The world is running out of time to act on climate change. At the current rate of national commitments, a warming of 3-4°C will bring about major and irreversible climatic changes which will severely impact human welfare.
The Paris Agreement has committed the world to limit global warming to well below 2°C and keep as close as possible to 1.5°C above preindustrial levels. To achieve these goals, global greenhouse gas emissions (GHG) need to reach “net zero” around mid-century, necessitating urgent action.
Financial regulators are also sounding the warning bell of the unsustainability of business as usual. The Task Force on Climate related Financial Disclosures and Network for Greening the Financial System have shown that climate-related risks could lead to declining profitability and impact overall financial stability.
Enhanced disclosure of these climate-related risks will allow financial markets to better internalize them more explicitly in companies’ valuation and shape where investors put their capital. To borrow the words of Bruno Le Maire at the 2017 One Planet Summit: “Finance will have to be green, or there will be no finance at all”.
As economics shift in favour of climate action, new investment opportunities are emerging.
The Stern Review on the Economics of Climate Change authoritatively showed that the economic costs of climate change were far greater than the costs of preventing it through reduced GHG emissions. A host of new evidence also show that rather than economic development and climate action being a trade-off, tackling both together can be mutually reinforcing. For example, falling costs of renewables combined with emerging technologies for energy storage is an example of how a sector can transform quickly when the economics tip in favour of low-carbon options.
However, neither sole focus on financial regulation and nor shifting economic incentives are likely to be sufficient alone. An enhanced collective action both between countries and between the public and private sector are crucial to tackle this agenda.
The European Bank for Reconstruction and Development (EBRD) works in nearly 40 countries and leveraging synergies between the public and private sector is fundamental to our core mission.
EBRD focuses on four key to tackle the climate challenge.
First, countries need to increase their emissions reduction targets towards achievement of “net zero” GHG emissions. This is to send a clear signal for private investors on the direction of travel. The Paris Agreement is built on the premise of national commitments to be reviewed periodically and ratcheted up through time, providing a framework for all countries to contribute to climate action regardless of level of development.
This, in turn, leads to commitments backed by legal force. We have seen commitments to achieve net zero emissions combined with formal instruments from California, Denmark, European Union, New Zealand, Norway, Sweden, and the United Kingdom – and others have similar ambitions including Ethiopia and Costa Rica. EBRD is supporting the Government of Ukraine to develop its Nationally Determined Contribution.
Second, commitments need to be backed up with implementable policies. Developing a clear carbon price is crucial though not sufficient in itself. In most of our countries of operations carbon is generally not priced at adequate levels to shift financial flows and pervasive fossil fuel subsidies are shifting the playing field towards fossil fuels.
We also know that a stable regulatory environment is critical to attract private finance.
For example, in Egypt we developed a bankable regulatory and contractual framework for renewable energy investment. This led to the financing of the Benban complex, the largest solar plant complex in Africa, involving 16 private sector companies for a project value of over USD $1.1 billion.
Third, more attention should be placed on achieving net zero emissions in “hard to abate” sectors. The work of the Energy Transitions Commission, which EBRD contributed to, has shown that GHG emissions need to be reduced and then eliminate from aviation, cement, heavy road transport, plastics, shipping and steel sectors.
Reducing emissions in these sectors will rely on improving energy efficiency, reducing demand for carbon-intensive products (e.g. through circular economy), or deploying new technological approaches such as electrification, carbon capture or the widespread use of hydrogen.
The good news is that technologies to do the job are either commercially viable or under development and bringing them to scale will require industries to work together with policymakers. EBRD support in this area ranges from developing a low-carbon roadmap for the cement sector to improving the energy efficiency of the steel sector across Poland, Slovenia, Turkey and Ukraine.
Fourth, given the scale and speed of the transformation, we must support those who will experience adverse consequences. The need for “Just Transition” to ensure that climate action is also socially inclusive was stated in the text of the Paris Agreement.
Managing socio-economic consequences of declining industries and better designing climate policy to overcome undesired distributional impacts (such as increasing fuel poverty following spikes in electricity tariffs) is likely to increase the political acceptability of decarbonisation. As an example, European Union has recognised the need to support coal regions as a priority and have established a “Platform for Coal Regions in Transition” to facilitate economic diversification and reskilling of workers.
At EBRD, we support our countries of operation in combining policies and private investment to support the “Just Transition” agenda in
In conclusion, it is through coordinated action and by leveraging synergies between public and private networks can we effectively tackle the climate challenge.