Author: Editorial Board, ANU
More than 35 trillion dollars of investment will be required over the next decade to win the battle against climate change. Most governments around the world are far from having the fiscal space to fill this gap. As many celebrate the return of US leadership on climate change, it will be US President Joe Biden’s ability to catalyze private finance that will determine the success of his leadership, both economically and by garnering sufficient national and international political support. for the sake of the climate. cash.
COVID-19 has put the scale of the climate challenge into perspective. Business closures, aircraft downtime, car parking and plant closures during COVID-19 reduced global carbon emissions of about 7%. It helps illustrate the scale of the climate challenge. If we are to avoid a 1.5 degree rise in global temperatures, we must achieve that same drop in carbon emissions every year for 10 years.
Since shutting down the global economy every year is not an option, governments around the world will need to fundamentally transform their economies if they are to reduce carbon emissions in a sustainable manner and do so at the lowest possible cost to them. livelihood of people. In addition to putting a price on carbon to bring about these changes, achieving them will require new investments in infrastructure and green technologies, and much of it.
Annual production of electric vehicles will have to increase tenfold to reach net zero emissions by 2030. The number of charging stations will have to be multiplied by 31. Up to 2% of the United States will have to be covered with solar panels and wind farms, according to an estimation. Mining companies will have to increase their production of minerals used in these technologies by more than 500%.
Unless Biden’s global climate change agenda includes practical ways to unlock billions of dollars in private funding, he will struggle to meet his climate goals.
Economically, most governments around the world do not have the fiscal space to undertake the necessary level of investment. This is especially true for developing economies due to high levels of foreign currency denominated debt, underdeveloped financial systems and weak monetary policy frameworks. This is also true for most European countries which have limited fiscal space due to their lack of independent monetary policy, shared exchange rate, and EU-wide fiscal rules on debt and debt. deficits.
Politically, Biden must appeal to both sides of politics, especially given his slim majority in Congress and the politically diverse group of G20 countries he must win. A Green New Deal might appeal to the American political left, but the political right wants solutions that involve the private sector.
The mathematics of climate change means that private sector investments will not only be important; it will be critical. Our ability to tackle climate change depends on the ability of global financial systems to direct sufficient finance where it is needed to emerge from a carbon dependent economy.
Fortunately, there are practical things the Biden administration can do globally to spur private investment in the fight against climate change.
First, Biden could lead a reform of global capital rules around the cushions banks are required to hold to withstand shocks. A growing number of searches shows that borrowers with strong environmental credentials are less likely to default. This means that these loans, and the securities underlying these loans, are more secure than their non-environmentally friendly counterparts. If global capital rules took this into account, banks would be incentivized to issue more green loans, hold more green debt on their balance sheets and thus direct more funding towards green initiatives while strengthening financial stability. .
Second, Biden should lead a campaign to normalize what constitutes “green” in the context of green finance. There are many metrics and metrics out there, but they rarely line up. It is a problem. The nature of finance capital means that these indicators need to be consistent and globally agreed upon, if global rules are to be developed in this area. More and more countries are developing their own indicators – from Canada and China to Singapore – but consistency will be essential for global markets to function effectively.
In our lead article this week, Robert Stowe assesses the claim that the US leadership is back on climate change. Although Biden has done a lot – joining the Paris Accord, implementing a climate-focused fiscal stimulus, signing a series of executive orders to cut emissions and hosting a global climate change summit – some see the return of the United States as more of the truant returning to class than the return of a great king to lead the battle. The fear, well-founded, is that Biden’s shift is just the latest installment in the US zigzag on climate policy – barely the stable commitment required for resolute leadership.
“President Biden holds only very slim majorities in Congress, putting out of reach the legislation that will be necessary to achieve much of his ambitious climate agenda,” warns Stowe. “The president’s green infrastructure plan is already in trouble in Congress. Biden could lose even that slim majority in Congress in the 2022 midterm election, and potentially the presidency itself in 2024 to a Trump-like Republican, jeopardizing executive action he may have. undertake ”.
One of the main goals of the Biden climate summit was to provide a forum for major emitting countries to submit more ambitious commitments under the Paris agreement. A number of leaders announced new commitments, including the leaders of South Korea and Japan. China and India, the world’s largest and fourth largest emitters, have not done so, however, although China made a commitment to net zero carbon emissions in 2060 some time earlier.
To conquer these countries, Biden must offer them practical solutions to finance the climate investments they desperately need. Limited fiscal space, difficult domestic politics and a politically diverse G20 mean that catalyzing private finance could be a critical way to move beyond mere rhetoric.
The success of the fight against climate change will depend on the ability of our financial system to meet the challenge. Without key reforms that recognize the real value of green investment, this will not be the case.
The EAF Editorial Board is located at the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.