With national climate commitments and a renewal of multilateralism both gaining momentum, there is a unique opportunity to forge a global consensus on issues such as carbon pricing, the green transition, and sustainable finance. In each case, the European Union offers a promising model for others.
The COVID-19 pandemic has caused the largest decrease in global economic
activity on record. But the drop in carbon dioxide emissions has been
only temporary. Although global CO2
emissions fell by 6.4% overall in 2020, they had already begun to
increase in the second half of the year and have now returned to
pre-crisis levels.
The fact that last year’s extraordinary
circumstances still did not bring global emissions into line with the
targets set by the 2015 Paris climate agreement is a stark reminder of
the scale of the challenge we face. As the Nobel laureate economist
William Nordhaus
reminds
us, climate change is the quintessential global externality.
Its
effects are spread around the world and no country has sufficient
incentives or capacity to solve the problem on its own. International
coordination is therefore essential.Fortunately, a return to
multilateral cooperation through the G7, the G20, and the Financial
Stability Board offers a unique window of opportunity. Following US
President Joe Biden’s decision to rejoin the Paris agreement, the
European Union’s commitment to reach carbon neutrality by 2050, and
China’s pledge to do the same by 2060, we may now be at a turning point
for global climate action
Three priorities stand out on the
international agenda. The first is the need to increase global carbon
prices. Putting a higher price on carbon is the most cost-effective way
to reduce emissions at the necessary scale and speed. By internalizing
the social cost of emissions – making emitters pay – carbon pricing
leverages the power of markets to steer economic activities away from
carbon-intensive activities.
Currently, carbon prices are far too low.
The International Monetary Fund calculates that the average global
carbon price is only $2 per ton. And, according to the World Bank, only 5% of global greenhouse-gas emissions are priced within the range required to achieve the Paris agreement’s goals.Here,
advanced economies can lead by example and use the current policy
window to commit to carbon-price paths consistent with the Paris accord.
Although smaller advanced economies account for only a limited share of
global emissions, their adoption of decisive decarbonization measures
could encourage developing countries to follow suit.
The second priority is to use the recovery from the COVID-19 pandemic to “build back better.”
Decisions made now will shape the climate trajectory for decades to
come. Policymakers should seize this opportunity to set the global
economy on a sustainable growth path. The EU recovery package – Next
Generation EU – lives up to that ambition.
The third priority goes to the heart of the financial system and central banking:
financing the green transition. Phasing out fossil fuels implies the need for massive investment, even if
estimates
of the precise figure are subject to significant uncertainty. Looking
beyond emissions reductions to the broader sustainability agenda, the
United Nations estimates that implementing the 2030 Sustainable
Development Agenda will require global investments of
$5-7 trillion per year.
To fill this gap, it will be crucial to mobilize the resources of financial intermediaries, including banks.Sustainable-finance
products – such as green lending, green and sustainable bonds, and
funds with environmental, social, and governance (ESG) characteristics –
have grown dramatically in recent years. Unfortunately, the field
suffers from information asymmetries and insufficient transparency.To
foster the growth of sustainable finance, many countries have started
developing regulatory frameworks to combat “greenwashing,” and the EU is
at the forefront of these efforts. Yet in the absence of global
coordination, different jurisdictions have developed different
approaches, and industry-based initiatives have proliferated.
The resulting edifice of inconsistent and incomparable standards, definitions, and metrics has fragmented
sustainable-finance markets, reducing their efficiency and limiting the
cross-border availability of capital for green investment. As
jurisdictions compete to attract finance, the risk of regulatory
arbitrage and a race to the bottom has grown. If left unaddressed, this
trend could result in lower standards globally, increasing the
likelihood of greenwashing.But we now have an opportunity to start
devising a common global approach. Sustainable finance is a top priority
for both the G20 under its Italian presidency and the G7 under its
British presidency. Moreover, in a public letter
shortly after her confirmation, US Secretary of the Treasury Janet
Yellen called for an upgrade to the G20’s sustainable-finance working
group to “reflect its importance.”A key first step is to agree on
minimum standards for corporate disclosures.
If a company’s
sustainability performance is unclear or unknown, ascertaining the
sustainability of the related financial assets is impossible. We must
replace the current alphabet soup of reporting frameworks with a common
standard. To that end, the EU’s approach – including the ongoing
revision of the Corporate Sustainability Financial Reporting Directive –
represents an advanced benchmark toward which any international
standard should aim.For a common standard to launch a race to the top,
it must not fall short of the best international practices. It should
cover all ESG aspects of sustainability. And it should require companies
to disclose not just issues that influence enterprise value, but also
information on the company’s broader environmental and social impact
(known as “double materiality”).A second and even greater challenge is
to ensure that countries develop consistent classifications of what
counts as sustainable investment. If an activity or asset is considered
sustainable in one country but unsustainable in another, there cannot be
a truly global sustainable-finance market...
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