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Why climate policy matters for G20 finance ministers’ agenda

In order to stay below the 2 °C guardrail set in the Paris Agreement, climate policy should be integrated with the G20 finance ministers’ agenda. Finance ministers should consider the merits of carbon pricing for sound fiscal policy and thereby stimulate investments in carbon-free infrastructure.

Ottmar Edenhofer
Ottmar Edenhofer, Chief Economist at the Potsdam Institute for Climate Impact Research (PIK)

“It is rational for G20 finance ministers to embrace climate policy, even if climate change is not their primary concern,” writes a team of authors led by the Mercator Research Institute on Global Commons and Climate Change (MCC) in an article published in the new issue of the journal Nature Climate Change.

In their article titled: “Aligning climate policy with finance ministers’ G20 agenda”, Ottmar Edenhofer, Chief Economist at the Potsdam Institute for Climate Impact Research (PIK) and Director of MCC, together with MCC Secretary General Brigitte Knopf and colleagues from other institutions argue that investments in fossil fuels have become more risky in the post-Paris world.

Most of the fossil fuel reserves have to remain unburnt in order to stay below a 2 °C temperature increase. “Financial markets have to deal with the risk that climate regulation may devalue assets — they must do so without destabilising international capital markets”, the authors, who chaired the Think20 Task Force on Climate Policy and Finance, write.

The scientists from the MCC, the Brookings Institution in the US and the Centre for International Governance Innovation (CIGI) from Canada contextualise this problem with the ever more urgent need to build new infrastructure around the globe while the world is facing declining tax revenues.

“Carbon pricing could become particularly important for the developing countries due to rapid urbanisation and economic growth,” says Amar Bhattacharya, senior fellow at the Global Economy and Development Programme at Brookings Institution. “In the next 15 years they will have to finance more than $80 trillion of infrastructure in energy, transport infrastructure, potable water supply and sanitation and telecommunications.”

The US administration is facing the same challenge as many other G20 countries. “Additional funding sources are crucial in the face of the rising need to rebuild American infrastructure,” says MCC Director Edenhofer. “Business leaders and international organizations have already understood that despite the announced withdrawal from the Paris Agreement by Donald Trump, in a globalised economy there is no longer a choice between climate and non-climate policy but between smart and costly regulation. Furthermore, there has even been some support by fiscal conservatives in the United States for a budget-neutral carbon tax.”

Financing such infrastructure in line with the goals of the Paris Agreement would require a reallocation of resources towards a climate-friendly infrastructure. However, the current fiscal system in many countries will not provide the necessary resources. Furthermore, because low-income households consume a higher share of carbon-intensive goods in their household budgets, the burden of carbon pricing on those households is relatively high compared with high-income households. The article in Nature Climate Change therefore calls for a well-designed progressive recycling of carbon pricing revenues.

Carbon pricing is already increasingly being taken up by business leaders and investors as an efficient way to reduce emissions. “The agenda of the global business community becomes ever more consistent with civil society’s agenda,” says Céline Bak, a senior fellow with CIGI’s Global Economy Programme.

“For example, in preparation for the G20 summit in Hamburg, German industry representatives call for an ambitious timeline for phasing out fossil-fuel subsidies, effective and globally converging carbon pricing mechanisms, as well as to implement international disclosure and reporting standards for environmental and climate-related financial risks.”

Meanwhile, China will implement a nationwide trading scheme this year, which has the potential to become much larger than the European carbon market. Carbon taxes have also been successfully implemented in British Columbia, Canada. The overall resistance within the business community to carbon taxes or emission trading schemes is weakening. A carbon pricing landscape is already emerging, with about 17 percent of emissions in the G20 covered by pricing schemes. The G20 countries are heavyweights in the arena of climate policy. They are responsible for roughly 80 percent of global energy use and CO2 emissions.

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