Opportunities that point to history in the making are rare. Entry into force of the Paris Agreement on climate change is a clear exception.
This watershed agreement is now a fully binding legal treaty less than 12 months after it was agreed. This is truly unprecedented. It is among the quickest that any UN multilateral agreement has entered into force, showing that despite rising geopolitical uncertainty, governments more than ever understand the impetus of climate action.
There is, of course, a huge gap between ratifying a treaty and achieving its objectives: especially one whose long-term goal is, essentially, the wholesale transformation of our economies, energy and transport systems away from a reliance on fossil fuels. We can and should invest in and build cities where we can move and breathe and be productive, while protecting the natural world that underpins our livelihoods. This brings with it fundamental opportunities to address broader economic issues.
For governments, multilateral institutions, investors and business now looking to implement the Paris Agreement, much of the answer lies in infrastructure, which is associated with more than 60 per cent of the world’s greenhouse gas emissions, and underpins our economic growth and development. Investing in sustainable infrastructure is key to tackling the three central challenges facing the global community: reigniting growth, delivering on the Sustainable Development Goals, and reducing climate risk in line with the outcomes of Paris.
Over the next 15 years, the world will invest more in infrastructure than the entire current stock. It need not cost much more to ensure this new infrastructure is compatible with international climate goals, and the additional upfront costs can be fully offset by efficiency gains or fuel savings. The smart sustainable choice is also the smart economic option. This is no coincidence.
With government borrowing costs at record lows, there is an obvious case for finance ministries to catalyse, unlock or even contribute to this investment. It was encouraging to hear UK Chancellor Philip Hammond make the case, in his speech to the Conservative Party conference, for “targeted, high-value investment” in the UK’s infrastructure. Surely this means infrastructure “fit for the future” – namely sustainable – strengthening the UK’s competitive advantage globally.
The Global Commission on the Economy and Climate, which I co-chair, has identified actions that should be taken to improve the quality of the world’s infrastructure.
Fossil fuel subsidies are fundamental price distortions that bias our investment away from sustainable infrastructure. Eliminating them would make our air cleaner and our economies more efficient. Action by Indonesia, Egypt and India is promising, as is the G7’s commitment to phase out fossil fuel subsidies by 2025.
We need to go even further to price or regulate the very damaging air pollution, which comes from the burning of fossil fuels and kills millions of people around the world including tens of thousands in the UK. Pricing of carbon is one important means to curb both pollution and provide the right incentives for sustainable investments. Some 12 per cent of global carbon emissions are already subject to existing pricing schemes in 40 countries and over 20 subnational jurisdictions, although in many cases, cautious system design means the carbon price is too low to change behaviour.
Maintaining the Carbon Price Floor that the government introduced in 2013 is vital to ensuring that the UK continues to decarbonise its energy system, while helping level the playing field for the very technologies on which future low-carbon industrial growth will be based. And now more than ever, the government should stay the course: low-carbon growth is the direction of travel for the future.
Governments also need to work to transform the financial system to deliver the quality of investment needed, shifting from a short-term to a long-term view. They can start by encouraging the growth of the green bond market and building global standards. Especially in the post Brexit era, the City of London should seize the opportunity to lead as an international hub of excellence in making this happen.
Governments can also look to support green banks, such as the UK’s trailblazing Green Investment Bank. It has leveraged £3 of private investment for every £1 of public money it has deployed and is now turning a decent profit. As it moves forward towards privatisation, it is vital to maintain its green mandate. Governments should also take-up the work of initiatives such as the Task Force on Climate-related Financial Disclosure. It is coming forward shortly with recommendations for voluntary disclosure of such risks, which can help investors make better informed choices, and governments need to look at how to quickly move to mandatory reporting.
Meeting the goals of the Paris Agreement is an environmental imperative but it is also an unmissable economic opportunity. Those countries that can properly incentivise and support investment in low-carbon infrastructure will be best positioned to revitalise their economies, boost innovation and spur competitiveness. And they will do so while also meeting the challenge of climate change. This is vital to boost demand now and is the growth story of the future.
Nicholas Stern is the I.G. Patel Professor of Economics and Government at the London School of Economics and Political Science and Co-Chair of the Global Commission on the Economy and Climate.
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