Signed in December 2015, the Paris Agreement on climate change is a milestone for both the environment and global development. Breaking with high cost carbon pollution, the post-Paris world has a clear mandate: accomplish the transition to new energy sources and invest in climate-positive infrastructure and climate-friendly products.
Accelerating the transition to low-carbon, carbon-free and renewable energy sources has many advantages in the near-term, including reducing air pollution and the use of hazardous chemicals. However, despite positive signs from Paris, there is anxiety about financing options. Some climate experts fear that the Paris Agreement could have little impact, if the initial $100 billion per year (by 2020) doesn't attract a significant amount of follow-on capital.
This article highlights three avenues that have the potential to raise funds for climate mitigation and adaptation--and also to catalyze global financial actors to invest in low-carbon development beyond the initial 2020.
Getting prices right: the need for fossil fuels subsidy reform
The Global Subsidies Initiative (GSI) of the International Institute for Sustainable Development (IISD) estimates that global fossil fuel subsidies could currently reach up to US$600 billion per year. These subsidies distort market signals and come with large economic, social and environmental costs. The New Climate Economy report finds that fossil fuel subsidy reforms could deliver GHG emissions reductions up to 13% by 2040. Countries are making efforts to advance this reform, notably through their Intended National Determined Contributions (INDCs) under the UN Framework Convention on Climate Change. INDCs, when coupled with other economic instruments, such as transport fuel duties and carbon taxes, could provide around USD$3 trillion in additional savings for governments. These governments use taxpayer money to subsidize carbon polluters and distort true costs.
Even if intuitive, these reforms are not politically frictionless. National fiscal policies often lack transparency and international monitoring. Implementing the "polluter pays" principle (as in the case of a carbon tax) invites social and political resistance. Reform is technically complex, politically difficult and slow. Larger political pressure can help fight the inertia.
Leveraging private finance for climate mitigation and adaptation
The second suggestion relates to a popular idea that is under-exploited: private finance for climate mitigation and adaptation. Considering the urgency to balance the carbon budget, the private sector is a large part of the answer. Its role won't be without controversy. Leaders from Venezuela and Bolivia, for instance, repeatedly raise concerns about the use of private finance. But the recent established Green Climate Fund (GCF) is widely expected to promote and extend private capital to fund the low carbon transition in developing countries.
Public finance lags far behind targets and cannot provide adequate funds solely by itself. According to the World Economic Forum, by 2020, the world will have to invest about US$5.7 trillion annually in green infrastructure to achieve the minimum 2° C pathway and avoid the most harmful impacts of climate change. Using private finance does not undermine the vital role of public finance. It's probably best for private investors and national leaders to look at the climate emergency as an unprecedented opportunity for 'complex interdependence' in decision-making, a unique opportunity for complementary purpose. The value of carbon stability is both existential and plainly financial.
Carbon reduction: the new "gold" of the 21st Century?
The third way to buoy resources for climate adaptation and mitigation relates to a promising new idea: positive carbon pricing. Across the world, many people recognize that fossil fuel use has provided rapid development benefits but also massive and unsustainable carbon emissions. Currently, these externalities are not factored into the price of fossil fuels, and proponents of positive carbon pricing would like to see a "true cost" established. One way to factor in the negative impacts of fossil fuel use would be a carbon tax. Implementing this aforementioned 'polluter-pays' principle is difficult and controversial but necessary.
Positive pricing, according to its supporters, is different than carbon taxing as popularly understood. Proponents believe that the social and economic cost of carbon must be recognized upfront. When fossil carbon is properly accounted for, businesses will have incentives to leave fossil fuels in the ground and look for alternative energy sources. Positive carbon pricing is the 'flip side of the coin' of subsidy reform, working to disincentive fossil fuels exploitation. This approach is gaining ground with the endorsement of a key decision at the UN Climate Conference in 2015 (COP21). Paragraph 108 of the Decision of the Adoption of the Paris Agreement "recognizes the social, economic and environmental value of voluntary mitigation actions and their co-benefits for adaptation, health and sustainable development."
This proposal should not be read as a replacement of carbon taxation. Positive carbon pricing is a chance to reward faster-acting, early adoption countries. As Alfredo Sirkis, executive director of a Brazilian climate think tank, said in an interview, it is the "Green Bretton Woods," a reference to the Bretton Woods agreement and its foundational system for monetary and exchange rate management created in 1944. He adds, "it's about carrots rather than sticks." In practice, this idea would require some deep-seated changes in the way we do business. The intention so far is to have a group of willing governments, central and development banks, and multilateral institutions, form a "climate club" responsible for giving guarantees for carbon-reducing assets. These carbon-reducing assets could ultimately be a convertible reserve currency. Following the "Green Bretton Woods" analogy, carbon reductions could themselves become the "new gold" of the 21st Century. As argued in "Moving the trillions a debate on positive pricing of mitigation actions", the ultimate goal is to achieve a more effective capital mobilization towards a low carbon economy while reducing the risks for investors.
There are still open questions. Which institutions are responsible for these transactions and certificates? Would the price be floating or a fixed? Would all sectors be entitled to a single price? Could it become a future currency? Positive carbon pricing has just started to gain agenda space in international discussions; it was officially discussed in the first UN meeting following the agreement in Paris in Bonn, Germany, for example. Given the unifying climate emergency, only a calculated and radical transformation will achieve carbon-neutrality by 2050.