Christine Lagarde calls on governments to back carbon pricing, slash fossil fuel subsidies as finance leaders gather in Peru
By Ed King
“If we collectively chicken out of this, we’ll all turn into chickens and we’ll all be fried, grilled, toasted and roasted.”
So said Christine Lagarde, head of the International Monetary Fund, in a press conference in Lima on Wednesday.
Her focus: climate change. Her message: it’s the right time for all governments to start pricing greenhouse gas emissions.
Lagarde’s call came two days before one of the most important financial meets of the year, hosted by the IMF and World Bank.
The three-day gathering of top finance ministers, which starts on Friday, is a chance to assess and analyse how to better manage the global economy.
China’s slump, weaker than expected growth in emerging economies, the end of the commodity boom and tax avoidance top the agenda.
But with a UN climate pact primed to be finalised in Paris this December, leveraging finance for green growth has never been more important.
Show me the money
The climate priorities in Lima appear clear. Developed countries and multilateral development banks (MDBs) are being asked to double their finance contributions up to 2020.
The IMF and World Bank are pushing the roll-out of carbon pricing hard, surfing on the wave of optimism generated by China’s confirmation last month that it will open a national market in 2017.
A recent study revealed 12% of emissions are covered by trading schemes or taxes. 40 governments and 20 cities are taking part, although the vast majority have a price below $10 a tonne, too low to make much difference.
And subsidies for oil, gas and coal – which an IMF analysis says total $5.3 trillion a year when the health and environmental costs of burning fossil fuels are incorporated – are in the crosshairs of delegates.
“We have been trying to help countries remove fuel subsidies,” said World Bank chief Jim Kim at a briefing yesterday.
Kim argued the fall in oil prices offered a window of opportunity to ditch what are effectively incentives to pollute, but added he understood why governments viewed the issue as toxic.
“Politicians don’t like it when taxi drivers and truck drivers block the streets,” he said, naming groups that stand to lose out from subsidy cuts.
The pressure will be raised later on Thursday, when finance ministers from 20 of the world’s most climate vulnerable countries announce the formation of a new economic and finance coalition to protect their interests.
The “V20” includes Afghanistan, Nepal, Rwanda, Kiribati, the Philippines and Vietnam – a sign of growing frustration at the lack of help they have received to prepare for future droughts, floods and the impact of rising sea levels linked to climate change.
Report: OECD estimates climate finance flows at $60 billion
Still, glimmers of hope are shining on Lima and Paris.
A report on Thursday by the Paris-based Organisation of Economic Cooperation and Development said green aid to poor countries was rising, from around $50 billion in 2013 to $60bn in 2014.
Questions remain over how the figure was reached – critics say the definition of climate finance is too loose – but most analysts Climate Home spoke to said the news was positive.
The UK and France have boosted their contributions in recent weeks. Climate Home understands the French government is pushing other developed nations to follow suit before the Paris summit.
G20 finance chiefs in Lima are also discussing how their bloc can collectively contribute. One idea proposed by green groups this week is an agreement to make energy efficiency a global infrastructure priority.
“This could make a huge dent in global energy consumption whilst boosting economic growth,” said Ada Amon from the E3G think tank in London. “No other infrastructure investment can do so much for so many.”
An estimated $90 trillion will be needed in the next 15 years to invest in infrastructure, land use and energy, according to the New Climate Economy report, a giant tome produced by an eminent team of academics, politicians and business leaders in 2014.
This week economist and climate expert Lord Stern called on multilateral development banks (MDBs) to start pulling their weight and ramp up infrastructure lending in the next decade from $30-40 billion a year to $200bn.
“Done well, this could leverage much larger sums from the private sector and could make a crucial contribution to sustainable growth and the low-carbon transition,” he said.
“The banks should focus on mobilising private finance, simplifying application procedures to speed up project approval, and help with policies to phase out fossil fuel subsidies.”
Some are starting to cough up more: the European Investment Bank and European Bank for Reconstruction and Development released plans in their last week to radically upscale their support.
The World Bank is understood to be on the cusp of a similar announcement this week, while a wider MDB pledge to screen all investments for climate risk by 2018 is under discussion.
What’s different this year is that it’s not just a debate led by activists banging their drums outside the talks. Integrating climate risk into global finance talks has support from serious players – such as Mark Carney, governor of the Bank of England.
Last week he told a London audience of bankers and insurers the window of opportunity to manage financial threats posed by global warming was “finite and shrinking”.
“With better information as a foundation, we can build a virtuous circle of better understanding of tomorrow’s risks, better pricing for investors, better decisions by policymakers, and a smoother transition to a lower-carbon economy,” he said.
Major corporations needed to start disclosing their exposure to high carbon assets on a wider scale, he added, citing analysis that many oil, gas and coal companies hold assets that will be unburnable if governments enforce tougher climate policies post Paris.
That’s also set to be at the heart of a report from the UN environment body – due out on Thursday – which will detail how changes in the finance system can prioritise sustainable and environmentally friendly growth.
Led by Nick Robins, former head of climate change at HSBC, it could send another signal to fund managers that fiduciary duty should include a care for the longterm wellbeing of their clients – beyond a 2-3 year time horizon – which means accounting for climate risk.
These types of deeper structural changes, fossil fuel subsidy reform and the roll out of carbon pricing could – long term – offer a better pathway to green growth than numerical targets like the $100 billion by 2020 promised by rich countries in 2009.
“The $100bn was picked out of the air at Copenhagen,” World Bank climate chief Rachel Kyte told the Guardian in an interview this week.
“If you think about the global economy and the challenge for finance ministers in developed countries, I’m not sure that an abstract number like $100bn is helpful. It is not a meaningful number to a country managing its economy.”