Our Last, Best Chance on Climate
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- Authors: AMAR BHATTACHARYA, NICHOLAS STERN
- Published: September 2, 2021
Overview — urgency, risks, and opportunities
- The COVID-19 pandemic demonstrated human fragility; failing to act on climate change could cause damage "even greater and more lasting than the effects of the pandemic."
- The 2018 IPCC special report Global Warming of 1.5°C highlights the limited time to arrest warming and the grave risks of exceeding 1.5°C.
- Specific impacts cited:
- Warming of 2°C instead of 1.5°C would "essentially wipe out all coral reefs on the planet, instead of 70 to 90 percent."
- Warming of 2°C would "expose 37 percent of the population, instead of 14 percent, to extreme heat at least once every five years."
- The IPCC’s 2021 report "documents the rapid acceleration of climate change, dramatically narrowing the window for limiting global warming from 2°C to 1.5°C" and underscores the imperative to reach net zero emissions by 2050.
- Unchecked climate change risks displacing "hundreds of millions of people," concentrated in the developing world, raising the potential for conflict and poverty increases.
- Declining costs of renewable energy and evidence indicate decarbonization can support "more inclusive, resilient, and sustainable growth" and "unlock the inclusive growth story of the 21st century."
Investment and innovation
- Short-term: Increased spending on sustainable infrastructure can support COVID-19 recovery by creating jobs and investment opportunities.
- Medium-term: Sustainable investment can spur innovation, create new growth sources, and reduce poverty and inequality while delivering cleaner air and water.
- Long-term: Stabilizing climate change is presented as "the only path to a viable future."
- Investment needs and priorities:
- The world "must increase annual investment by 2 percent of pre-pandemic gross domestic product for this decade and beyond."
- Emerging market and developing economies (other than China) require an even greater boost given recent declines in investment and needs for financing structural change and urbanization.
- The coming two decades will require greater investment across physical, human, natural, and social capital.
- Market shifts:
- The 2020 "Paris Effect" report finds that by 2030, low-carbon solutions could be competitive in sectors accounting for "70 percent of emissions," up from "25 percent" today and "none five years ago."
- Policy and cooperation to accelerate innovation and availability of low-carbon technologies across developed and developing economies are emphasized.
Policies to accelerate change — recommended instruments
- Set clear expectations and direction to achieve net zero emissions.
- Key policy levers highlighted:
- Eliminate fossil fuel subsidies and put a price on carbon. Quoted targets for carbon pricing:
- "by 2030, we need an average global price of $75 per ton of CO2, way up from today’s $3 per ton," according to the IMF managing director.
- Recognize carbon pricing must be reinforced by sector-specific and supportive policies due to major market failures and political economy challenges.
- Detailed policy measures governments and the private sector must pursue:
- Reinforce carbon pricing with sector-specific policies—regulations, energy efficiency standards, feebates—and phase out coal.
- Boost public investment in sustainable and resilient infrastructure, including nature-based solutions—restoration of degraded lands and conservation of existing ecosystems—while mitigating the impact on the poor.
- Promote sustainable use of natural resources with measures such as payments for ecosystem services, regulations, reform of agricultural and water subsidies, and incentives for a circular economy.
- Deploy industrial and other policies to spur climate-friendly innovation, including in digitalization, new materials, life sciences, and production processes, focusing on coordination and long-term policy planning.
- Provide information and promote public discussion on social norms and behavior to reduce energy demand and carbon intensity of consumption and business activity; educate the public about climate change risks and on early warning systems and evacuation plans.
- Align finance with climate objectives—manage financial stability risks posed by climate change; align social and private returns with green investment; mobilize resources for investment, including a major boost to international climate finance; and make monetary and supervisory policies consistent with net-zero-emissions objectives.
- Develop insurance instruments and social safety nets to mitigate the immediate impact of climate shocks.
- Foster a just transition with investment in and support for affected workers, businesses, and regions.
