Davos 2016: First steps along the road from Paris

Implementation of the Paris Agreement on climate change was high on the agenda last week at the annual meeting of the World Economic Forum in Davos, Switzerland.

Ahead of the meeting, the Forum published its annual assessment of global risks, based on a survey of almost 750 experts and decision-makers. It concluded that “the failure of climate change mitigation and adaptation has risen to the top and is perceived in 2016 as the most impactful risk for the years to come, ahead of weapons of mass destruction, ranking 2nd, and water crises, ranking 3rd”.

The survey was carried out between mid-September and the end of October 2015, before the historic outcome of COP21 (the 21st session of the Conference of the Parties to the United Nations Framework Convention on Climate Change) was known.

The Paris Agreement is a lot stronger than many of the participants at the summit had expected, particularly in terms of the commitment to “[h]olding the increase in the global average temperature to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C above pre-industrial levels, recognizing that this would significantly reduce the risks and impacts of climate change”.

It also acknowledged that the ‘intended nationally determined contributions’ which were submitted by more than 180 countries ahead of COP21, includes pledges to reduce emissions by 2025 or 2030 that are collectively not consistent with the goal of having a reasonable chance of limiting the rise in global mean surface temperature to well below 2°C.

But the Agreement also includes a commitment to a “global stocktake” every five years, beginning in 2018, in order to “assess the collective progress towards achieving the purpose of this Agreement and its long-term goals”. Each country will also revise its contribution in 2020 and every five years afterwards, to increase its ambition.

While the targets contained in each nationally determined contribution are voluntary, countries are legally obliged by the Paris Agreement to revise and strengthen them. And countries need to begin the process of intensifying their ambitions now.

The Paris Agreement was the result of both the skillful management by the French Presidency of COP21 and the collective will of all countries to reach an accord. A strong signal of the commitment by countries was provided by the participation of more than 150 heads of governments and states at the opening of the summit. The Agreement was achieved because countries wanted it.

The meeting in Davos provided an opportunity for leaders from the public, private and third sectors to reflect on how to deliver the Paris Agreement, including raising the ambition of the nationally determined contributions, in relation to the Forum’s overall theme of the Fourth Industrial Revolution.

This Revolution stems from the profound and fundamental changes driven not just by big and exciting technological developments across a wide range of areas, but also by re-structuring of the global economy.

We are at a critical moment in the transformation of the global economy, which requires large investments in sustainable cities, energy systems, and other infrastructure. Poorly structured cities and polluting energy infrastructure can impose burdens and inflict damage for decades or centuries to come.

So the next 20 years will be critical both for shaping our cities, energy systems and ecosystems as the global economy continues its fundamental structural transformation, and for determining whether we can achieve the goals of the Paris Agreement by cutting greenhouse gas emissions sharply.

These next two decades will be full of innovation and discovery, creating a period of remarkably rapid technological progress. It will provide a vital opportunity to invest in the low-carbon economy, the growth story of the future, at a time when interest rates are very low. These investments will set ourselves on the path towards both better growth and a better climate, creating cleaner energy systems, liveable cities and flourishing ecosystems.

The world’s urban population will increase from around 3.5 billion today, or about half the global population, to around 6.5 billion by 2050, or about 70 per cent of the global population. Most of that growth in urban populations will occur in developing and emerging market countries. How these cities are planned and built will determine whether they are clean and efficient, or congested, dirty and polluted.

Over the past 25 years, annual global energy demand has increased by around 50 per cent. More than 80 per cent of that demand is today met through fossil fuels. Over the next 20 years, energy demand could increase by more than 40 per cent. If we continue to burn fossil fuels for energy and release dirty emissions into the atmosphere, we will create immense risks from local air pollution and climate change.

The Paris Agreement recognises the need to cut global emissions of greenhouse gases strongly, reaching net zero during the second half of this century. The Global Commission on the Economy and Climate, in its report on the New Climate Economy in September 2014, pointed out that perhaps 90 per cent of the reductions in annual greenhouse gas emissions required over the next two decade to avoid dangerous climate change could be achieved through measures that will yield other significant economic benefits, such as reductions in air pollution.

