Are We Getting Climate Finance All Wrong?

Long term thinking about climate change challenges widely held assumptions about how we spend money today.

It’s widely accepted that by the year 2050, the world needs to be approaching net-zero carbon if the goals of the Paris climate deal are to survive.

This long term rallying point, laid down by experts, has been followed by political commitments from countries, cities, and businesses.  But much of the thinking on financing this ambition remains stuck in the short term. 

Meeting these goals will require enormous progress on energy efficiency, decarbonisation of electricity and fuels, electrification of most transport fleets, building, and industry energy needs.

It will also need massive investments in electricity generating capacity, grid infrastructure, and storage, as well as in both zero-emissions and carbon negative solutions including nuclear energy, carbon capture and storage, soil carbon sequestration, and afforestation and reforestation.

But, despite rapidly increasing clarity on the array of climate solutions needed, the investment implications of achieving midcentury decarbonisation are less understood beyond the need to “scale-up”.

Given the fundamental role finance plays in all facets of the global economy, it’s time to ask: How does a focus on 2050 change how we spend money today?

Answering this question has surprising consequences that challenge assumptions about climate finance as a tool to accelerate effective mitigation.

For example, a fundamental principle of climate economics has been to focus on the “low-hanging fruit” of emissions abatement.  That is, tackling no- or lowest-cost solutions first, like certain energy efficiency interventions, with the rationale that this gives the best immediate bang for buck.  This is captured in the often-referenced marginal abatement cost curves, popularized by McKinsey and Company.

In a mid-century timeframe, however, delayed investment in sectors with high emissions abatement costs, such as buildings or transport, at best delays and at worst radically increases those high costs.

This thinking is best argued by Vogt-Schlib, Meunier, and Hallegatte who make a compelling case that in many high-cost abatement sectors a late, rushed transformation will be more expensive than a progressive, slow shift towards decarbonisation.  This is primarily due to “adjustment costs,” such as the costs associated with abruptly diverting the labor force to retrofit buildings, or replacing infrastructure faster than its useful life.

Read more at Are We Getting Climate Finance All Wrong?