Economic Issues, Problems and Perspectives
Great Thunberg and other leaders of the environmental movement repeatedly demand that world leaders do more to save Earth from the existential threat posed by climate change. Those demands will be repeated at the next global climate summit (COP27), to be held in Sharm el Sheikh, Egypt, in November. But the question of how much the rescue operation will cost, who will pay for it and how it will be coordinated are likely to go unanswered.
In an FCCJ Book Break event on his recently published book, Who Will Pay to save the Planet? The $100 trillion Question (Nova Science, New York), FCCJ regular member Anthony Rowley argues that the battle against climate change cannot be won in time to avert disaster unless more urgent attention is given to organising and financing it. Following are extracts from the Book and the Book Break.
The bill for rescuing Earth and its inhabitants from the rapidly increasing ravages of climate change is going to be very large - perhaps a minimum of $100 trillion. And it is going to have to be paid by us as taxpayers, savers and investors, and consumers. That's roughly equal to one year's annual GDP of the world, according to estimates from expert sources ranging from the International Monetary Fund and the International Energy Agency to individual investment banks and consultancies.
The cost of dealing with devastating floods and rising sea levels is going to be overwhelming in places such as Pakistan, the Maldives and Bangladesh. But it's going to be huge too in Belgium and Germany, for example, which have suffered serious flooding this year. Forest fires, droughts and crop disasters are just as real in the US, Europe and Australia as they are in Latin America and Africa.
Until quite recently, most people were either in the dark or in denial about climate change, and even now that the impact is being felt from so-called natural disasters – which in fact are largely man-made disasters - such as typhoons, hurricanes, forest fires, floods and rising sea levels, the world remains dangerously divided over what action to take and largely ignorant as to what the cost of action will be.
The critical issue of who will pay for a climate rescue operation has long been neglected. Now that it is finally coming into focus, it is obvious that the deficit of finance is matched only by a deficit of clear thinking on how to marshal and deploy the funds needed to transition from a "brown" to a green global economy.
To quote the then Prince Charles – now King Charles III - at the COP26 summit in Glasgow last November: "We know this will take trillions, not billions, of dollars. Climate change and loss of biodiversity pose a great threat and the world must go onto a war-like footing to combat it." But the world has not done so because it is too divided, economically and ideologically.
What is all this money needed for? A narrow definition would include things like the cost of replacing or modifying multiple thousands of fossil fuel power plants that belch carbon dioxide emissions into the atmosphere, with power plants that use renewable energy. Or the cost of reintroducing nuclear power on a much larger scale than at present. There will be a huge number of so-called stranded assets created in the process of cleaning up power sectors that create CO2 emissions.
The head of sustainable investment at the Institute of International Finance in Washington, Sonja Gibbs said during an FCCJ event that we cannot simply "turn out the lights" on coal or oil and other fossil fuel power stations, in which hundreds of billions of dollars have been invested and which have years or decades to go before their cost has been fully depreciated or amortized.
The transport sector – particularly automobiles - faces a heavy cost in going electric, while households will need to grapple with the cost of clean and green heating and air conditioning. As the IMF has observed, climate change costs will "strain public finances for at least a generation".
A broader definition of climate change costs must take account of the severe impact it will have on physical infrastructure, health and social services. It is possible to pick up a newspaper on just about any day and read about forest fires and floods that devastate vast tracts of land and displace communities, rising sea levels that inundate coastal areas, rivers that burst their banks, scorching sun that buckles railway lines and highways, creating public health crises in the process.
Adapting basic infrastructure to cope with climate change will add trillions of dollars over time in the Asia-Pacific region alone.
Who will pay? China is by far the biggest single emitter of CO2, accounting for 31% of total global emissions in 2020. The world's top five largest polluters – China, the US, India, Russia and Japan – were collectively responsible for about 60% of global CO2 emissions that year. Some argue that countries such as China and India should bear the lion's share of combatting the impact of global warming, but the picture looks different when viewed from a total stock rather than annual flow perspective of emissions over decades or centuries.
While China now emits the highest levels of CO2 annually, it has emitted far less than the US over the past century. The task the world faces is to clean up the mess accumulated in the atmosphere since the industrial revolution. No single country or even group of countries can hope to deal with the problem alone, as global warming is no respecter of national borders. That is why we need a Global Climate Authority. This could take the form of a multilateral agency such as the World Bank that has expanded powers to coordinate national climate actions and to access more funds that would find their way directly into climate-related projects.
Instead, we have seen a series of half-hearted initiatives taken at the national and international level. Yet, while nations can claim sovereignty in some areas, climate change is not one of them. We all sink or swim together. The primary vehicle for coordinating climate actions is the United Nations Framework Convention on Climate Change, introduced in 1992 as a first step toward addressing climate change on a collective basis.
Almost 200 countries have ratified this convention and have pledged to avoid dangerous human interference with Earth's climate system. Three years after the convention was adopted, these same countries adopted the Kyoto Protocol, which legally binds developed countries to carbon emission reduction targets As to how binding these commitments really are in practice is a matter of debate given the absence of a formal body that can sanction any country that breaches voluntarily targets.
