Lessons From the World’s Most Successful Climate Change Agreement
It’s About More than the Much Discussed $100 Billion “Promise”
One of the most discussed issues at the UN climate meetings in Glasgow, COP26, will be the vague unfulfilled reference in the 2015 Paris Agreement of $100 billion per year for climate actions by developing nations. However, the real story is about the need to redirect trillions of private dollars to climate related investments, a transformation of the financial system finally beginning to happen — but so far not nearly fast enough.
While frequently described as a “broken promise”, the $100 billion figure originated as a “goal” in an “Accord” not formally approved at UN meetings in Copenhagen in 2009. In 2015, the Paris Climate Agreement referenced the earlier text with language still much less than a promise, noting “developed country parties should continue to take the lead in mobilizing climate finance from a wide variety of sources, instruments and channels, noting the significant role of public funds. . .” (italics added). The ambiguity of the Accord and subsequent references to it have been a source of considerable disagreement on the proper accounting of the funds delivered. Climate funding “mobilized” approached $80 billion in 2019 and is likely to be somewhat larger in 2020 according to the intergovernmental organization the OECD, while only $19–22.5 billion in 2017–18 according to the nongovernmental group Oxfam — a difference largely due to Oxfam’s belief loans should not be counted unless offered at highly discounted rates.
Whether or not a “broken promise,” meeting the $100 billion target has become a highly charged issue at the Glasgow climate meetings with multiple countries linking their commitments to emission reductions conditional on receiving sufficient financing. The vast majority of countries attending the climate negotiations are responsible for very small shares of greenhouse gas emissions; consequently negotiating for greater financial support, preferably in the form of grants for responding to the impacts of climate change, is of prime interest.
Recognizing the $100 billion figure has become iconic, developed nations have responded. President Biden promised to more than double the U.S. contribution to $11.4 billion by 2024, and Canada, Japan and Germany have announced increased contributions. Projections by Canada and Germany prepared for the COP predict financing will reach or surpass $100 billion in 2023 and approach $120 billion in 2025. Announcements at the COP have included $8.5 billion to help South Africa transition from coal and $19 billion to help developing countries end deforestation by 2030. Not surprisingly, developing nations are already upping the ante asserting the amount is not nearly enough and that much greater compensation is owed for “loss and damages”.
In contrast with the attention being given to the amount of development aid, there has been much less discussion of the enormously greater amount needed to achieve the Paris climate goals. In one of numerous relevant analyses, the International Energy Agency recently concluded that to reach net zero global emissions by 2050, annual clean energy investment worldwide will need to more than triple by 2030 to around $4 trillion. A group of the largest companies estimate climate risks to their businesses at almost US$1 trillion, much of it within the next 5 years. Economic studies of climate damage costs show comparable or greater expected reductions in GDP.
While the investment requirements are large, so are the opportunities for commercial returns. A report by the International Finance Corporation, the private sector arm of the World Bank, identified nearly $23 trillion in opportunities for climate smart investments in emerging markets by 2030, implying that there are plenty of climate projects that make commercial sense. The case becomes even stronger when the benefits of climate damage avoidance and a cleaner environment are included, over $7 trillion for an investment of less than $2 trillion based on analysis by the Global Commission on Adaptation. The capital is available — just the long-term assets under management today substantially exceed $100 trillion.
The financial community is showing signs of recognizing both the risks of inaction and the opportunities for good returns from climate related investments. The discouraging news is that the largest banks have collectively continued to invest large amounts in fossil fuels — $3.8 trillion since the 2015 Paris Agreement according to analysis by a group of environmental organizations (see figure). This was about double the amount going into green bonds (although in a positive sign the two appear to be roughly equal this year).
Fortunately, there are indications awareness of climate risks is growing rapidly both within financial institutions and among regulators.
· The Glasgow Financial Alliance for Net Zero (GFANZ) claims $130 trillion of private capital is committed to transforming the economy for net zero
· A Climate Finance Partnership organized by BlackRock with a target of $500 million for investment in climate infrastructure in emerging markets attracted $673 million
· The Network for Greening the Financial System launched in 2017 now includes 83 central banks and supervisors; a major focus is recommendations for disclosure of climate risk by banks
· The EU recently announced banks in member countries will be required to “systematically identify, disclose and manage” ESG risks, including climate-related risks
· More than 30 insurance companies have announced restrictions on underwriting coal projects, essential for obtaining finance
· Multiple pension funds and endowments with almost $40 trillion under management have promised to divest from fossil fuels
We may be at an inflection point.
Progress toward the goal of $100 billion “promise” will undoubtedly be one of the major stories to emerge from the Glasgow meetings. For the sake of the planet, at least equal attention should be given to the role of private investment related to climate change. As an official in the US Treasury Department notes, “There’s pure public funds, there’s public funds that mobilize private capital, and then there’s private capital, which at the end of the day has to dwarf the previous two categories.”
Alan Miller is a former climate change officer in the International Finance Corporation (2003–13) and climate change team leader, Global Environment Facility (1997–2003)