How will governments fund net zero?

By on 02/05/2022 | Updated on 03/05/2022
Dock workers unloading a coal ship in Karnaphuli, Chittagong, Bangladesh
Dock workers unload coal from a ship in Bangladesh. Governments will need to fund the transition from fossil fuel-intensive industries to sustainable ones. Photo by Adam Cohn via Flickr

It is estimated that half of the world’s population is ‘highly vulnerable’ to the impacts of climate change. Driven in part by COP26 last year, the race to decarbonise economies, protect people and safeguard ecosystems has begun. But who will pay the trillions of dollars needed to effect real change? Karen Day reports   

Last year was a climate change wake-up call as extreme weather events ripped across the globe. Soaring temperatures in the Pacific Northwest rewrote records, California suffered a particularly bad wildfire season, China saw the worst dust storm in a decade, and countries including Germany, India and Indonesia experienced devastating floods.

These events – which displaced millions of people and destroyed valuable ecosystems – consolidated the global consensus on stemming climate change during COP26 in Glasgow, UK, where governments committed to reducing carbon emissions by 2030 and most to net zero by 2050. But the cost of fundamentally changing people’s way of life and our economies requires sustained investment, running into trillions of US dollars every year. The question for governments is: who is going to pay and how?

According to the Climate Policy Initiative (CPI) think tank, the amount spent globally on ‘climate finance’ increased from US$574bn in 2017/18 to US$632bn in 2019/20 – the most recently available figures. This includes public and private sector investment in renewable energy, sustainable transport systems, and adaptation solutions.

The CPI warns that despite steady growth in climate finance, it is nowhere near enough to mitigate climate change. It estimates that the world needs to invest at least US$4.5 trillion to US$5 trillion annually by 2030, a staggering rise of 590% [on current spending levels?], to tackle the most damaging aspects of climate change.  

“That’s the true picture,” says Baysa Naran, a senior analyst who leads the CPI’s climate finance tracking. “The challenge we have ahead of us is enormous. We are not looking at incremental improvements, there needs to be step change. What we do every day needs to change.”

Currently governments, largely through development finance institutions, are the biggest funders of climate finance. According to the CPI report Global Landscape of Climate Finance, the public sector contributed 51% of the world’s climate funding between 2019 and 2020, at US$321bn. This will have to change if climate funding is to reach the levels predictions indicate is needed to bring about real change. “Even if we spent every single dollar of public money, we are not going to get there,” Naran says. “The obvious answer is driving more private sector resources.”

Mark Carney

At COP26 there was some international movement on this. Mark Carney, UN Special Envoy for Climate Action and Finance, announced that he had corralled 450 major financial companies from 45 countries to join his Glasgow Financial Alliance for Net Zero, or GFANZ. These companies have all committed to net zero investments and to reporting on their financed emissions annually. Carney claims that, given the US$130 trillion in assets held by GFANZ members, the Alliance is now of a scale to start “mainstreaming” climate finance. “We now have the essential plumbing in place to move climate change from the fringes to the forefront of finance, so that every financial decision takes climate change into account,” he says. The challenge now, he concedes, is directing that cash into scalable net zero projects, particularly in emerging and developing countries.

Reducing emissions investments

Like driving climate finance, reducing emissions investments will also need to become a greater priority. Currently, more than US$850bn is invested in fossil fuels every year, compared to US$632bn in green finance. The real push now, says Naran, should be aligning global public and private financial flows with low carbon and climate resilience as covered by article 21.C of the Paris Agreement. Over 190 countries have, in theory, agreed to do this, but progress is glacially slow. “It is so important and crucial,” says Naran. “But the reality is, we are far from doing this.”

Part of what is required to shift finance flows and align economies with decarbonisation is for governments to create the policy and regulatory environments to make it happen. “We don’t need all this money to magically appear,” says Samantha Gross, director of the Energy Security and Climate Initiative at US-based think tank, the Brookings Institution. “We need to shift capital investment. If the playing fields are drawn well by governments and the costs are right, the capital will shift in that direction.”

Gross, also a former director at the US energy department, points to proposals published in March that will force US companies to report on their carbon emissions and those of their suppliers and consumers. She says this is a prime example of “setting the right playing field”.

