Increasing Urgency and Impact to Address Climate Change

Part 2: The importance of policy to enable climate action

It's been a rather long time since my first post on the case for responsible finance. The good news is that there’s been a recent increase in the recognition for the urgency dealing with climate change and the implications for failing to do so. Extinction Revolution has pointed out that climate change really is an existential question, Sir David Attenborough continues to increase consciousness through highlighting the consequences of climate change on the natural world, the politicians are responding by declaring a climate emergency in the UK and serious work is being done on a low carbon transition by the UK Committee on Climate Change.

We need to judge action with respect to the IPCC report to limit climate change to 1.5 degrees Celsius and the increasing nature and scale of climate disasters which affect the poorest and most vulnerable disproportionately. We also need to be mindful of the potential risk of dangerous feedback loops that can create a rapid climate breakdown. But we also need to think about the economic benefits of climate action and the potential for improvements in health and well-being as we create a more sustainable planet based on more intelligent capitalism and longer-term thinking.

The conditions for shifting the financial system to create a more sustainable future are emerging with the realisation that additional investment in fossil fuels is not viable. There’s some vital work going on at a national and sub-national level including the Green Climate Task Force. The Bank of England is raising awareness of the challenges.

Changes in behaviour and the acceptance to act in a more radical way are increasing. People are taking the issue of single use plastic seriously as they see the consequences for oceans and sea life. There is an increasing awareness of the impact of food systems on climate change. People are eating differently and reducing food waste. These are important contributions to the changes we need to make.

They need to be combined with effective and ambitious policy at the international, national and sub-national level. Policy objectives and frameworks need to facilitate for long-term thinking and investment. Good policy, supported by regulation, discourages and penalises bad and self-interested actors.

Despite the proposed withdrawal of the US from the Paris Agreement and the failure to incorporate Article 6 into the Rule Book, the Paris Agreement still provides a robust framework for collective action and increasing ambition. At a national level, NDCs (countries’ commitments to reducing emissions) are generally taken seriously and, in many cases, they are becoming more ambitious and robust.

Since the Industrial Revolution, the UK is one of the largest contributors to global warning. However, the steps taken in the 2005 Energy Act and 2008 Climate Change Act, supported by enabling policies, have set the UK onto a low carbon pathway. Emissions were 43% below 1990 levels in 2017. Renewables roll out has resulted in remarkable decreases in the price of solar and offshore wind. The rate of coal phase out is striking for a country that relied on coal for so many years. The climate targets send a strong signal on the UK’s trajectory as does the carbon pricing. 

There are, of course, limitations. Feed-In Tariffs have sometimes been an inefficient subsidy and, when they change, they result in uncertainty which puts off investors. Little has been done to influence aviation. The prospect of Heathrow expansion is contradictory to reducing long haul flying and the unwillingness to change the fuel price escalator is inconsistent with objectives for increased productivity as well as reduced emissions.

The EU has also been developing far sighted policy on climate change investment through the rules it is proposing on integrating sustainability in the fiduciary duty of investment firms and insurers and its increasing ambition of its Emissions Trading Scheme. In many ways, policy on climate change in the US is going backwards and regulations are being rolled back in an alarming and highly detrimental way. However, the Green New Deal is a radical response and states and cities are ensuring that emissions don’t get out of control.

So how do we reconcile the dilemma? Is climate action happening because of policy or is it being help back because of policy? What can we do about it? So here’s three good things that are happening and three gaps in policy that need to be filled:

Examples of the conditions for effective and ambitious climate objectives and policy:

