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The cost of capital is on its way up not just in the West, but in India too, as signalled by Wednesday’s sharp hike in the main policy rate of our central bank. Like the US Fed, our Reserve Bank was caught behind the inflation curve and had to tighten credit for the sake of price stability; local banks must now pay 4.4% on funds taken from its repo window. Lenders are expected to raise their own rates in response. Yet, what matters in business is not just the cost of borrowing, but how handily this rate can be beaten by annual returns on investment. By this reckoner, big investors are not exactly short of opportunity. It is unlikely, for example, that dearer debt would deter Indian cement-makers seen to be vying for Holcim’s assets in India. About 65 million tonnes of cement capacity may be up for grabs as the Swiss major rejigs its portfolio to offload what doesn’t fit in with its climate adaptation plan for 2025. The Adani, JSW, Dalmia and Aditya Birla groups are reported to be in the fray for Holcim’s factories run by Gujarat Ambuja and ACC, each churning out a product whose demand is forecast to swell as our economy’s emergence takes concrete shape. While such an acquisition would be an entirely legitimate play for profit expansion, it’s also part of a trend that has been flagged as a global worry: Climate arbitrage.

Making cement involves calcination, a process that’s not just laden with carbon emissions, but also difficult to decarbonize at scale. Its value chain has other dirty processes too, and while devices for pollution control do exist, that core difficulty has prompted rethinks among businesses exposed to regulatory reproach and shareholder repudiation. As the imperative of going green gains investor approval globally, new norms kick in, and corporate goals are set for emission caps, a global reshuffle of carbon-heavy assets has begun. So far, much of it has been in the sectors of coal mining and oil and gas. By one estimate, hydrocarbon majors offloaded almost $200 billion worth of fossil-fuel assets between 2015 and 2020, with more divestments to come as businesses based in Western jurisdictions chart out clean paths to profitability. Other sectors look headed the same way. Buyers for high-exhaust, high-return assets are not hard to find. So long as the stuff being churned out is still in daily use, bargains would likely be available to those under less climate pressure. In theory, a global market for carbon credits could even out the value vagaries of this transition, but one hasn’t yet emerged. Amid a patchwork of varied climate rules and investor sensitivities, what’s emerging instead is a chance to exploit those gaps. What’s risky for one investor may be far less so for another. This makes space for grand deals.

BlackRock’s chief Larry Fink articulated a specific arbitrage anxiety last year after this US-based investment firm put its portfolio on watch for climate risks. Private sell-offs that took businesses off open markets, he argued, would worsen the planet’s crisis by pushing opacity up rather than emissions down. The basic problem, though, stems from green plans running ahead of usage reality, which throws asset supply and demand out of whack and distorts valuations. Game theory solutions call for collective action, with a cap-and-trade system based on carbon pricing. Policy wonks have called for a global framework to stop a reshuffle of assets that leaves the planet no safer. Even as bargains pop up, the cost of carbon must go into our rate-versus-return calculus.

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