Translating Urgency into Action: Climate Finance Mobilization
When President Biden addressed fellow leaders at the United Nations General Assembly last week, his speech mentioned “climate” more than a dozen times (second only to “Russia”). Climate is expected to feature prominently next month at the annual meetings of the World Bank and International Monetary Fund (IMF) in Washington, D.C., ahead of November’s 27th UN Climate Change Conference of the Parties (COP27) in Egypt. The attention on climate is welcome, as mobilizing sufficient capital to finance the transition to a net-zero world is a Herculean task. This summer’s passage of the Inflation Reduction Act (IRA) gives the United States credibility to lead renewed international efforts, especially those aimed at mobilizing climate finance.
Decades of scientific research shows that human activity—specifically greenhouse gas (GHG) emissions—has led to global warming, threatening the stability of the Earth’s climate. The Paris Agreement, with its 193 parties including the United States, calls for the reduction in GHG emissions “to limit the global temperature increase in this century to 2 degrees Celsius while pursuing efforts to limit the increase even further to 1.5 degrees.” In aggregate, the world needs to achieve “net-zero emissions,” where any GHG emissions are offset by GHG removals. How individual countries contribute to this effort is spelled out in their Nationally Determined Contributions (NDCs). The “global public goods” challenge when it comes to climate is ensuring that one country’s emissions reduction is not offset by another’s increase.
The economic transformation that net zero requires is unprecedented and calls for investment in the hundreds of trillions of dollars over the next 30 years. Many investments will have positive returns, meaning the private sector has a financial incentive to invest, provided there is sufficient economic, political, and regulatory stability along with tools to manage risks. Work by IMF staff highlights the importance of adequate fiscal, regulatory, and insurance policies to “incentivize adaptation and create profitable opportunities for private finance.” Policymakers have a role to play, both in creating the conditions that will mobilize private capital and in providing public funding where private sector incentives are lacking.
As noted above, passage of the IRA in the United States has both national and global significance for climate finance. The legislation, which includes hundreds of billions in economic incentives to accelerate the United States’ transition to a net-zero economy, has been called a “game changer for U.S. decarbonization” and “the most aggressive action on climate in U.S. history.” It is estimated to reduce U.S. GHG emissions 32 to 42 percent below 2005 levels by 2030, bringing the United States within range of delivering on one aspect of its NDC. As the largest historical GHG emitter, the second largest current GHG emitter after China, and the most intensive CO2 per capita emitter, the United States is central to any serious effort to achieve net-zero emissions globally.
Beyond lowering the United States’ contribution to global emissions, the IRA can advance efforts toward net zero by lowering the price of clean technologies globally and the total investment required to reduce global emissions. It also provides a model to incentivize clean technology adoption for those countries with the financial resources to do so independently or with the assistance of official and private donors.
The IRA is only possible because the United States is able to finance investments and incentives toward achieving net zero. Recognizing that many of the worst effects of climate change are borne by populations less able to finance climate investments, the Paris Agreement also commits developed countries to mobilize $100 billion annually for climate action in developing countries starting in 2020. Unfortunately, a report published this month by the Organization for Economic Cooperation and Development (OECD) estimates total finance provided and mobilized by developed countries at $83.3 billion in 2020, falling well short of the $100 billion annual commitment.
Multilateral development banks (MDBs), climate funds, national development finance institutions, and export credit agencies represent more than 80 percent of total finance for climate action in developing countries; reaching the $100 billion goal will require additional efforts by these official sector institutions. For example, an Independent Review of Multilateral Development Banks’ Capital Adequacy Frameworks, commissioned by the G20 under Indonesia’s presidency and published in July, calls on the MDBs to use their capital more efficiently and expand innovations to increase MDB lending capacity. Proposed innovations include new forms of nonvoting capital, risk transfers to the private sector, and shareholder guarantees, among others, which could increase MDB financing substantially in the coming decades. The centrality of climate to MDBs’ multiyear strategies means significant additional resources would be available for climate finance.
Official sector finance is essential to achieving net zero and adapting to climate change, but a timely transition will ultimately depend on mobilizing private finance given investment needs in the hundreds of trillions. The OECD report highlights the fact that private climate finance has been lower than anticipated and calls for more to be done to measure the impact of climate finance and assess effectiveness. It cites limited information availability due in part to the “non-mandatory nature of reporting requirements for developing countries and the limited capacity of these countries to collate such information.”
Closing information gaps through standardized measurement and reporting, especially for the largest emitters, is foundational to advancing decarbonization efforts and mobilizing climate finance. A level playing field for emissions measurement and reporting will also be important to maintaining support for decarbonization efforts in the years to come. OECD work on emissions measurement, as well efforts by the newly created International Sustainability Standards Board (ISSB) to develop a global baseline for sustainability reporting standards, provide two concrete examples where standardized measurement and reporting work is proceeding with G7 and G20 support. Sectoral arrangements also have the potential to promote methodological and reporting standards; for example, the announcement of U.S.-EU steel and aluminum arrangements outlines work on methodologies for calculating carbon intensity and data sharing.
These efforts highlight the granular nature of work needed to mobilize climate finance at scale. Coordinating this work requires continued senior-level engagement to identify linkages, prioritize work programs, and forge consensus. Consistent prioritization of climate by individual countries and companies, in international fora such as the G7 and G20, and in private-public partnerships is encouraging. To paraphrase a German official at a recent event hosted at CSIS, this decade must be one of transitions, beginning with the energy sector and ultimately extending to the entire global economy.
Stephanie Segal is a senior fellow with the Economics Program at the Center for Strategic and International Studies in Washington, D.C.
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