Amid the COVID-19 pandemic and its accompanying economic gyrations, the world’s 20 biggest economies have been battered by heatwaves, floods, wildfires, droughts and cyclones — all urgent reminders of the need to tackle climate change. In response, the G20 countries enacted aggressive recovery and response packages for the virus and the economy, but largely ignored the climate crisis by focusing on business-as-usual and carbon-intensive solutions, making unconditional investments of $262 billion in fossil fuels and only $67 billion in clean energy.
These same countries have committed to reach the temperature, adaptation and finance long-term goals of the Paris Agreement. However, failure to make the G20’s recovery spending environmentally sustainable will lock in the worst impacts of climate change. But these countries still have the time and tools to build back better.
What Tools Do Recovering Governments Have for Climate Action?
While there is extensive literature on the policies and tools governments need to implement to reach these goals, less has been written about how COVID-19 recovery and response packages could be structured to reach the Paris Agreement goals. New WRI research proposes a typology of Paris-aligned policies and interventions that governments can use in future recovery packages or economic policymaking.
Our research analyzed the existing literature on what it will take to align with the Paris Agreement, looking at government levers, policies, and interventions to see which ones align finance flows with Paris goals and which ones are consistent with our current, carbon-intensive economy. We found governments had five levers available to set climate policy: monetary policy; financial and real-economy policies and regulations; fiscal policy and budget support; public finance, and information instruments (such as voluntary disclosure).
Five Types of Policy Levers Governments Can Use for Paris Alignment
Monetary policy: Central banks and other banking authorities are increasingly using their tools to provide the right price signals and incentives to align finance flows with climate goals. Monetary policy addresses interest rates and the supply of money in circulation. These tools will likely become more important as alignment efforts accelerate.
Financial and real-economy policies and regulations: This lever influences behavior through force of law, where mandatory and enforced. It covers legal requirements or standards in the financial sector and real economy (e.g. the energy, transport, agriculture, or water sectors). In most G20 countries, the real-economy (i.e., sector-based) policies and regulations are critical to investment decisions.
Fiscal policy and budget support:Governments can use this lever to influence behavior by changing price signals. This could be through taxes, subsidies, price support or controls, or even direct budget allocations and expenditures.
Public finance: This lever aims to influence behavior by shifting financial risk and is provided by public pension funds, sovereign wealth funds, and international and national public finance institutions (like national development banks). This includes instruments like grants, loans, equity stakes, or guarantees.
Information instruments:These aim to influence behavior by raising awareness. Examples include nonbinding recommendations or certification processes, transparency initiatives, corporate or national strategies, plans, or frameworks.
Source: WRI authors, adapted from Whitley et al. (2018)
Figure ES-1 | Typology of Paris-Aligned Interventions
Financial and Real-Economy Policies and Regulations
Fiscal Policy and Budget Support
Public Finance (from Government-owned Financial Institutions)
Addition of climate risks to macroeconomic models and forecasting tools
Climate-informed stress testing of financial institutions
Consumer-specific subsidies and tax rebates for green goods and services
Investments in climate-positive infrastructure
Strategies, voluntary disclosures, standards or frameworks, roadmaps, guidance documents, etc. (nonbinding)
Adjustment of collateral requirements for financial institutions to reflect climate-related risks
Mandated disclosure of climate risks
Divestment of public funds from emission-intensive holdings
Liquidity support to financial intermediaries, SMEs, or other institutions with decarbonization or climate conditions
Adjustment of interest rates for financial institutions to reflect climate-related risks
New or reinforced climate or environmental policies or regulations
Design or implementation of climate-driven budget process
Structure, issuance, or purchase of sovereign green bonds
Analysis of climate-related implications for current monetary policy regimes and risk management practices
Establishment and/or reinforcement of carbon pricing mechanism
Climate-informed quantitative easing
Issuance of sovereign green bonds
Investments in climate-positive infrastructure from government expenditures and public budget programs
Investments in workforce development, including skills training and provision of educational opportunities
Liquidity support for companies in carbon-intensive industries with decarbonization or climate conditions
Liquidity support with climate conditions for small and medium enterprises (SMEs), non-carbon-intensive businesses or institutions
Mandated green public procurement
Removal or reduction of publicly funded support for coal, oil, gas, or other fossil fuel subsidies
Research and development in green and/or sustainable technology
Note: This typology is based on an extensive literature review and meant to be indicative, but not exhaustive, of the tools available to policymakers. These levers can be applied to all sectors. The trackers and literature review covered agriculture, buildings, disaster risk management, energy, finance, health, industry, information communications technology, nature, social protection systems, transport, urban areas, and water and waste management.
