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Publié le
Vendredi 11 Décembre 2015
By now it is universally accepted that if humankind is to avert the potentially catastrophic consequences of a warming climate, the rise in global temperatures must be kept within 2°C by the year 2100.
Climate Change: The Finance Sector and Pathways to 2°C

Of course, the question everyone is trying to answer is how the world economy can be weaned off of fossil fuels before it’s too late.

France Stratégie has no doubt the answer lies in large part with finance and its ability to drive the transition to a low-carbon economy.

With this in mind, along with the 2° Investing Initiative and the Oxford Martin School at the University of Oxford, it organized on 30 November, the opening day of the COP21, the conference “Climate Change: The Finance Sector and Pathways to 2°C”.

Zero emissions

Denis Baupin, member of French Parliament, got the ball rolling with a sobering fact: we are going to have to leave roughly 80% of fossil fuels in the ground if we want to halt the rise in temperatures.

Despite a growing number of climate change mitigation policies and the increasing importance of renewables in many countries energy mix, greenhouse gas (GHG) emission growth has accelerated over the last decade.

Indeed, German economist and former Co-Chair of the Intergovernmental Panel on Climate Change (IPCC) Ottmar Edenhofer highlighted the fact that not only were emissions the highest in human history over the first decade of the 21st century, their rate of growth had also accelerated.

Contrary to what may be popular opinion, he said, the world is currently enjoying a renaissance of coal. Its low cost and availability is driving the carbonization of the global energy system, with coal becoming more and more international.

We have already exhausted our carbon budget which is consistent with the two-degree target,” he emphasized. “If we want to limit the increase of global mean temperature to two degrees, we are allowed to emit a cumulative total of 1000 gigatonnes [i.e. 1000 billion tonnes], which translates into a reduction of our emissions by mid-century of between 40 and 70%.”

Even if we are able to deploy carbon capture technology (CCS) to reduce emissions, we will still need to keep 70% of coal and over 30% of oil and gas in the ground. If CCS is not used, a full 90% of coal and over 60% of oil and gas will have to be left untouched.

Corinne Le Quéré, the director of the Tyndall Centre for Climate Change Research at the University of East Anglia, highlighted the necessity of using biomass energy and capturing and storing carbon if we are to meet the 2°C target.

“If you’re prepared to accept 2°, 3°, 4° or 5° [of warming], the emissions have to go down to zero,” she stressed. “The only difference between 2° and 3° is when they have to go down – for 3°, you have about 30 to 40 years more.”

Finance as a pivot

Climate change already has an impact on goods, prices and foodstuffs. As warming intensifies, it will affect both economic growth itself and the allocation of resources. “Given the context, central bankers must keep an eye on and monitor the economic consequences of climate change,” said François Villeroy de Galhau, the governor of the Bank of France.

“Monetary policy must do its job of gradually rebalancing prices in line with its mandate of maintaining price stability.” However, he pointed out that central banks must work towards overarching macroeconomic goals and not the specific needs of a particular sector of the economy.

Doubling down on innovation

Innovation is clearly crucial in propelling the transition to clean energy. And finance plays a key support role in this process, Jean-Pisani Ferry, commissioner-general of France Stratégie, stated.

Kamel Ben Naceur, director of sustainable energy policy and technology at the International Energy Agency (IEA), pointed to Mission Innovation and the Breakthrough Energy Coalition, spearheaded by Bill Gates and launched at the COP21. Twenty countries will participate in the former to make clean energy widely affordable by seeking to double their clean energy research and development investment over the next five years. In the latter, 28 investors will help companies develop their clean-energy projects.

While this is a positive development, the priority must be to integrate renewables into the grid rather than reducing their cost, which has largely been the case thus far.

Another pitfall is continuing to subsidize fossil fuels while investing in clean energy. This has been a perverse result of Germany’s energy transition (Energiewende), where the German government has been underwriting wind and solar power but at the same time essentially paying coal plant owners for the depreciation of their assets.

Getting the carbon price right

While R&D and technological breakthroughs are needed, carbon pricing remains the entry point for tackling climate change, according to Edenhofer.