- Integrate sustainability considerations into public financial management and corporate governance; use better models and look beyond gross domestic product when deciding policy priorities and measuring well-being and sustainability.
- Collective action benefits: stronger demand expansion, investment recovery, economies of scale, and lower costs for new technologies.
Mobilizing climate finance — scale, quality, and institutions
- Access constraints:
- Many emerging markets and most developing economies "find it difficult to access long-term financing on the necessary scale," and "the cost of capital is a major impediment to sustainable investment."
- Commitments and targets:
- Developed economies’ commitment to provide "$100 billion in climate finance by 2020" is described as foundational; credible progress on this commitment is "a make-or-break issue" for developing-world climate action.
- Recommendation: Rich countries should boost climate finance in "2021–22" and "doubling it to $60 billion by 2025."
- Immediately double finance for adaptation and ensure that "at least half of concessional climate finance supports adaptation and resilience objectives."
- Role of multilateral development banks (MDBs):
- MDBs "are the most effective source of support for climate action in developing economies" and must "use all their powers and instruments at this moment of crisis, agreeing to triple financing by 2025 from 2018 levels."
- Actions required include accelerated replenishment of IDA, more effective use of development banks’ balance sheets, enhanced private sector finance mobilization, accelerated alignment with the Paris Agreement, and proactive capital increases.
- Other mechanisms and initiatives:
- Establishing the Resilience and Sustainability Trust within the IMF could help bolster efforts.
- Proposals from the United Nations Economic Commission for Africa and the Bezos Earth Fund are mentioned as additional ways to leverage concessional climate finance.
- Use of country platforms, promoted by the G20 but not yet effectively applied, is an option to increase coordination.
- Efforts to align the financial system with climate risk and opportunities are under way through the COP26 private finance agenda and initiatives including the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures, the Network for Greening the Financial System, the Coalition of Finance Ministers for Climate Action, the European Union sustainable finance expert group, and the Group of Twenty working group on sustainable finance.
COP26 goals and expectations
- COP26 (the 26th Conference of the Parties on Climate Change) in Glasgow aims to:
- Secure broad-based targets and a roadmap to achieve net zero by mid-century and keep 1.5o C within reach, with ambitious action on carbon pricing, sector policies, phaseout of coal, and support for innovation;
- Support adaptation and resilience, especially in poor and vulnerable countries, and protect and rebuild natural capital;
- Mobilize private businesses and climate finance and channel finance to emerging market and developing economies;
- Deliver collective action by finalizing the Paris Rulebook and accelerating collaboration.
- Timing and leadership:
- The conference was postponed for a year due to COVID-19 and is described as beginning in Glasgow on "October 31."
- UK COP26 presidency priorities under Alok Sharma: commitment to net-zero-emissions target, stepping up adaptation and resilience, delivering on the $100 billion climate finance commitment, bolstering and transforming private finance, and increasing collaboration.
- Progress noted prior to COP26:
- At the June Carbis Bay meeting, the G7 committed to net zero emissions by "2050," "halving collective emissions over 2010–30," increasing and improving climate finance by "2025," and conservation/protection of "at least 30 percent of the land and oceans by 2030."
- The G20 has signaled the need for action on carbon pricing.
- Private sector: a growing number of businesses and major financial institutions have committed to net zero targets and timelines to take portfolios to net zero.
From pledges to action — implications for the decade ahead
- The decade is decisive: national and international decisions will determine whether the post-COVID recovery is "strong and inclusive" and whether a new path of sustainable growth is embarked upon.
- Potential outcomes:
- If actions are effective: usher in a new era of sustainable development with expanded opportunities worldwide.
- If actions fail: risk of "a lost decade for development" and heightened danger for people and the planet in coming decades.
- Closing imperative: "We need to choose now, and we must choose wisely."
Source: Our Last, Best Chance on Climate — AMAR BHATTACHARYA and NICHOLAS STERN, September 2021.
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