Why Net Zero Without a “Just Transition” Isn’t an Option

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  • While developed markets are likely to have the finance needed to meet their long-term climate goals, in emerging markets the financing gap remains large.
  • To ensure a fair transition, developed markets must help emerging markets find the financing they need – and this is where private investors can have a huge impact.
  • To unlock the necessary private investment, there needs to be greater collaboration between government and the private sector.

While climate change does not respect borders, its impact will be felt much harder by the poorer markets of the developing world.

The world is waking up to the need to act to reduce our dependence on fossil fuels and move towards net zero carbon emissions, but we must make the transition in a way that leaves no one behind.

The big question is how do you find the money to go to net zero? Governments are looking for ways to introduce more renewable energy sources, create cleaner transport networks and make buildings more energy efficient.

While developed markets are likely to have the finance needed to meet their long-term climate goals, in emerging markets the financing gap remains large. According to our latest report, “Just in Time”, emerging markets need close to $95 trillion to make the transition.

Finding funding will not be easy. Higher taxes and borrowing in emerging markets could put more strain on some of the most disadvantaged communities. Household consumption in emerging markets would, on average, be 5% lower per year, impoverishing households by around $2 trillion per year by 2060. It just won’t work.

What we need is a just transition – a transition where emerging markets can reach net zero without sacrificing growth and prosperity. As long as their growth remains heavily dependent on carbon-intensive activities, emissions from many of these markets are likely to continue to rise. The sooner we can get climate finance to them and cultivate more sustainable growth, the sooner they can go to net zero.

Finding funding for a “just transition”

To ensure a fair transition, developed markets must help emerging markets find the financing they need. This is where private investors can have a huge impact.

Of the $94.8 trillion needed, there is an estimated $83 trillion opportunity for private investors. However, as our 2020 report, The $50 Trillion Question, shows, encouraging investment in emerging markets can be challenging.

The world’s top 300 investment firms, with total assets under management of more than $50 trillion, have only 2%, 3% and 5% of their investments in the Middle East, Africa, respectively. and in South America.

Encouraging more private investment could help emerging markets make the transition while increasing growth. If investors help fund a just transition, household consumption in emerging markets could grow by up to 4.5% on average each year by 2060, with emerging market GDP on average 3.1% higher each year during the same period.

Securing this investment is crucial, as the stakes couldn’t be higher. If emerging markets don’t get help transitioning to net zero, they either won’t transition at all, meaning the Paris Agreement goals aren’t being met, or they will transition , but it will have a crippling impact on their economies. To deny these markets the same carbon-fueled development richer nations have enjoyed for two centuries would be unfair and could deepen global inequality and social unrest.

Public-private collaboration

To unlock the necessary private investment, there needs to be greater collaboration between government and the private sector. The public sector will have to use its own funds to encourage private investment. Blended finance, for example, can attract private sector investment by reducing risk, as public money is used to subsidize the cost of capital or mitigate potential losses.

Meanwhile, banks and other financial institutions need to step up and take the lead with innovative financing products for emerging market investments. Low-carbon projects in emerging markets offer great opportunities in terms of potential impact and returns, which would help attract needed capital. As our “50 trillion dollar question” research revealed, 88% of investors said investments in emerging markets matched or surpassed developed markets between 2017 and 2020.

The clean energy shift is key to tackling climate change, but over the past five years the energy transition has stalled.

Energy consumption and production contribute two-thirds of global emissions, and 81% of the global energy system is still based on fossil fuels, the same percentage as 30 years ago. Additionally, improvements in the energy intensity of the global economy (the amount of energy used per unit of economic activity) are slowing. In 2018, energy intensity improved by 1.2%, the slowest rate since 2010.

Effective policies, private sector action and public-private cooperation are needed to create a more inclusive, sustainable, affordable and secure global energy system.

Benchmarking progress is essential to a successful transition. The World Economic Forum’s Energy Transition Index, which ranks 115 economies on how well they balance energy security and access with environmental sustainability and affordability, shows that the biggest challenge facing the energy transition is the lack of preparedness of the world’s largest emitters, including the United States, China, India and Russia. The 10 countries with the highest score in terms of preparedness account for only 2.6% of annual global emissions.

To future-proof the global energy system, the Forum’s Shaping the Future of Energy and Materials platform works on initiatives such as systemic efficiency, innovation and clean energy and the Global Battery Alliance to encourage and enable innovative energy investments, technologies and solutions.

Additionally, the Mission Possible Platform (MPP) works to bring together public and private partners to drive industry transition to put the heavy industry and mobility sectors on an emissions path. net zero. MPP is an initiative created by the World Economic Forum and the Commission for Energy Transitions.

Is your organization interested in working with the World Economic Forum? Learn more here.

More importantly, banks must deliver on the promises made at COP26 if emerging markets are to move to net zero. For example, the Glasgow Financial Alliance for Net Zero, of which we are a key member, will need to fully leverage the leverage of the $130 trillion in assets it represents to achieve our shared climate goals.

In short, the funding required is significant and reaching net zero will not be an easy task. However, despite the mountain we have to climb, we must remain optimistic about our ability to ensure a just transition.

We will all need to act with much more urgency and work tirelessly together on the difficult issues. But then again, given the stakes involved, why wouldn’t we?

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