Sources: Authors, based on Whitley et al. (2018); Vivid Economics (2020); Buckle et al. (2020); Larsen et al. (2020); Hepburn et al. (2020); Allan et al. (2020); and Network for Greening the Financial System (2020, 2021).
We tested this typology using five COVID-19 rescue and recovery trackers from other organizations. We examined the domestic and international policies and interventions that G20 countries enacted between March 1, 2020 and January 31, 2021. These tests allowed us to identify trends – and gaps – in how G20 countries’ COVID rescue and recovery packages were and were not aligned with the Paris goals. Our typology provides a policy toolkit that can be applied across every relevant sector to align finance flows with the Paris Agreement.
G20 Countries Aren’t Doing All They Can to Make Recovery Greener
When it comes to assessing how the G20 COVID-19 rescue and recovery packages align with the Paris Agreement, we identified the following trends:
Countries are using only a small subset of the Paris-aligned levers and interventions available. For example, in their COVID-19 recovery packages, very few G20 countries mandated disclosures of climate risks, implemented carbon pricing mechanisms, divested public funds from emission-intensive holdings, reduced subsidies for fossil fuels or invested in retooling the workforce.
Countries preferred shorter-term, business-as-usual interventions under the fiscal policies and budget support levers. These interventions often included either liquidity support without climate conditions for carbon-intensive industries, small and medium-sized enterprises, and financial intermediaries or investments in current or traditional infrastructure. These preferences suggest significant systemic inertia.
Most interventions — either business-as-usual or climate-positive — were targeted at the energy sector, followed by the transport and buildings sector. Governments used real-economy policies and regulations to advance support for renewable energy but also froze or repealed existing environmental or climate regulations. Through tax incentives subsidies, and direct budget support, countries are advancing renewable energy generation, retrofitting public buildings and private homes, and accelerating the transition to low-carbon road transport systems. Simultaneously, governments targeted liquidity support at carbon-intensive industries to alleviate their financial pressures. These were largely enacted without decarbonization or climate conditions, pointing again to governments’ preference for systemic inertia.
Almost all countries are missing opportunities to invest in adaptation or resilience and none are systematically considering the climate resilience of all investments. Only four countries explicitly included adaptation or resilience in their COVID recovery packages. The adaptation measures supported were in the agriculture, water, and disaster risk management sectors.
Implications for Policymakers and How to Turn the Tide on Spending
Continued failure to rapidly shift both COVID-19 recovery spending and all other government spending toward Paris-compatible pathways is making all Paris goals unattainable. Although some G20 countries used climate considerations in their recovery packages, these were outweighed by business-as-usual interventions. Given that we must cut emissions in half by 2030 to keep global temperature rise to 1.5 degrees C (2.7 degrees F) over pre-industrial levels, this spending profile is putting the Paris goals out of reach.
G20 countries need to begin using every tool at their disposal to support the Paris transformation. This typology could provide a starting point.
More specifically, G20 countries can take the following steps:
Align financial operations with the Paris Agreement: Countries need to develop and implement an operational understanding of Paris-aligned financial flows (including for sovereign wealth funds, public pension funds and national development banks), follow the Group of Seven (G7) by requiring climate risk disclosures in line with the Taskforce on Climate-Related Financial Disclosures, and transparently report progress. Countries should collaborate with the World Bank, International Monetary Fund, and other stakeholders to ensure that all countries have access to high-quality climate data.
Prepare for risks and impacts: Governments should ensure that all investments consider future physical climate risks and proactively adapt their infrastructure, systems, and communities. There is an alarming lack of adaptation and resilience considerations in recovery packages. Continuing this trend jeopardizes the longevity, reliability, and value of any investment. Governments should systematically use screening tools to consider the physical and social impacts of current and future climate risks of investments and programs.
International leadership: G20 countries should use all their political will and institutional leverage to encourage peers to pursue and demand Paris-aligned investments. This could include enacting Paris-aligned domestic policies, advocating for greater climate ambition at the multilateral development banks, or committing to inclusive and climate-just processes under the international climate negotiations.
The window for climate action is closing, rapidly. While some progress was achieved at the Rome Leaders’ Summit, much more remains to be done. The time is now for G20 countries to use all five levers of policymaking to implement Paris-Aligned tools and interventions and to lead the way towards the low-carbon, climate resilient economy of the future.