Lhe question of financing climate action is the main source of mistrust between countries of the North and the South, but also the greatest obstacle to limiting global warming to a level well below 2°C. Known, tried and tested financial instruments are available, but they are underutilized. The most pressing question is how to make them work in credible North-South partnerships. If we don’t meet this challenge, everyone will lose.
We have however, with the paris agreement, a common and shared agreement and a legally binding treaty signed by 196 countries. We have increasingly proven alternative technologies to fossil fuels, the costs of which are falling rapidly. We have a lot of academic work on how to insert them into systemic shifts and shifts in our consumption patterns to create climate-resilient, more equitable, job-creating development pathways.
All of this is doable, but requires large-scale investment. It is relatively easy for the 15% of the world’s population who live in the richest countries, but much more difficult, with their own means, for the 85% of the world who do not have the same financial means and must accomplish a major leap in their social and economic evolution. Finance is the fulcrum on which these changes depend.
Governments need to orchestrate the energy transition just as strongly as they did to respond to the pandemic, but most of the financing will come from the private sector. The overall size of the global financial system is $400 trillion (€384 trillion), with annual growth of 7%, or $28 trillion more each year. Reallocating just a quarter of the annual growth in returns from these financial assets to climate change mitigation would be enough to cost-effectively finance the estimated $5 trillion to $7 trillion needed each year to ensure climate transition on a global scale in the next twenty years. There is therefore no problem of overall macro-financial constraint.
Capital reallocation
The main problem is to reallocate capital from where it resides, overwhelmingly in the richest regions of the world, i.e. in the North (75% of global assets), to where it is most lacking in the South, in developing countries. Absent such reallocation, much of global finance is generating low or negative returns in wealthy country banking systems, or moving towards repeated speculative bubbles in assets such as cryptocurrencies, corporate “zombies” and overinflated real estate markets. Six approaches are jointly needed to bring the global financial system in line with the Paris Agreement, none of them constituting a silver bullet.
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