How Would a Low Carbon Economy Work?

What would a green financial system that encourages net zero greenhouse gas emissions look like?

It would have to reduce the risks of high-carbon assets while simultaneously scaling up capital for the low-carbon transition.  But who would set the ground rules, and what role would there be for investors?  It would mean a rechanneling of trillions of dollars of private capital.  Can this be done in a way that doesn’t threaten the world economy?

These are key questions in an ongoing dialogue among global business leaders.  The discussion became public last month at a one-day summit meeting in Paris that showcased solutions and highlighted actions taken by a growing number of pioneering bankers, insurers and institutional investors.  They had come together under the auspices of the United Nations and the French government to suggest low-carbon policies.  Then they were asked how the new policies might work if they were applied together.

“The question is how to shift trillions,” was the way France’s finance minister, Michel Sapin, put it in his opening speech.

At this meeting, unlike at climate change meetings in previous years, there was a new array of policy tools to draw upon.  They ranged from placing “green financing” on balance sheets to getting banks to set up strategies for “environmental risk management” and pushing the insurance sector to pay closer attention to climate risks in its investment portfolios.

Public authorities are doing their part, insisted Sapin, citing a decision by the Group of 20 major economies to set up climate risk analyses of the financial sector as an important indicator of how attitudes have shifted.  The U.N. Green Climate Fund has signed up $4 billion in contributions, with the 50 percent threshold for triggering payouts sure to be reached before the U.N. climate conference convenes in Paris in December.  As for the French government, Sapin took evident pride in announcing the passage of an energy transition bill mandating the measurement of carbon footprints for all institutional investors in France.
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The World Bank estimates that over the next 15 years, the global economy will require $89 trillion in infrastructure investments across cities, energy and land-use systems, and $4.1 trillion in incremental investment for the low-carbon transition to keep within the internationally agreed limit of a 2-degree-Celsius temperature rise.

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