Climate action is gaining momentum. Since the Paris Agreement of 2015, countries have stepped up climate action and many have committed to achieving net zero emissions by 2050, meaning any additional carbon emissions will be fully offset by carbon emissions. removed from the atmosphere.
However, the carbon budget, or maximum amount of emissions allowed, to limit global warming to well below 2 ° C is running out quickly. More frequent and intense disasters, declining agricultural productivity and rising sea levels will only increase if this critical goal is not met.
In our recent G20 Climate Policy Briefing, we detail the policies and, most importantly, the amount of investment needed over the next 5-10 years to achieve net zero emissions by 2050 in a manner conducive to the growth. The strategy has three building blocks: carbon pricing; a green investment plan; and measures for a just transition.
Carbon price: Carbon pricing, which can take the form of a carbon tax or emissions trading systems (or equivalent measures such as sectoral regulations), are key elements of the decarbonization strategy. Green investments and support for R&D are unlikely to be enough to achieve net zero emissions by mid-century. By increasing the cost of high-carbon energy, carbon pricing creates incentives for a shift to cleaner fuels and energy efficiency. In contrast, simply increasing the supply of clean energy sources tends to lower the cost of energy and does not encourage energy efficiency as much, making it more difficult to meet targets. zero net emissions.
Our analysis shows that delaying action on carbon pricing by 10 years would likely result in a breach of the mid-century net zero emissions target, as the prices required at this point to meet those targets do not appear to be sustainable. Such a delay, compared to the rapid introduction of carbon pricing, would raise temperatures and lead to potential irreversible damage to the climate and the economy. An agreement on minimum carbon prices between major emitters, with prices differentiated according to the level of development, as recently proposed by the staff of the IMF, could facilitate action on carbon pricing by addressing concerns that action unilateral could lead to losses of competitiveness for companies in energy-intensive and trade-exposed sectors and shift production to countries where prices are lower.
Green investment: Green investments are crucial to enable the transition to a low carbon economy and support the response to carbon pricing. The radical transformation of our energy system will require increased investments to finance the switch from fossil fuels to renewables, as well as for smart grids, energy efficiency measures and electrification in sectors such as transport, electricity and electricity. buildings and industry. Significant investments will be needed in the transition. For example, a person looking to buy a new car may be more willing to buy a battery-powered vehicle rather than a gasoline-powered vehicle if electric vehicle charging stations are more widely available. It is also essential to invest in R&D: further technological advances in low carbon technologies will be necessary to make the transition to net zero possible.
In many industries, while lower emissions may come with a higher initial investment associated with building new infrastructure, this results in a lower recurring cost due to reduced fuel consumption. Installing solar panels to power a water pump in a rural village comes with a new cost upfront, for example, but the energy from the sun is free. Investments to improve energy efficiency follow a similar path. As a result, the investment is in the shape of a bump, with an increase over the next 20 years and a decrease from recent historical levels thereafter.
It is estimated that an additional $ 6-10 trillion in global investment, both public and private, is needed over the next decade to mitigate climate change. This represents a cumulative total of 6-10% of annual global GDP.
According to data from the International Energy Agency, around 30% of additional investment, on average globally, is expected to come from public sources, or a total of 2 to 3% of annual GDP for the decade 2021 to 2030. The remaining 70% would be private.
On the public side, government fiscal measures to support recovery from the COVID-19 pandemic are a unique opportunity to invest in a transition to a low-carbon economy. And as we move beyond recovery, governments should also move towards a more comprehensive system of green budgeting, looking at both the ‘brown’ and ‘green’ incentives offered by budgets and helping to align them. budgets on Nationally Determined Contributions (NDCs) and Paris Agreement targets.
Governments can also help mobilize private sector capital by improving investment frameworks, helping to create bankable project pipelines, and effectively using international public finance to reduce perceived risks and lower the high cost of capital. (the latter, especially in emerging and developing economies). Financial sector policies such as the requirement to disclose climate-related risks and establishing a common taxonomy of what constitutes green and brown assets would also be crucial in channeling financial flows towards sustainable investments.
Just transition: A just transition takes on both a national and an international dimension. Domestically, governments need action to help households that already struggle to afford basic necessities afford higher energy costs. These measures should extend to coal miners and other workers and communities who depend on high carbon sectors for their livelihoods. Internationally, financial support will be needed for developing economies, which are expected to bear higher costs in the transition but have few means to pay for it.
Major carbon emitters like China, the EU, Japan, Korea and the United States have pledged to achieve net zero emissions by mid-century. This will reduce a large part of global emissions, but also provide technological and policy solutions to make it easier and more affordable for other countries to follow. Yet without a global climate policy, today’s small emitters will become major emitters as their populations and incomes grow. These are also the countries, often more severely affected by the effects of climate change, for which the transition costs are more difficult to bear, due to rapidly growing energy needs and a lower budgetary margin to finance green investments.
Climate finance – the financing of investments to reduce emissions in developing economies – would allow for more equitable burden sharing and help the global economy achieve net zero emissions. Many developing economies are poised to increase their NDCs if they receive climate finance, and given that many of the world’s cheapest mitigation opportunities exist in emerging and developing economies, it is in the global interest. to ensure that they are implemented.
* About the authors:
- Florence jaumotte is Deputy Division Chief in the IMF’s Research Department. She has worked in the Multilateral Surveillance Division and the Global Economic Studies Division of the Research Department, as well as in several country teams. His research has focused on labor market institutions and policies, income inequality, and open economy macroeconomics.
- Gregor Schwerhoff is an economist in the Multilateral Surveillance Division of the IMF’s Research Department. His research covers various aspects of climate policy, with a particular focus on the welfare implications of carbon pricing.
Source: This article was published by IMF Blog