Lessons from the EBRD regions
An extended version of this article will also appear in the October issue of European files magazine under the title “Promoting synergies between public and private networks in green finance”
The world is running out of time to act on climate change. The 2015 Paris Agreement has committed the world to limit global warming to well below 2°C and stay as close as possible to 1.5°C above pre-industrial levels. To achieve these goals, global greenhouse gas emissions need to reach “net zero” by the middle of the century. Urgent action is needed.
Financial regulators are also sounding the alarm bell. The task force on Climate-related Financial Disclosures and the Network for Greening the Financial System warn that climate-related risks could lead to declining profitability and impact overall financial stability. Enhanced disclosure of climate-related risks will allow financial markets to better account for them in companies’ valuation. To borrow the words of France’s Minister of Economy and Finance, Bruno Le Maire: “Finance will have to be green, or there will be no finance at all”.
As economies move towards climate action, new investment opportunities are emerging. The Stern Review authoritatively stated that the economic costs of climate change were far greater than the costs of preventing it through emission reduction. New evidence also shows that rather than economic development and climate action being a trade-off, tackling both together can be mutually reinforcing. For example, falling costs of renewables combined with emerging technologies for energy storage have the potential to tip the economics in favour of low-carbon options.
However, neither focusing on financial regulation nor shifting economic incentives alone will be sufficient. Enhanced collective action – both between countries and between the public and private sectors – are crucial to tackle this agenda. The EBRD works in nearly 40 economies and leveraging synergies between the public and private sector is fundamental to our mission. We focus on four areas to tackle the climate challenge.
First, countries need to aim their emission reduction targets towards “net zero”. This will send a clear signal to private investors. The Paris Agreement is built on the premise of periodically reviewed and adjusted national commitments, providing a framework for all countries to contribute to climate action regardless of their level of development. This leads to legally binding commitments. We have seen commitments to achieve net zero emissions combined with formal instruments from Denmark, the European Union, New Zealand, Norway, Sweden, the United Kingdom and State of California, the United States of America, while others such as Ethiopia and Costa Rica have similar ambitions. The EBRD is supporting Ukraine to develop its nationally determined contribution.
Second, commitments need to be backed by policies. Developing a clear carbon price is crucial, though not sufficient in itself. In most economies where the EBRD invests carbon is generally not priced at levels adequate to shift financial flows. Meanwhile, pervasive subsidies are distorting the market in favour of fossil fuels. We also know that a stable regulatory environment is critical to attracting private finance. For example, in Egypt we developed a bankable regulatory and contractual framework for renewable energy investment. This led to the financing of the Benban complex, the largest solar plant complex in Africa, involving 16 private-sector companies with a project value of over US$ 1.1 billion.
Third, more attention must be paid to achieving net zero emissions in “hard-to-abate” sectors. The Energy Transitions Commission, an experts’ group to which the EBRD has contributed, has shown that greenhouse gas emissions need to be reduced and then eliminated from the aviation, cement, heavy road transport, plastics, shipping and steel sectors. Reducing emissions will rely on improving energy efficiency, reducing demand for carbon-intensive products, or new technological approaches such as electrification, carbon capture or widespread use of hydrogen. Such technologies are either commercially viable or under development. Bringing them to scale will require industries to work together with policymakers. The support the EBRD provides in this area ranges from developing a low-carbon roadmap for the cement sector to improving the energy efficiency of the steel sector across Poland, Slovenia, Turkey and Ukraine.
Lastly, given the scale and speed of the transformation, we must support those who will experience adverse consequences. The need to ensure that climate action is also socially inclusive was stated in the Paris Agreement. Managing the socio-economic consequences of declining industries and designing climate policy to overcome undesired distributional impacts (such as increasing fuel poverty) is crucial to increase the political acceptability of decarbonisation. The European Union has recognised the need to support coal regions as a priority and established a “Platform for Coal Regions in Transition” to facilitate economic diversification and reskilling of workers. The EBRD supports the economies where it invests in combining policies and investment to facilitate the concept of “just transition".
It is through such coordinated action and by leveraging synergies between public and private networks that we can effectively tackle the climate challenge.