Climate finance and divestment appear to be increasingly vital to a universal agreement to decarbonise the global economy. But bursting the ‘carbon bubble’ could crash the global economy. Our partner La Tribune reports.
The $1.25 billion green bond issued by EDF last week (a new record), the Green Climate Fund and the carbon tax, which is once again raising its head in the climate debate, are just a few of the many faces of climate finance.
It has become clear that the success of the Paris Climate Conference (COP 21) in December hinges on the question of finance, without which the world will surely fail to wean itself off carbon.
The famous promise made by developed countries to provide $100 billion per year to help poor countries with the sustainable energy transition and to deal with the effects of climate change was one of the main points of discussion at the recent IMF and World Bank meetings in Lima.
The French COP 21 organisers are not too shy to point out that there is little chance of the most vulnerable countries signing a universal agreement in Paris if the much-vaunted $100 billion fund fails to materialise. The mathematical sleight of hand has stepped up as the deadline creeps ever nearer.
At the last count, $87 billion had been secured. This package is made up of the $62 billion of public and private funds (mobilised by financial leverage) reported by the OECD on 7 October, and a further $15 billion promised by development banks in Lima on Friday (16 October).
Bolstering funds with “worthless junk”
But far from reassuring NGOs, this recent addition has them almost more worried than before: it is still highly uncertain what will happen after 2020, and the exact nature of the $100 billion fund is just as vague.
NGOs have called for the majority to come from public funds, while politicians claim that such a sum could never be raised without the competition of the private sector and leverage… But this has not stopped the big economic powers from engaging in a kind of bidding war.
>> INFOGRAPHIC: Financing climate change and development
Germany raised the curtain at the G7 summit in June by announcing that it would double its commitment. The United Kingdom, China and France followed suit at the New York Climate Week in September. François Hollande’s announcement on 29 September that France would be adding a further €2 billion to its efforts against climate change raised big questions, and eventually forced the government to amend the 2016 budget in order to ensure the promise could be kept.
In any event, NGOs have questioned the quality of these funds. The $87 billion, they say, will be obtained by adding “worthless junk”.
Only 16% of the funds covered by the OECD report are in the form of grants to finance the adaptation of the poorest countries, whose access to loans and private investment for climate-related projects is often limited by their ‘high risk’ status.
But the role of the private sector does not stop with the $100 billion package. The whole financial system must be reformed to support the global transition to a low carbon economy if global warming is to be limited to +2°C and catastrophic climate change averted. This operation, called “shifting the trillions”, could take many different routes.
Carbon markets have already been tested in 40 countries and 20 cities, which together represent 12% of global carbon emissions (the Chinese carbon market, covering 26% of global emissions, will be launched in 2016).
Sweden is a good example of what these schemes can achieve: the first country to implement a carbon tax in 1990, it has since cut its emissions by 23% while its economy has grown by 60%.
A working group presided by Ban Ki-moon has reported on the many private sector initiatives that have been launched since the 2014 New York Climate Week. The “Trends in Private Sector Climate Finance” report highlights the explosion of green bonds to nearly $70 billion, the boom in annual renewable energy investments (up 55% between 2009 and 2014) and the fact that at least 1,000 companies are now calling for carbon pricing.
Ten banks managing $4,000 billion of assets have published a “Positive Impact Manifesto”; an approach to handling the social and ecological effects of their investments. Confronted with an explosion of premiums linked to the effects of climate change, the insurance sector is also keen not to be left behind.
More and more institutional investors have joined the fossil fuel divestment movement, which is now worth $2,600 billion. Despite gaining the support of several major multinational companies and achieving 50-fold growth in just one year, this is still just a drop in the ocean compared to the scale of the challenge. According to the American NGO Ceres, $1,000 billion need to be divested from fossil fuels every year by 2030 in order to decarbonise the global economy.
A systemic risk?
Climate finance of all kinds now enjoys broad support. Just weeks before the COP 21, it has even become the ace up the sleeve of many developing countries, which hope to use it to leverage more ambition from the big polluters.
But the energy transition is not risk-free. Rachel Kyte, the World Bank’s special envoy for climate change, said that the decarbonisation of the economy must be carefully managed to avoid a bursting of the “carbon bubble”.
She warned that the massive investments of some businesses in carbon intensive industries in recent years could pose a “systemic risk” to the entire economy. Mark Carney, the governor of the Bank of England and president of the global Financial Stability Board also warned investors of the risk of “enormous losses”, and called for better information for investors on the risks of an energy transition.
In a similar vein, a group of 1,000 NGOs have asked the fossil fuels industry to change the way it communicates data to improve transparency over how the aim of limiting global warming to +2°C will impact carbon intensive businesses.