Aligning Finance Is the Forgotten Goal of the Paris Agreement, But It Is Vital to Successful Climate Action
The 2015 Paris Agreement broke new ground by including, as one of its three long-term goals, a commitment to "making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development." This is (Article 2.1c).
It doesn't make headlines as often as the other two long-term goals: to limit global average temperature rise (Article 2.1a) and to increase the ability to adapt to climate impacts (Article 2.1b). However, without aligning finance, the mitigation and adaptation goals will not be achieved.
Why Finance Matters
The Paris Agreement's long-term goal on finance marks the first time countries in the United Nations climate negotiations have set a collective goal reflecting the full scale of effort needed on finance to address climate change. The negotiations have historically focused on public funding from developed to developing countries. This funding is vital, particularly for the poorest and most vulnerable developing countries, but is only part of the picture.
Focusing only on a subset of public funding to assess progress on finance would be like examining only carbon dioxide emissions to assess progress on mitigation. To be sure, CO2 is a key driver of climate change, but without looking at all greenhouse gases and all the major emitters, we won't successfully address the problem. Negotiators understand the need to look at all emissions; similarly, Article 2.1c recognizes the importance of looking at all finance—public and private, domestic and international—and ensuring it supports (and doesn't undermine) the transition to a net-zero greenhouse gas emission, climate-resilient world.
How to Shift Trillions
To give a sense of the scale of the challenge, the Intergovernmental Panel on Climate Change (IPCC) cites the global stock of financial capital at $386 trillion. What would it take to make these trillions of dollars consistent with low-emissions and climate-resilient pathways?
Our new paper, Making finance consistent with climate goals: Insights for operationalizing Article 2.1c of the UNFCCC Paris Agreement, proposes a three-part framework for how governments and other stakeholders could think about implementing Article 2.1c: (1) drive action to mobilize and shift finance; (2) track progress against Article 2.1c; and (3) increase ambition.
Change must come from both public and private actors. But this will not happen passively; there is a need for interventions to drive the real economy's demand for low-emissions and climate-resilient finance and to increase supply of climate-compatible finance.
There are four key sets of tools that primarily governments can employ to shift finance:
- Financial policies and regulations, which influence behavior through force of law. For example, in 2015, France passed a law requiring mandatory climate reporting by asset owners and managers.
- Fiscal policy levers, which influence behavior through price signals. For example, in 2011, Uruguay implemented renewable energy auctions and feed-in tariffs that drove rapid wind energy development.
- Public finance, whichinfluences behavior by shifting financial risk. For example, the creation of green banks and climate funds to fund emissions reduction and climate resilience activities, and commitments by multilateral development banks to ramp up their climate financing and scale down support for fossil fuels.
- Information instruments, which influence behavior by raising awareness about climate risks and opportunities. For example, in 2017, the Task Force on Climate-related Financial Disclosures launched a framework for companies to disclose climate-related risk in financial filings to investors and other stakeholders.
While our analysis focused on finance-specific policies, policies and practices in other sectors, such as renewable energy mandates or incorporating climate projections into agricultural planning, also play a critical role by shaping the broader investment environment.
There is already a lot of action taking place to support the objectives of Article 2.1c. However, with billions of dollars of investment still going to activities that are incompatible with climate goals, such as fossil fuel subsidies of over $373 billion in 2015, there is clearly a long way to go to realize the goal.
What Can Be Done, In Negotiations and Beyond
Governments, the private sector and civil society all have critical roles to play in driving action, tracking progress and raising ambition. The workload is substantial, and it will be important to further map, coordinate and build on existing initiatives, as well as develop new ones, to achieve the objectives of Article 2.1c.
There are steps to be taken within and beyond the scope of climate negotiations:
- Within the UN climate negotiations – ensuring that the implementation guidelines for the Paris Agreement (to be agreed at COP 24) clarify and build upon provisions of the Agreement to support action that countries can take towards meeting Article 2.1c. Negotiators should ensure the Global Stocktake, the collective assessment of progress that will take place every five years, looks at progress in making all finance flows consistent with climate goals, and allows inputs from the wide variety of sources that have the vital data to do this. Countries could also voluntarily include commitments on aligning finance in their future nationally determined contributions (NDCs) and then report on progress towards these through the enhanced transparency framework.
- Beyond the negotiations – informing and mobilizing key actors, including public finance institutions, investors and business groups, to support efforts to make finance flows consistent with climate goals. There is also a need to ensure existing initiatives deliver on their past pledges as well as setting new ambitious Paris-aligned commitments. Some of the initiatives raising ambition include green budgeting and efforts to mainstream climate resilience into development finance. In the near-term, the UN Secretary-General's 2019 Climate Summit and the associated Climate Finance Leadership Initiative provide opportunities to assess progress, increase cooperation and galvanize new pledges to meet the finance goal.
There is an urgent need to act fast. The recent IPCC report found that to keep warming to 1.5°C, the world needs to reach net-zero greenhouse gas emissions within 25 years, and that this will require a 'major reallocation of the investment portfolio'. More starkly, emissions are currently on a course to exceed the 'carbon budget' for 1.5°C by 2030. There is no time to delay.
LEARN MORE: for more on Article 2.1c, download our new paper, Making finance consistent with climate goals: Insights for operationalizing Article 2.1c of the UNFCCC Paris Agreement.