Accelerating Paris-Aligned Financial Flows: A Typology for Facilitating a Paris-Aligned COVID-19 Recovery
This paper discusses the COVID recovery packages of the G20 countries and assesses the Paris alignment of stimulus actions taken by these countries against a new typology for policies and regulations and their climate implications.
To confront the economic upheaval induced by the COVID-19 pandemic, the world’s 50 largest economies announced over $14.6 trillion in stimulus over the course of 2020. These funds also represent a massive down payment on future economic pathways—which is why it is essential that the COVID-19 recovery accelerate Paris alignment.
Unfortunately, G20 countries have not been able to provide global leadership in this regard. Instead, recovery packages show no systematic consideration of climate risk, and policymakers have not taken advantage of the full range of tools for green recovery at their disposal. To the extent that the recovery has preferred business-as-usual policies—especially in energy, transport, and the building sectors—it has raised the long-term cost of climate action. Failure of G20 countries to green COVID-19 recovery could make all Paris goals unattainable.
We conducted an extensive literature review to build a typology of policies and interventions and their implications for Paris alignment. We also interviewed governments to understand their motivations, processes, and challenges. In the end, we found that where Paris-compatible interventions occurred, countries benefited from having “shovel-ready” projects, and had already integrated Paris-compatibility into their project planning process before the pandemic.
Going forward, G20 countries should consider a multifaceted approach to Paris alignment and recovery, leveraging the full suite of policy levers and tools available. Taking an expansive view of what is needed, these interventions should include monetary policy; financial and real-economy policies and regulations; fiscal policy and budget support; public finance; and information instruments (such as voluntary disclosure).
- Public sector policymakers and financial institutions can pursue a wider range of interventions to advance a greener recovery. Our typology of interventions (see Figure ES-1) provides decision-makers with a guide to the available tools that can advance a greener recovery and build a Paris-aligned future.
- Emerging trends of the initial stimulus packages show a preference for BAU investments in COVID-19 recovery packages.2 BAU policies and investments perpetuate carbon-intensive activities and threaten to derail efforts to reach the Paris goals. Despite the transformative opportunities presented by the recovery, countries are only using a small subset of the levers and interventions available to advance the transition to low-carbon and climate-resilient pathways.
- Countries generally have used shorter-term BAU fiscal actions. Two levers—the fiscal policy and budget support lever and the financial and real-economy policy and regulation lever—are being used to invest in BAU infrastructure and economic pathways. These interventions have been concentrated in the energy, transport, and building sectors; little investment went to the agriculture, industry, nature, water and waste management, and disaster risk reduction sectors. Almost all countries are missing opportunities to invest in adaptation and resilience, and recovery packages showed no systematic consideration of climate risks.
- Countries that implemented Paris-compatible interventions benefited from having “shovel-ready” projects and delivery mechanisms prior to the COVID-related crisis. All countries used their project planning processes to facilitate the rapid spending of stimulus packages. As a result, whether countries implemented Paris-compatible interventions largely depended on whether they had Paris-compatible “shovel-ready” projects at the start of the COVID-19 crisis. Thus, a lack of internal processes focused on advancing Paris-compatible investments and policies hindered a country’s ability to design and implement a robust green recovery.
- Bilateral agencies and multilateral development banks (MDBs) reconfigured their portfolios to respond to the immediate needs of their client countries. MDBs mainly offered governments support for the health crisis and liquidity support to financial intermediaries to provide financial relief to small and medium enterprises (SMEs) and other institutions. Multilateral climate funds’ portfolios were more supportive of nature and other adaptationrelated activities than the portfolios of bilateral agencies or MDBs.
The converging economic, health, and climate crises present a rare opportunity for the Group of 20 (G20) countries to align their economic policies with their climate commitments.
This study analyzes the available literature and five existing COVID-19 stimulus trackers to build a typology of the policies and interventions available to G20 countries to promote Paris alignment domestically and internationally.
Between March 1, 2020, and January 31, 2021, G20 members primarily used business-as-usual (BAU) policies, incentives, and investments during the COVID-19 response and recovery. BAU policies and investments benefit carbon-intensive activities, delay climate action, and lock in the use of high-carbon technologies and business models that will be more expensive to replace later.
During the COVID-19 response and recovery, G20 countries have used a small subset of the levers and interventions available to reach their Paris goals.
G20 members should ensure that their recovery interventions across all economic sectors are fully aligned with the Paris Agreement. We have nine years to cut emissions in half, as is required to limit global warming to 1.5°C.
International Climate FinanceVisit Project
Our International Climate Finance work strengthens key policies and governance elements in important international institutions to promote Paris Agreement alignment in finance and uphold the role of climate finance in international negotiations.Part of Finance