As we move towards zero emissions, the assets of coal, gas and oil owners will be inevitably devalued, and banks are faced with their investments in the latter becoming riskier and riskier as time goes by. An effective carbon price could ensure a smooth transition.

Villeroy de Galhau made a point of emphasizing “the price of carbon is too low” and that a higher price could send “an effective economic signal”.

To be sure, financial institutions are taking this issue very seriously. Bertrand de Mazières, the director general of finance at the EU’s European Investment Bank, said it applies a carbon price on case by case basis for investment projects, which is different than the price used for the European Emissions Trading Scheme (ETS).  

Pierre Moscovici, European commissioner for economic and financial affairs, nevertheless underscored that the market has already begun integrating a price and that the COP21 should provide momentum for creating an effective value.

Edenhofer pointed to three things an adequate carbon price could achieve: one, it would incentivize clean technologies; two, it would penalize the use of fossil fuels; and three, it would generate revenues that can be invested in not only mitigation but also fighting poverty and infrastructure.

Eradicating indigence is essential to any strategy to mitigating climate change, maintained Irving Mintzer, professor at the Johns Hopkins University School of Advanced International Studies.

Investment and the calculus of risk

As for investment, it must be both in new infrastructure and in retrofitting aging infrastructure, which is essential to adapting to a changing climate. OECD countries are particularly concerned when it comes to upgrading their roads, bridges and other structures designed and built for the needs of the 20th century, said Mintzer.  

“But if we don’t address the basic needs of billions of people, then investments in OECD countries won’t really matter – our goose is cooked,” he added.

For Mintzer, the “guardians of global savings pools” (i.e. hedge funds, pension funds, etc.), who hold some USD 80 trillion of our collective assets, need to shift some of their fixed income allocation from sovereign debt to investment in infrastructure. This could be underwritten by commercial and development banks and insurance companies.

However, for this to happen the calculus of climate change risk needs to improve – and indeed it is, through a spread of so-called stress tests. In short, there is increasing awareness that warming temperatures affect not only individual assets but the entire corporate portfolio financial institutions hold.

For Villeroy de Galhau, there is no doubt that stress tests are an integral part of financial institutions’ job of managing risk. The insurance and reinsurance sectors have developed them furthest. “But the current regulatory framework for banks doesn’t take climate change enough into account as a potential risk,” he added.  

To be clear, there are three main categories of risk financial institutions are concerned with: physical, legal and macroeconomic.

France’s recently passed law on energy transition is seen as having provided a welcome boost for building a regulatory framework to help financial institutions assess risk and spur green finance.

Not only does it call for reviewing the risks climate change poses for banks, it also requires financial institutions to disclose how they factor in environmental considerations in their investments and how they are contributing to the energy transition. Baupin emphasized that it set an important precedent and provided an example for other governments to follow.

“At the end of the day, it’s good for the planet and good for those who invest,” he said.

Villeroy de Galhau pointed to the enhanced disclosure task force that the Financial Stability Board (FSB) and the G20 have decided to implement by early 2016 to study climate change risks and lay out key recommendations for action.

Empowering finance

Myriam Durand, managing director at Moody’s France, confirmed that climate-related risks are very much a central concern for financial institutions. Moody’s looks at both the direct impact of environmental risks and the impact of policies on such risks, she said.

As a central financial institution for monetary authorities the world over, the Bank of International Settlements is well placed to gauge how finance can steer the low-carbon transition. Luiz Pereira da Silva, its deputy general manager, confirmed that while there needs to be a move towards important changes in relative prices, it needs to be stewarded within the political and economic constraints of modern societies.

Scott Dickens, global head of structured capital markets at HBSC, went perhaps further by stating that ultimately the solution lies in governments and regulators setting a price, thereby providing an incentive for decarbonisation. “We have to bite the bullet,” he said.

“We haven’t got as of yet any regulatory capital incentives to invest in green financing,” he pointed out.”

“We as a society have to decide who pays the cost [of the energy transition],” he added. “Do we just leave it with those companies, or do we work with them to deal with the problem in a manner best for society.”

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