COP26 PRESIDENT DESIGNATE Alok Sharma has made it clear that the mission for global leaders at the United Nations climate summit in Glasgow is to ‘keep 1.5˚C alive’.
But time is running out. The latest science warns us that emissions are on track to rise 16% by 2030 – rather than the 45% cut needed to keep the global temperature rise to below 1.5˚C.
As this year’s Dasgupta Review into the economics of biodiversity warns, global finance is still overwhelmingly flowing towards activities that are destroying the planet and putting our planet’s life support systems and our economies at risk. The value of fossil fuel subsidies globally was about US$6trn (£4.4trn) in 2020, according to the International Monetary Fund.
Developed countries are also failing to provide the US$100bn (£73.5bn) a year they promised to help developing countries address climate change.
The OECD reports that international climate finance only increased 2% between 2018 and 2019, to about US$80bn (£59bn), leaving a significant financial shortfall for those most in need.
According to the Climate Change Committee, the UK is falling behind its own pathway to net zero.
Research firm Cambridge Econometrics estimates that the total funding gap for decarbonising key UK economic sectors is £141bn between 2022 and 2025, with power generation, residential buildings and surface transport requiring the largest investments.
Most of this is expected to come from leveraging in private investment, but of the £24bn that will need to come from government, so far only around half has been committed over the next parliament.
To keep 1.5˚C alive, we need to re-invent finance.
Phasing out coal, shifting to electric vehicles, mobilising international climate finance, and recovering nature: all of the prime minister’s priorities means shifting financial flows from polluting to clean infrastructure, and recognising that investment in helping communities to adapt, is in everyone’s interests.
It will also require help from all forms of finance, public and private.
Public spending is vital for developing the green, climate-resilient infrastructure we need to support the transition.
Public policy and finance must also leverage private investment, helping to develop new markets and channel the trillions needed away from fossil fuels and into tackling climate change.
Aligning the UK’s fiscal framework with net zero is a key priority.
Government expenditure represents around 40% of UK gross domestic product, but at present HM Treasury does not assess and report how much spend is going on green policies versus polluting ones, or if spending overall is putting us on track for net zero or taking us in the opposite direction.
This is why WWF and others are calling on the Treasury to apply a net-zero test (NZT) to all future spending reviews and annual budgets.
‘Government-led efforts to organise knowledge and build capacity will help to bridge the gap between suppliers and procurement teams in national, regional and local government’
An NZT is a method for systematically assessing the impacts of spending and tax policies on climate and other environmental criteria, and for quantifying emissions to help assess alignment with net zero.
When applied to the previous budget in March 2021, the NZT revealed that overall, it will undermine progress to net zero, with policies that will drive up emissions – like the fuel duty freeze – equating to more than £40bn.
Only £145m was associated with policies that will reduce emissions. Other opportunities were also missed, such as not applying green requirements on the super deduction for capital allowances.
Many other countries have already adopted ‘green budgeting’ tools to help in the race to net zero, such as France, Ireland, Denmark, and Canada.
Having recently joined the OECD’s Paris Collaborative on Green Budgeting, the UK is well placed to announce a commitment at COP26 to do the same.
Greening public procurement
The UK’s £290bn government procurement budget is another vital tool in promoting net zero innovation.
This year, the UK became one of the first countries in the world to commit to bringing in new legislation that requires companies bidding for major government contracts to commit to net zero by 2050.
Such companies must also have a clear and published transition plan to do so.
Government-led efforts to organise knowledge and build capacity will help to bridge the gap between suppliers and procurement teams in national, regional, and local government.
Canada has opened a Centre for Greening Government, aimed at green technology uptake, both to decarbonise the public sector and to stimulate the broader Canadian green technology sector.
Keeping our international finance promises
Hitting the $100bn (£73.5bn) target at COP26 is pivotal in the global race to net zero.
The UK has doubled its International Climate Finance commitment to help developing nations with £11.6bn over the next five years up to 2025-2026.
It is vital that this is ‘new’ money, rather than being offset by reductions elsewhere (such as the UK overseas aid budget), and that the UK encourages other countries to step up.
Unleashing trillions in private investment
Mark Carney, the prime minister’s finance adviser for COP26, has emphasised the need to redirect the power of the private sector towards net zero by creating a “virtuous circle of innovation and investment”.
Governments must start by translating the Paris Agreement into ambitious national legislated targets and credible climate policies, setting the direction for the new economy and providing certainty for future investment.
This will help companies, banks, insurers and investors develop credible plans for the transition, adjust their business models, and invest accordingly.
As private action intensifies, this will, in turn, help governments to target and amplify the effectiveness of climate policies and investment, minimising the overall cost of transitioning and burden on the public purse, while delivering green growth and jobs.
Transforming global debt capital markets is another priority. With more than US$280trn (£206trn) in outstanding financing and investment, they are by far the largest pool of global capital and exert a profound influence on global patterns of development and investment.
At COP26, the UK must lead by example, ensuring that its financial sector is fully aligned with Paris Agreement targets.
It must commit to requiring all UK-listed companies and financial institutions to disclose and report their climate and nature-related risks, and to publish net zero transition plans that cover their global investments and lending.
Other countries have already taken steps. France now requires all financial institutions to disclose climate and biodiversity-related risks, and to publish information on compliance with the environmental criteria in the EU taxonomy.
As the UK prime minister put it, COP26 is a “turning point for humanity”. Governments must use every tool in their toolbox.
In the UK, bold policy and spending can unleash a wave of green private sector spending, unlocking £90bn of annual benefits, including green jobs and export opportunities; warmer, comfier homes; and more green space for everyone.
Aligning the City of London with climate goals can help ensure that UK trade and investment is helping rather than hindering global efforts to tackle climate change.
This is not just our moral duty – it also makes economic sense. The UK’s fiscal watchdog, the Office for Budget Responsibility, estimates that unmitigated climate change will send UK debt spiralling by up to 290% of GDP by 2100 as the country is forced to adapt to a warming climate.
Early global action to curb emissions will cost far less overall than a delayed response, and will reward us in terms of stability in our economy and public finances.
Glasgow is perhaps the last major opportunity to keep 1.5˚C alive and prevent irreversible damage to our world. With so much at stake, our leaders must succeed.
