Accelerating the speed and scale of climate finance in the post-pandemic context

Abstract

In this paper, we examine how to trigger a wave of low-carbon investments compatible with the wellbelow 2°C target of the Paris Agreement in the current post-pandemic context of increasing private and public debt. We argue that one major obstacle to catalyzing global excess savings at sufficient scale and speed on climate mitigation, and to 'greening' economic recovery packages, lies in the upfront risks of low-carbon investment. We then explain why public guarantees should be the preferred risk-sharing instrument to overcome that obstacle. We outline the basic principles of a multilateral sovereign guarantee mechanism able to maximize the leverage effect of public funds and massively redirect global savings towards low-carbon investments, with the double benefit of bridging the infrastructure investment gap in developing countries and reducing tension between developed and developing countries around accelerated funding for low-carbon transitions. We carry out numerical simulations demonstrating how the use of guarantees from AAA-rated sovereigns, calibrated on an agreed-upon 'social value of carbon', is compatible with public-budget constraints of developed countries. In summary, the use of such guarantee mechanisms provides a new form of 'where flexibility', which could turn real-world heterogeneity into a source of reciprocal gains for both developed and developing countries, and contribute to meeting the USD 100 billion + pledge of the Paris Agreement. Key policy insights Catalyzing excess world savings through low-carbon investments (LCIs) would secure a safer and fairer economic recovery from the COVID-19 crisis and avoid locking developing countries into carbon-intensive pathways. Public policy instruments focused on creation of public guarantees can reduce the up-front financial risks associated with LCIs, mobilize private money and increase the leverage of public finance. A multi-sovereign guarantee mechanism would yield financial support from developed to developing countries in cash grant equivalent and equity inflows two to four times higher than the 'USD 100 billion and more' commitment of the Paris Agreement, and provide greater confidence in meeting this commitment equitably and effectively with benefits for all.

Paris Agreement requires substantial, broad, and sustained policy efforts beyond COVID-19 public stimulus packages

“…By taking into consideration the reduction of investments in fossil fuels, they further claimed an estimate of 20 billion US$/year until 2024 (thereafter, additional total energy investments ). They concluded that “in sum, a small fraction of announced COVID-19 economic recovery packages could provide the necessary financial basis for a decided shift toward a Paris Agreement-compatible future.” Although we agree with A20 and others that COVID-19 stimulus funds may offer an opportunity to boost climate actions (Hepburn et al 2020 ) and may be important for reducing upfront risks that can deter low-carbon investments (Hourcade et al 2021 ), we nevertheless believe that the conclusions by A20 misrepresent the grand challenges that climate change mitigation entails (IPCC 2018 ). In our view, their analysis and other similar claims need to be balanced by the following five arguments.…”

“…Energy investments into low-carbon energy and away from fossil fuels are most cost-effectively induced by carbon pricing complemented with subsidies for technology development and the expansion of low-carbon infrastructure (Sandén and Azar 2005 ; Baranzini et al 2017 ; Hourcade et al 2021 ), unlike what is implicitly assumed when comparing the face values of recovery public funds with energy investments in IAMs. It is well-established that carbon pricing should be the backbone to meet the Paris Agreement targets cost-effectively (Stiglitz et al 2017 ).…”

“…It adds further evidence to the underestimation of required low-carbon investments by A20 if the shift toward decarbonization takes place primarily through low-carbon investments. Nevertheless, further such insights from IAMs directly simulating energy investments, as well as those from other complementary approaches (Guan et al 2020 ; Hourcade et al 2021 ; Pollitt et al 2021 ), are needed to assess the long-term economic and climate implications of COVID-19 public stimulus packages. In particular, complementary analyses are needed to model several classes of investments according to their origin, destination, risk level, and/or expected return rate.…”

Drivers of CO2 Emissions: A Debt Perspective

“…Public debt affects emissions in many ways [3,43]. First, variation in debt can change macroeconomic policy and GDP growth, thus greatly impacting energy use and subsequently, CO 2 emissions [17].…”

“…Now, policymakers are deciding on recovering the economy through debt financing [2]. The pandemic has increased expenditure demands as countries strive to lessen the side effects of the crisis, while revenues have decreased due to dull growth and trade, together pushing debt burdens to a higher level [3]. However, as in former crises, only the concentration on economic recovery will exert devastating impacts on the sustainable development goals (SDGs) [4].…”