To realise this potential, it is crucial that investments in infrastructure promote – rather than derail – sustainable development and growth, as I explained in a recent article for the International Monetary Fund’s ‘Finance and Development’ magazine. Global investment in infrastructure of about US$90 trillion will be needed over the next 15 years, mostly in developing and emerging market countries. There are great dangers if this investment locks in high-carbon infrastructure.

The international financial institutions will play a critical role. The World Bank and regional development banks can provide the finance required for clean new infrastructure, and shift attention away from dirty high-carbon projects, helping to reduce the risks and cost of capital for private investors, as I outlined in a recent paper with Amar Bhattacharya. These institutions can, for example, take early stage risk, and provide long-term loans in ways that the private sector finds difficult to offer.

It is essential that the funding ability of the multilateral development banks is expanded very substantially. Both the multilateral and national development banks, must be enabled to provide hundreds of billions of dollars in support for the transition to low-carbon growth, so that the private sector multipliers can move the financing to the trillions of dollars. This is money that would be invested in infrastructure anyway, and it costs very little extra to make it clean and sustainable. The multilateral and national development banks can and should, where possible, work hand-in-hand with each other.

Well-designed policies and instruments will be required to reduce the risks in the early stages of this investment and to lower the real interest rates. These are essential both to create the scale of investment and to diminish the bias against renewable energy at a time when infrastructure financing is subjected to very expensive interest rates while governments can borrow very cheaply.

As a result, it should then be possible to attract, for example, very large potential investment of the private sector and other sources of finance from sovereign wealth funds, pension funds and other institutional investors, as well as managed funds from very wealthy private individuals and trusts.

The new low-carbon investment opportunities must also be transformed into real projects. Governments hold the key, not just through their own domestic expenditure, but also by creating the kind of strong and stable policy frameworks that provide confidence to those seeking a return on long-term investments. Credible policies are needed, including the removal of direct subsidies for fossil fuels, as well as carbon pricing and regulation.

Investments in low-carbon research and development also need to be significantly increased, as 20 governments in Paris acknowledged when they announced the creation of ‘Mission Innovation’. Each country pledged that it will “seek to double its governmental and/or state-directed clean energy research and development investment over five years”, and that “[n]ew investments will be focused on transformational clean energy technology innovations that can be scaled to varying economic and energy market conditions that exist in participating countries and in the broader world”.

This initiative was matched by the formation by more than 20 wealthy investors across the world of the ‘Breakthrough Energy Coalition’ to “form a network of private capital committed to building a structure that will allow informed decisions to help accelerate the change to the advanced energy future our planet needs”.

Businesses have a crucial role in making the case for enlightened investments in clean and efficient infrastructure. Business leaders, such as Paul Polman, the chief executive of Unilever, are showing how to create wealth and prosperity without polluting and degrading the planet. Mr Polman is co-founder of the Global Commission on Business and Sustainable Development, which was launched in Davos.

Businesses should also give their active support to the Task Force on Climate-related Financial Disclosures, announced in Paris by Mark Carney, the Governor of the Bank of England in his capacity as Chair of the Financial Stability Board for the Group of 20 countries. Mr Carney gave a powerful speech ahead of the Paris summit about the immense potential risks climate change poses to businesses, investors and markets.

The Task Force will be headed by Michael Bloomberg, the former Mayor of New York City, and will “develop voluntary, consistent climate-related financial risk disclosures for use by companies in providing information to lenders, insurers, investors and other stakeholders”. This Task Force is due to report by the end of the year on the methods, principles, protocols and conventions for assessing carbon risk, and will transform carbon disclosure and the reporting of climate risks.

Taken together, the Paris Agreement and these other developments should mean that clean infrastructure becomes the staple of long-term investments by pension funds, replacing the current weight of investments by such funds in fossil fuels.

The meeting in Davos represented the first steps along the road from Paris, but it has moved us closer to our ultimate goal of a safer and more prosperous world for us, our children and grandchildren, and future generations.

 

Nicholas Stern is Chair of the Grantham Research Institute on Climate Change and the Environment and the ESRC Centre for Climate Change Economics and Policy at the London School of Economics and Political Science, and President of the British Academy.