Rachel Kyte :
Last weekend, the leaders of the G7 committed to a series of actions that mark their first serious recognition of the economic transformation that is ahead of us.
Collectively, they recognized the need to decarbonize the global economy, enshrining in economic cooperation what the scientists in the IPCC told us last year in their Fifth Assessment Report. They called for ambition at the Paris climate talks this year – not new, but they recognized that they, individually and collectively, need to be in the upper part of the ambition bracket and that that means at least a “transformation of the energy sector by 2050.”
They talked about the mobilization of capital for this transformation, as well as ending the increasingly profligate use of harmful fossil fuel subsidies. Recognizing the need for an orderly transition to low-carbon growth as quickly and as smoothly as possible, they took on some degree of leadership around the pledge to provide $100 billion in climate finance for developing countries from public and private sources before 2020. More on that in a moment.
Pricing and policies
As part of their commitments to mobilize finance, they put a finger on three areas where they need much greater policy coherence in their economic management: The need to get prices right, the need to use all instruments and levers available, and the need to attack all sources of the pollution causing dangerous warming. We are glad to see such coherence at this level.
The G7 called for “carbon-market based and regulatory instruments” as one example of effective policies and actions to reduce emissions – that is recognition of the need for carbon pricing. Pricing is an essential, if insufficient, piece of the policy package. Some G7 members have operated within carbon pricing mechanisms for several years, others have watched their states and provinces move forward unilaterally. Others are watching their neighbors moving ahead. This recognition that we all need to move forward is very important.
The G7 also acknowledged that harmful fossil fuel subsidies need to be removed and that to subsidize on the one hand and to price on the other makes no sense and, one could argue, undermines the investment and innovation that comes from clear, consistent long-term economic signals, the kind that the Business & Climate Summit called for a couple of weeks ago. Additionally, the G7 announced a commitment to phase down HFCs – short-lived climate pollutants used in refrigeration – and called on the Montreal Protocol parties to amend the protocol this year. This Montreal-to-Paris journey is of increasing importance, and if progress were made, could buy essential time in the battle to slow warming.
Adaptation and resilience
At the same time, we were very pleased to see commitments and support for the critical adaptation and resilience agenda. We have argued strenuously that the richest cannot leave the most vulnerable unsupported between now and 2020 (when whatever is agreed in Paris comes into force). The economic rationale for investing in the resilience of the poorest and most vulnerable as well as the avoided cost in terms of human life is substantial.
The commitment to extend catastrophe risk insurance and the extension of early warning systems, championed by German Chancellor Angela Merkel and French President François Hollande are first steps in ensuring that least-developed countries and small island developing states can have the means to withstand shocks and disasters and bounce back better.
Speed and strategy
But of course their long-term economic prospects depend to a large extent on the deep cuts in emissions that the G7 signals it understands are needed and needed now.
So, how quick and orderly can this transition to low-carbon growth be? That’s exactly the work we are focused on here. In our recent publication Decarbonizing Development: 3 Steps to a Zero-Carbon Future we talked about the steps policy makers can take.
We are pleased that the G7 leaders’ commitment to a strategic dialogue on carbon pricing will boost the remarkable partnership that is ongoing among leaders, governments, and companies on how, with what effect, and with what other policy accompaniments carbon pricing can best be introduced.
Working closely with the IMF and OECD, we are close to completing a technical document that examines effective pricing, and, working with many of those who supported the Put a Price on Carbon Statement in October 2014, we are close to completing a set of principles that describe the fundamentals of effective and efficient carbon pricing. All of this will be championed by leaders through the rest of this year and into next. From the groundswell of support, we and our partners in international development, business and government are forming a Carbon Pricing Leadership Coalition committed to collective action to support the development effective carbon pricing regimes at country, state and city levels.
Stretching dollars
However, as the G7 signaled, there is a short-term litmus test of climate leadership in the politics of the UNFCCC – the mobilization of $100 billion a year from 2020. Highly leveraged and catalytic public monies can mobilize private finance to, for example, close the energy access gap and shift to cleaner, more efficient energy at affordable prices.
We are glad that the role of MDBs is recognized in the G7 communique and that we are called on to stretch our balance sheets and to continue to use our financial innovation and engineering capacity to crowd in other sources of capital for climate action. Part of our leverage capacity will be to help the Green Climate Fund leverage itself as it comes into operation. We have been extending our capabilities, from developing innovative auctions to support methane-reduction projects, to pay-for-performance systems for avoided deforestation, to green bonds and landmark agreements with other financiers to account for our climate lending. There is more to come.
We will over the summer be reporting more on progress made in how we track our finance and on the levels of finance we are already achieving toward the $100 billion target, and we will make commitments of what more we can do in advance of Paris.
Clearly, we see that all development finance needs to build resilience and adaptative capacity, and in a year when development finance will be discussed both in Addis Ababa at the Financing for Development summit in July and at the Leaders’ Summit on the Sustainable Development Goals in September, we will keep our focus on the need to boost financing for adaptation as well as mitigation.
It is important that the G7 is leading from the front now, before a busy summit series on development and climate change where financing will prove to be an essential ingredient in any agreements. Now, G7 leaders will have to follow their words with actions in their INDCs, where not already issued, in the way they conduct their economic, trade and development agendas, and in the way they partner with their private sectors.
In the Financial Times over the weekend, peering out from the pink pages was an ad, calling for the Chancellor to be a “climate hero.” Maybe at a time when Hollywood still seems so reticent to make the female-lead superhero blockbuster that everyone wants, we need only to look to Berlin. With a lot on her plate, from GREXITS to BREXITS and neighborhood disputes and trade rows, she still managed to get the G7 to look up from their short-term crises and put down a much needed marker for the type of long-term economic leadership we are crying out for.
(Rachel Kyte is World Bank Group Vice President & Special Envoy for Climate Change)