The climate battle is not - or should not be - just about governments setting targets. It needs to be about economy-wide plans involving governments, state agencies, private corporations, and savings and other financial institutions, preferably at the international level.
We can hardly blame people for not thinking too seriously about this problem. Even though the Central Intelligence Agency was drawing attention to strang weather patterns as far back as the 1970s, few governments were taking the climate change threat seriously. Some were influenced by energy lobbies - Big Oil and, significantly, Big Coal – that were against cuts in fossil fuel use.
The great greening movement sought to assure us that if we grew enough trees and stopped cutting down forests all would be well. But as Lord David Howell, a former UK energy minister and now a climate activist member of Britain's House of Lords, says: "We can talk about greening until we are blue in the face, but that won't solve the problem of the world's overdependence on fossil fuels."
What will solve the problem - or at least slow down climate change pending the advent of new technologies - is the early closure of CO2-belching power plants. But that will cost a lot of money.
Governments globally collect around $17 trillion a year in taxes, according to OECD data. That sounds like a handy sum for dealing with climate change. But, of course, most of that revenue is already spoken for to cover general government expenditures and debt service on government borrowing. Governments are already borrowed up to the hilt, and with interest rates rising, further borrowing is not an option to cover climate change costs. Governments can always raise taxes, but that hardly seems viable at a time when the global economy is teetering on the brink of recession.
What about all the money in private savings and investments? In a recent blog, IMF managing director Kristalina Georgieva and her director of Monetary and Capital Markets, Tobias Adrian, suggested that firms hold $210 trillion in financial assets, or roughly twice the world’s GDP. But as they noted: "The challenge for policymakers and investors is how to direct a bigger share of these holdings to climate mitigation and adaptation projects." This is indeed a huge challenge. A large part of the holdings they referred to are under the control of asset managers and institutional investors who have preferred to inflate a bubble in tech stocks rather than focus on long-term investments in climate change.
What about Environment, Social and Governance (ESG) investment criteria? Isn't that the answer?Under this scheme, devised by in 2004 by the then UN Secretary General Kofi Annan, some of the worlds biggest companies were urged to incorporate ESG considerations into their corporate vision and strategy. This was a worthy motive, but far too nebulous to direct funds directly into climate change alleviation. Likewise, the 17 Sustainable Development Goals (SDGs) announced by the United Nations in 2015 specify climate change mitigation as only one among several aims. As their name implies, SDGs are no more than goals to which it is hoped public and private development efforts will be directed. They are far from being mandatory or measurable targets with an institutional structure through which financial and other resources can be directed and projects implemented.
The battle against climate change appeared to take on a more tangible form during COP26 with the launch of the Glasgow Financial Alliance for Net Zero, or GFANZ, which is co-chaired by former Bank of England governor and current UN Special Envoy for Climate Change Issues Mark Carney. This private sector-led grouping of more than 450 major firms and private financial institutions from 40 different countries describes itself as a "global coalition of leading financial institutions in the UN's Race to Zero". The race to net zero refers to the fact that some 130 countries have set or are considering a target of reducing greenhouse gas emissions to net zero by 2050. These countries are included in the 190 or so countries that have adopted the Paris Agreement, a legally binding international treaty on climate change reached at COP21 in 2015. The Paris Agreement aims to keep the rise in global temperatures to below 2°C compared to pre-industrial levels by the end of this century, and to pursue efforts to limit the rise to below 1.5 C.by the second half of the present century.
According to the GFANZ, over US$130 trillion of private capital is committed to net zero. Yet the basis on which the GFANZ contributions will be decided among parties to the agreement has not yet been spelled out. Similarly, it is unclear as to whether myriad pension fund investors, insurance company policyholders, mutual fund investors and others whose funds have been committed to the climate change fight will readily agree to having their money used in this way.
It is clear that the battle cannot be financed by either public or private finance working independently. The real money is in the private sector, yet the real organising ability in getting climate projects implemented is in the public sector. That means we have to find better ways of enabling them to work together and combine their resources.
One way in which this might be achieved is by making better use of multilateral development banks, such as the World Bank and regional development banks. These are remarkable and yet under-used institutions. They have the ability to raise huge amounts of loan capital at relatively low rates of interest on international capital markets and to deploy these funds in long-term investment projects - which is precisely what the battle against climate change needs
Ultimately, finding acceptable solutions to the climate change challenge will demand compromise at the political level, so that the burden of global warming mitigation and adaptation can be shared in an equitable fashion. This in turn implies a need for new institutions – or restructured and strengthened existing ones – with a global mandate to plan or coordinate, as well as to finance, climate actions. And it suggests that financial markets will need to work closely with the public sector to ensure the effective distribution and monitoring of climate funds. In other words, it will require a form of quasi-state capitalism capable of collecting and deploying savings on the massive scale required. The COP 27 summit is now only two months away. It will need to be much more specific on the issue of who will pay to save the planet, and how the rescue mission can be better organised, if the meeting is to have any credibility.
Anthony Rowley is a columnist and contributor for The South China Morning Post.