Current outlook for climate investment and policy cooperation
According to recent estimates by the Intergovernmental Panel on Climate Change (IPCC), investments in climate action totalling $1.6 trillion–3.8 trillion annually will be needed within the next several years to avoid global temperatures from increasing by more than 1.5°C above pre-industrial levels. Given that current global temperatures are 1.1°C higher than pre-industrial levels, and only 20 per cent of those estimated investment levels are being met, this will be very difficult. Under the Paris Agreement in 2015, developed countries reiterated their 2009 commitment to provide $100 billion per year in financing by 2020 for climate change mitigation and adaptation projects in low- and middle-income countries. Sadly, those pledges have not been fulfilled. The failure to put in place even this relatively small amount, in the context of the very large investments associated with effective climate action, illustrates the obstacles faced by the international community in generating additional climate investments. As part of an accompanying decision to the Paris Agreement, a New Collective Quantified Goal (NCQG) was initiated within the COP process to reinvigorate climate finance goals by 2025, but recent reports suggest that many countries are merely diverting funds from other development projects.
Notwithstanding these setbacks and challenges, an overall expectation of raising trillions in climate investments is not necessarily as unrealistic as might be assumed. The example of the COVID-19 pandemic illustrates that very large amounts of public finance can be raised in a very short space of time if the threat is clear. A UNEP report states that between the start of the COVID-19 pandemic and May 2021, $16.7 trillion was spent on pandemic recovery packages by national governments and MDBs.
In light of the economic devastation caused by the pandemic, institutions such as the FSB and the World Bank have begun to shift their focus towards green economic recovery frameworks (see Chapter 3). The phrase ‘building back better’ has often been used by governments and institutions to describe efforts to promote recovery while addressing environmental degradation.
The example of the COVID-19 pandemic illustrates that very large amounts of public finance can be raised in a very short space of time if the threat is clear.
Policy and rhetorical endeavours to incorporate analysis of climate change in macroeconomic evaluations have, however, had mixed success in catalysing efforts to meet the ambitions of the Paris Agreement. Recent analyses of G20 fiscal stimulus in response to the pandemic, for example, have contradicted government rhetoric of a ‘green recovery’. Only around $860 billion in such stimulus (about 6 per cent of the total) has been allocated to areas that would reduce GHG emissions, such as electric vehicle investments and energy efficiency improvements. Moreover, 3 per cent of the spending has gone towards fossil fuel subsidies. Indeed, G20 investments in climate action have accounted for a lower percentage of recovery spending, in relation to the pandemic, than was the case with economic recovery packages in the aftermath of the 2008–09 global financial crisis. Several major GHG-emitting countries are expected to invest heavily in their coal industries over the next decade. In the case of India, the figure is $55 billion.
G20 investments in climate action have accounted for a lower percentage of recovery spending, in relation to the pandemic, than was the case with economic recovery packages in the aftermath of the 2008–09 global financial crisis.
Use of fossil fuels could also be prolonged as a result of Russia’s invasion of Ukraine and the consequent decision by Russia to cut energy supplies to Europe by 80 per cent, in response to G7 sanctions. It is worth noting, however, that Russian action has galvanized European countries’ efforts to improve their energy efficiency and substitute alternatives to hydrocarbon energy sources, spurring further investments in renewable energy systems. Nevertheless, European dependence on natural gas has, in part, simply shifted to other global sources. A few Western economies have also reinvested in fossil fuel industries, in light of recent higher energy prices.
An unintended consequence of the European response may also be the increase of GHG emissions in other parts of the world. For example, if Europe continues to corner the international market for liquefied natural gas (LNG), other countries, particularly in Southeast Asia, may be forced to use more coal in the short term. Higher global energy prices, combined with the ability to demand sharp discounts, have prompted India and China to increase their purchases of Russian LNG. It is unclear, however, if this will be a permanent change, underpinned by new investments in fossil fuels.
Compounding the challenges for international economic policymakers in addressing climate change is the continued bifurcation of the international political system. G7 and European powers are often at political odds with China and Russia. The paradox is that the emergence of greater bipolarity in geopolitics comes precisely at a time when more, not less, international cooperation is needed to reduce global GHG emissions. As the war in Ukraine has placed enormous stress on international cooperation, major economies are becoming more ‘siloed’ in their policy responses to the pandemic, high energy prices and other inflationary pressures. As the US treasury secretary, Janet Yellen, recently remarked, the US will seek to favour the ‘friend-shoring’ of supply chains – i.e., using trusted partners – to lower the risk of future shocks to US market access. Geopolitical tensions have strained global cooperation on climate change, and are reshaping strategic and defence policy calculations around energy security.
As this chapter has outlined, there is a fundamental need for increased multilateralism in the global economy and financial system as a means of promoting and protecting the global climate ‘commons’. One way to do this is for collective political and economic decision-making on climate action to be embedded in the mandates and actions of the institutions that comprise the international economic architecture. This could help reinforce existing policy frameworks to deliver predictable schedules for transitions to a low-carbon economy, which would include fossil fuel phase-outs, technical capacity support and debt service refinancing.
At the same time, there remain real challenges to such multilateralism. These are likely to increase as the economic and financial impacts of climate change intensify. Institutions in the international economic architecture will have to address the possibility of more frequent macroeconomic shocks linked to extreme weather events, sharp policy changes by governments, shifts in financial and product markets, and technological changes. Failure to prepare for such developments is likely to lead to further financial instability. The urgent task for ‘green’ recovery strategies, implemented by various institutions and networks within the international economic architecture, is to break decisively the link (see Box 1) between economic growth and increased GHG emissions.