We need to decarbonize human activity, and we need to do it fast. Will we collectively succeed? Not unless we help the emerging world with a manyfold increase in international climate finance. Let’s capitalize on COP26 to move it forward.
As we approach COP26 in Glasgow an increasing number of countries, as well as private and public organizations, are joining the UN’s “Race to zero campaign”.
It will not be an easy feat for any of them to meet their pledge to be carbon neutral by 2050. The scale and breadth of the changes required for any one of our societies to function without emissions is formidable. We need to change our habits and behaviors. We need to deploy carbon-free technologies across all emitting sectors, from electricity to shipping and aviation and all forms of transportation; from steel and cement and plastics production to agriculture, forestry and raising cattle. For many of these sectors we first need to develop carbon-free technologies that do not exist today.
This massive transformation requires colossal capital investments, to an extent never seen before in any economy. Estimates are above $150 trillion for the period 2020-2050, amounting to around 5% of world GDP (*).
Judged purely on economic terms, the business case for much of this investment is already very clear, because the reduced operating cost associated with deploying existing clean technologies more than offsets the initial outlays. This seems to be the case for investments in renewable power generation, electric vehicles, energy efficiency or some relevant parts of agriculture (e.g. fertilizers).
In other instances, especially in industrial sectors, there is a need for incentives to develop and to deploy clean technologies that are still not competitive. A well functioning global carbon market would be the most powerful such incentive, as it would set a price for the negative externality of emitting CO2. Clean technologies would avoid this added cost, and this would make them relatively more competitive.
Faced with the decarbonization challenge, emerging economies should be among those leading the race, for two reasons. First, according to UN, they will suffer the negative effects of climate change much more than the rich world, so they should be most interested in collective success. Secondly, these regions have tremendous potential for renewable energy projects, as well as for nature-based solutions to offset CO2 emissions, in what would constitute an immense opportunity for growth and development.
Instead of making their net-zero pledge, and decisively establishing carbon pricing mechanisms, however, we see emerging markets lagging behind. Most countries in Africa, Asia, or Latin America, have not yet defined a net-zero target, nor limit nor price CO2 emissions. Why is this so? Lack of conviction and lack of resources.
As part of a bank with a very significant presence in emerging markets I can attest how different the perception of the carbon issue is in those countries. The sense of urgency is overtaken by more immediate and pressing issues like inequality, health, or lack of infrastructures, particularly in the aftermath of the pandemic.
Curbing emissions is also perceived as onerous and hardly affordable, slowing down growth and development. In fact, the amount of investment needed for the transition to carbon neutrality is beyond their reach, well exceeding $1 trillion annually by 2030, seven times current levels. These countries do not have the resources themselves, nor the ability to attract external capital. Without support from the rich world, they will not be able to respond to the challenge and to seize the opportunity.
Nor will they join the race, with dire consequences. Without them we will go over our collective carbon budget; without them we cannot effectively implement a global carbon market; without them we will not take advantage of their potential to develop green projects. In short, we will collectively fail to decarbonize the Planet, which is one and the same for all of us.
The developed world should be bolder in its financial support to developing countries, for the sake of the Planet and also to alleviate the inequality gap. This is not a new idea. In 2009, during COP15 in Copenhagen, developed countries agreed to mobilize $100 billion annually for mitigation and adaptation action in developing countries by 2020. They repeated this pledge in Paris in 2015. This past June again the G7 pledged to mobilize $100 billion per year through 2025.
Twelve years later, our ambition level should have increased by several orders of magnitude, as it is clear that the $100 billion figure (around 0.2% of the GDP in developed countries) seems well short of the actual amount required to mitigate and to adapt. Instead, we have failed to deliver on that commitment. According to the latest data available from the OECD, the developed economies climate financing program only reached $79.6 billion in 2019. Despite recent announcements by President Biden (to quadruple the US contribution) and President Von der Leyen (increasing EU’s support by €4 billion) we will continue to fall short.
We need more ambition. We also desperately need a more robust framework to ensure countries deliver on their commitments, including specific amounts by country on a yearly basis; clarity on how those commitments are going to be funded, specifying the role of private capital and public institutions; clarity on how funds are going to be allocated between nations; and all of this grounded in a sound governance mechanism to increase transparency, predictability and trust in future climate finance flows. Perhaps existing multilateral institutions including the International Monetary Fund and multilateral development banks can play a role, as they have “tried-and-proven” tracks to raise funding, and to channel international financing, including catalyzing private funds.
Time is running out. COP26 in Glasgow represents a great opportunity to raise the bar and to set the basis to move from words to action in supporting emerging countries in their journey to decarbonization. For the sake of our Planet, let’s make it real this time.
(*) Lenaerts, Tagliapietra and Wolff (2021). Average of different estimations (2021-2050) of global investment needs in order to reach net zero CO2 emissions from energy by 2050