1. Finance ministers from 23 countries have pledged to back climate action through their policy, tax and spending decisions, in a coalition launched at the World Bank and International Monetary Fund. spring meetings in Washington DC. The coalition signed up to the “Helsinki Principles” for climate-friendly growth. Representing a mix of developed and developing nations, they pledged to align their policies with the Paris Agreement and work towards effective carbon pricing. The principles warn that further warming posed “risks to economic growth and macroeconomic stability”. This could represent a serious attempt to ensure that climate change is reflected in fiscal decisions and country budgets. https://pubdocs.worldbank.org/en/600041555089009395/FM-Coalition-Principles-final-v3.pdf
2. Several countries are considering committing to net zero emissions. The European Commission has proposed a target for 2050. Sweden, Denmark and Norway have adopted net-zero targets in legislation or binding agreement. California has an Executive Order for net zero emissions by 2045. Several countries – developed and developing - are including net zero targets in their NDCs including Ethiopia, Costa Rica, Bhutan, Fiji, Iceland, the Marshall Islands, and Portugal. With the right collective political commitment, there’s a momentum to integrate these ambitions into all policy and budgeting decisions.
3. Orchestrated by the C40 group of cities, the leaders of 19 global cities have committed to eliminating carbon emissions from new building portfolios by 2030. By signing the Net Zero Carbon Buildings Declaration, the mayors of cities including London, Los Angeles and Paris have pledged to introduce planning regulations that will require all new buildings to operate at net-zero carbon by 2030 and all buildings by 2050. Other cities are making commitments and implementing policies to improve air quality, not only reducing emissions but improving health. Ironically, in the UK these policies correct the counterproductive policy incentive in the UK to shifting to diesel cars without taking account short lived climate pollutants that exacerbate climate change and are a major cause of ill health.   

Areas for greater ambition, better aligned collaboration and new climate policy development:

1. Carbon pricing is widely recognised as one of the policy tools - and an important one at that - in the transition to a low carbon economy. But we are a long way away from the level of ambition required. The High Level Commission on Carbon Prices, chaired by Nobel laureate, Joseph Stiglitz and Lord Sir Nick Stern, a leader and first mover on climate change economics, recommended prices of $40-80/tC02 by 2020 and $50-100/tCO2. We are a long way from those prices. We are also not covering enough of the economy. A serious commitment to ambitious carbon prices by the aviation and maritime industries would put them onto a lower carbon trajectory and make their transition less painful. https://www.carbonpricingleadership.org/highlevel-economic-commission-1/
2. Consumption and the way we live our lives is at the heart of the climate challenge. There’s scope to take a system wide view to reducing consumption and accelerating the path to a low carbon future. We can start to get serious about a low carbon circular economy. Policy makers can encourage new business models through the way they regulate and also provide finance where there’s a market failure in early stage development. Nudge policies can encourage citizens to keep products and materials in use through repairing rather than replacing and business, encouraged by appropriate regulations, can help by designing out waste and pollution from their products and services. A combination of ambitious international, national and city policies, supported by behaviour change can change the ways in which we produce, construct and consume.
3. If we don’t deal with rising emissions - and the evidence is mounting that we won’t do it fast enough - there will need to be more fundamental policy development to plan for adaptation and potentially to develop policies for geoengineering. The Global Commission on Adaptation and the associated Global Centre on Adaptation are starting to grapple with policy choices for adaptation. The mounting evidence is that these policies will be expensive and require difficult choices between short-term cost and long-term resilience. Switzerland attempted to introduce a resolution on geoengineering at the UN Environment Assembly in Kenya in mid-March, calling for an assessment of the potential methods and governance frameworks for each one by August 2020. This was rebuffed by the Saudis and the US showing how hard it will be to get agreement to co-ordinated international action.

The policy agenda is making progress with clearer goals setting long-term signals. But policy design and implementation need to remain faithful to ambitious objectives. That will require greater political conviction and clear thinking that avoids contradictory actions on, for example, aviation and fossil fuel exploitation. At the same time, there’s scope for policy innovation and smart design as policy reflects the importance of accelerating the transition to a net zero future.

The more we do now and the greater conviction to effective and ambitious climate policy, the less we will have to make difficult policy choices about adapting to climate change and addressing the costs of runaway global warming. There’s too much at stake to be timid or prevaricate.