The plans, by the Securities and Exchange Commission, have been in the pipeline for a year and are broadly comparable, Gross says, to the EU’s taxonomy on sustainable finance. “This should give different flavours of risk,” she says. “If a company has a manufacturing plant located at sea level, that’s one risk, another is if that company is making a carbon heavy product. It gives investors better standardised information. I’m excited about that.”

The UK Treasury has also pledged to introduce disclosure requirements for private investment, although there is no clear timetable yet.

Read more: Governments urged to end ’empty pledges’ on climate

In Canada, the last 12 months have been pivotal for the federal government in getting its regulatory regime in place. In June 2021 its Net Zero Emissions Accountability Act came into force, legally enshrining its targets to reduce emissions by 40%-45% by 2030 and achieve net zero by 2050. It outlined how it aims to do this in its emissions reduction plan, published in March, including through the country’s carbon pricing system.

Introduced in 2019, this will see an incremental increase from C$65 per tonne of carbon emitted in 2023, to C$170 per tonne by 2030. The price increase, which applies to emissions from both businesses and householders, is designed to drive greener behaviour and encourage the switch to a low carbon economy.

“There is a role for public dollars in priming the pump, mobilising private capital and directing it in the right way to do the things that private capital won’t,” says Dale Beugin, vice president of research at the Canadian Climate Institute (CCI). “In Canada that’s especially possible because we have the carbon price.” The CCI is also urging the government to accelerate four other policies if it is to hit its targets: plans for an oil and gas cap, a clean electricity standard, land-use emissions reductions, and a strengthened clean fuel standard.  

To ‘prime the pump’ the federal government has set up a Net Zero Accelerator fund of up to C$8bn. This is targeted at emission-heavy industries, principally those that use fossil fuels, to help them decarbonise. It has also set up tax incentives for businesses investing in carbon capture – which Beugin says overlaps with the Accelerator fund – and is using the Canada Infrastructure Bank, which has C$35bn to invest, to try and drive private capital into longer-term emissions reduction projects.

“This is what you can do with government levers to reinforce and buttress that carbon price and drive emissions reductions,” Beugin says. He adds that despite the policy planks now being in place in Canada, with 2030 just eight years away, the country’s targets are “barely achievable”.

Build Back Better Act – a setback

In the US, the return to climate positive policy has not been plain sailing for President Biden’s administration. Last year Biden set out an impressive list of climate change targets including reducing emissions by 50%-52% by 2030, creating a carbon neutral power sector by 2035, and leading the world on developing climate finance. One of the key planks for meeting emissions targets is the Bipartisan Infrastructure Bill, an unprecedented US$550bn package that will fund clean energy and climate change infrastructure, including around US$320bn in tax incentives. Though this investment package has been passed, the much more significant US$7 trillion Build Back Better Act – Biden’s framework for helping the country meet its climate goals, create millions of jobs, and grow the economy – was passed by the House in November last year but floundered in the US senate. It is unclear whether it will become law.  

Read more: UK urged to create ‘net zero’ development bank

Brookings Institution’s Gross concedes that this is a setback but it is far from a “bust” pointing to the infrastructure bill, which includes US$235bn for sustainable transport, an electric vehicle charging network, US$65bn for new renewable energy transmission lines, and research and development. She adds that Biden’s “whole-of-government approach” – what his executive branch, individual states and the legislation passed so far can do collectively – puts the US on a “positive” path.  

Internationally, the US recommitting to the Paris Agreement after it withdrew from it under Donald Trump in 2020, is a step forward, particularly as world governments start to renegotiate the collective goal on climate finance. This currently sits at US$100bn a year, but this figure is controversial with claims it does not cover the needs of developing countries. It is estimated that collectively developing countries will need nearly US$6 trillion a year, raising questions about where that money will come from.  

Gross adds her voice to US, Canada, UK and EU experts’ views that public finance is an enabler to climate finance – corralling private capital into climate change, pump priming new technologies and incentivising behaviour change. But there are still huge obstacles to overcome to decarbonise economies and time is ticking for governments and international communities. “Once people can make money fixing this problem, you won’t be able to stop them fixing it,” Gross predicts. “That’s ultimately what we need to do. The government can bring down the cost of technologies and draw the playing field differently and all the things that make it possible for the private sector to make money, because ultimately that’s what moves mountains.”

Read more: Averting climate catastrophe: how can civil servants help deliver COP26 commitments?

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