It seems calamitous that at precisely the moment when the need to scale up climate finance is most urgent, the public finance engine room of climate investment could ‘run out of steam’. In this issue, we consider why there are actually many reasons to be optimistic about the future of climate finance, especially in a post-COVID-19 world.
Governments’ capacity to scramble together eye-watering volumes of emergency relief proves that money can be raised when there is the will to do so. The scientific likelihood of a serious, flu-like pandemic has been understood for decades. In 2015, a commission established after the Ebola outbreak by the US National Academy of Medicine estimated that investing USD 4.5 billion globally would minimise the risks of future pandemics. In a case of ‘too little, too late’, the cost of COVID recovery puts that original USD 4.5 billion into context. By June 2020, COVID-19 rescue packages alone had exceeded USD 15 trillion.
Since 2016, the International Energy Agency has called for USD 1.5 trillion in annual investments to 2030 in the energy sector alone, to align it with Paris Agreement goals. In 2018, however, total climate finance flows reached USD 579 billion, topping half a trillion for the first time – but still dramatically short of the levels needed. If COVID-19 has proven one thing beyond any doubt it is that the costs of inaction do vastly outweigh the costs of action.
The sheer value of the finance available has provided an opportunity to make the green transition irreversible, an objective the EU’s EUR 1.8 trillion Next Generation recovery plan is aiming to achieve. The package prioritises climate neutrality and digitalisation on the back of a pathway already mapped in the EU Green Deal and sets a starting point for others to follow.
COVID-19 has not impacted countries and communities equally. Indeed, external shocks, such as climate change and COVID-19, hit the poorest and most vulnerable communities hardest and amplify pre-existing inequalities. In a climate-changed world of irreversible impacts, the pandemic’s massive disruptions to global supply chains have resulted in the loss of around 495 million full-time-equivalent, mostly low-paid jobs. In 2020, the World Bank estimates that many of the development gains made since 1990 will be decimated while around 150 million people will fall back into extreme poverty.
Before COVID-19, many low-income countries were already highly indebted and could ill afford to support vulnerable households and sectors, let alone boost climate investment. The USD 1 trillion earmarked by the international community to support COVID recovery in low-income countries prioritises many of the same countries that are also most vulnerable to climate change. Together with least-developed countries and many small island developing states, development partners should insist this recovery is urgently aligned with sustainable and sustained growth and resilience goals.
Looking ahead, recovery finance invested in low-carbon and climate-resilient outcomes around the world should count as climate finance. After the 2008-09 financial economic crisis, Chinese and US stimulus packages invested heavily in wind and solar, thereby greatly reducing technology costs. The spike was recorded in higher-than-average climate finance flows for several years and the ultimate legacy is today’s price parity for wind- and solar-power-generated electricity.
Countries should anticipate growth in climate finance levels. Governments can deploy powerful policy and public financial management avenues to ensure this happens, including inter alia, direct investing blended finance, public private partnerships, taxonomies, and ultimately, carbon pricing. Under international cooperation, development partners must deliver the 2020 climate finance goal transparently and on time.
Finally, international climate finance flows must continue to grow, even as overseas development assistance (ODA) budgets are being eyed up by constrained domestic agencies and ministries. ODA targets are linked to gross national income (GNI) goals and, with the collapse of GNI in 2020, many developing countries may worry that climate finance will disappear. This cannot be permitted as the fragile climate system on which we all rely depends upon sustainable development everywhere.
The opportunity to align recovery with scaled-up climate finance and strengthened climate action is unimpeachable. It is up to governments to make it happen.