgieva

BUSINESS

Izabella

Kaminska

FEBRUARY 19 2020 Section:Features Time: 18/2/2020-18:44 User:alistair.hayes Page Name:COMMENT USA, Part,Page,Edition:USA, 9 , 1