The roles of financial institutions and finance ministries in delivering the Paris Agreement on climate change

This commentary is based on presentations made at the 22nd session of the Conference of the Parties (COP22) to the United Nations Framework Convention on Climate Change, which took place in Marrakech Morocco between 7 and 18 November 2016.

For the first time since the end of the Second World War, we have a global agenda, created by the Paris Agreement on Climate Change and the Sustainable Development Goals.

Of the 17 Goals, 12 are directly related to environment, climate or sustainability.

International and regional financial institutions, finance ministries and finance ministers all have crucial parts to play in achieving the goals set out in the Paris Agreement and the Sustainable Development Goals.

Delivering on the Paris Agreement is all about radical economic transformation and fostering sustainable, low-carbon and strong growth. Economic policy and finance, and this finance ministries, will be at the core.

What we do over the next two decades will determine whether we succeed or fail to deliver this global agenda. During that time, the size of the world’s economy is likely to double, and the amount of infrastructure will probably increase by a still larger factor, with strong urbanisation and growth in developing and emerging market countries.

Investments in sustainable infrastructure will not only help us to realise the goals of the Paris Agreement but will also allow us to reach the Sustainable Development Goals. The world is set to invest aboutUS$90 trillion in infrastructure over the next 15 years. That means spending will increase from about US$3.4 trillion per year to about US$6 trillion. Most of this investment will be in developing and emerging market countries.

If this infrastructure is not sustainable, and instead locks in high-carbon activities, the world will lose its chance of meeting the Paris Agreement goal of holding the rise in global mean surface temperature to well below 2 Celsius degrees above its level in the middle of the 19th century.

Sustainable infrastructure is not only low-carbon but it is also climate-resilient. It must be able to cope with the current climate and with those impacts of climate change that we cannot now avoid. And it is clean, efficient and smart.

All new infrastructure, including for energy, transport, water and communications, must be sustainable, as was emphasised by the report on ‘The Sustainable Infrastructure Imperative’ by the Global Commission on the Economy and Climate in October. This is particularly true for cities and towns, which already host the majority of the world’s population.

Urbanisation is taking place at a remarkable speed. Only sustainable infrastructure can help to reduce pollution, waste and congestion, and ensure that we can live and breathe in our cities. If we get the infrastructure right, we will have resilient and inclusive towns and cities where poor people have a chance to raise their living standards and escape from poverty. And those in rural areas will see new opportunities to move, and more will be able to access, energy, transport and water supplies.

The ‘nationally determined contributions’ to the Paris Agreement can help each country to have sustainable and inclusive growth and to reduce poverty. Building low-carbon and climate-resilient infrastructure will drive growth, and will allow us to tackle together economic development, and climate change mitigation and adaptation; they are intimately intertwined in both urban and rural areas.

The low-carbon route can boost economic growth in the short-term and is the growth story in the medium and long term. Success will create huge economic opportunities. But there are also great dangers in delay and severe risks of locking in unsustainable infrastructure.

The urgent need to invest in sustainable infrastructure is a central issue for both finance ministries and for the national and regional development banks.

Finance ministries are concerned with growth, investment, policy and resources. And they understand that sound and credible policies raise finance, through both direct revenue and economic growth itself. They can attract investment in sustainable infrastructure by implementing stable and consistent policies that create a clear sense of direction.

Consistency, clarity and credibility create an environment that is conducive to investment. Confused and inconsistent policies create government-induced policy risk, putting off investors and increasing the cost of capital.

Circumstances change of course, often with success as renewables have shown, but the criteria for policy change must be clear; policy must be ‘predictably flexible’.

Tax and regulation should address the key market failures that hold back new low-carbon technologies. The biggest market failure is related to emissions of greenhouse gases, but other very important failures also exist in relation to research and development, capital markets, networks, information and co-benefits (such as reduced air pollution and healthier ecosystems).

The multilateral development banks, including the regional banks and the World Bank, must also play their part in bringing about the necessary quality and quantity for the trillions of dollars in investments required in sustainable infrastructure. They can, for instance, help with the design of projects and support them through their critical and often difficult early stages. They can use equity, guarantees and long-term loans to take projects and programmes to the point where they can be sold on. The development banks reduce risks for other partners, are trusted convenors, and bring essential skills and a range of instruments to successfully deliver projects.

The current scale of investments in sustainable infrastructure is not yet able to reach the scale of trillions, but it could if the potential financing of the multilateral and national development banks is expanded significantly. That is a crucial and urgent task.

The multilateral and national development banks should increase their investments from US$50 billion to US$200 billion over the next 10 years. Then private sector multipliers by fourfold or more, together with power of the example could increase billions to trillions.

The message that the banks should take from COP22 is that they should double their investments in sustainable and resilient infrastructure over the next five years. That is the case they put to the G20 in September 2016. They must be supported. In particular, finance ministries should work to expand the capacities of the development banks.

It is important that spending on economic development and growth is not separated out from investments in climate change mitigation and adaptation. They can and must be tackled together if we are to improve prosperity and well-being, and rise to the two biggest challenges of our generation: overcoming poverty and managing climate change.

In addition, finance ministries can reduce the risks in, and promote the sustainability of, the finance sector by supporting efforts to identify and measure the exposure of companies to risks associated with the impacts of climate change and the transition to a low-carbon economy. They should implement the recommendations of the Task Force on Climate-related Financial Disclosures, which was set up under the chairmanship of Michael Bloomberg by Mark Carney in his capacity as Chair of the Financial Stability Board. The Task Force is due to publish its final report before the end of the year.

Finance ministries are at the centre of domestic policy-making, but they must also lead internationally. Now is the time for them to push for strong expansion of the multilateral development banks to increase investments in sustainable infrastructure, to drive growth, to reduce poverty, and to implement the Paris Agreement and achieve the Sustainable Development Goals.

 

Professor Lord Stern of Brentford 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.