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A strong Paris agreement will give the right signal to shift trillions of dollars from grey to green economy

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Concept of money and living plant

By Geneviève Pons Deladrière

Only a strong Paris climate agreement will give the necessary signal to the private financial sector that it has to change its investment portfolio rather soon and in a fundamental way. Of course, we also need enhanced support by public finance of the wealthy nations to fill the $US 100 billion per year commitment for poor countries that already suffer from climate change.

But the overall challenge is of another order of magnitude: a shift in trillions of dollars is needed to embark on a decarbonised, climate resilient economy. Most of the investment efforts will need to come from the generally risk-averse private sector. It will mainly go to the global energy sector, key for all climate actions since it emits about 70% of all greenhouse gases.

To give the right signals, the Paris agreement must contain a clear commitment to a full decarbonisation of the energy sector by mid-century, based on renewables and energy efficiency. It must be based on a scientifically sound, transparent and regular review of the adequacy of the present climate pledges. If these conditions are fulfilled, it will trigger major investment shifts.

Let us keep in mind that, though the present climate pledges by all nations together do not yet put us on a trajectory able to limit global warming to 2 degrees, national implementation of climate laws after Paris and the already observed actions by many players from business, the trade unions, the financial sector, and many governments alike have the potential to dwarf the present targets as too timid. Just a few examples from the recent years: in 2014, China reduced its energy intensity with a record 8%, thanks to many legislative actions for energy efficiency in industry and buildings. That contributed to a doubling of energy intensity improvements globally.

At the same time, many nations from Sweden to Brazil, South Africa to Germany, Uruguay to Kenya and US to China saw a double digit growth in renewables, particularly solar and wind. As a consequence, for the first time in a period of economic growth, global energy-related CO2 emissions remained stable last year and might also stay flat this year, while coal is starting to slightly decline, particularly in China and Europe.

But there is no reason to be complacent. Global CO2 emissions are still very high and so are investments into fossil fuels despite the recent decline in the oil sector because of low hydrocarbon prices.

It is assumed that overall fossil fuel investments are still about $US 1 trillion annually, which is approximately twice as high as investments into renewables and energy efficiency combined. The “champions” of clean power, solar and wind combined, today reach less than 3% of all energy used together, though their shares are higher in the electricity sector.

Yet, as an observed trend, renewable energy investments and actions are rising continuously and significantly in many developing countries while they decline on average in most OECD nations, particularly in Europe, what is a worrying trend.

To stay well below 2 degrees/1.5 degrees, it is suggested by various experts from the International Energy Agency (IEA), the Intergovernmental Panel on Climate Change (IPCC) and Bloomberg New Energy Finance (BNEF) that overall clean energy investments of renewables and energy efficiency combined need to quadruple from today to about $US 2 trillion annually by 2030/2035. And this includes clean energy access for the poor in developing countries.

But such a huge investment move also requires the significant downscaling in fossil fuel investments rather rapidly, particularly coal and oil. Investing in both, renewables and fossil fuels does not do the trick. This is the key message for the private sector to be taken from Paris.

The trillion-shift to clean energy in the next decades requires more investment upfront than the present energy expenditure. Much of the investment into accelerated energy efficiency will be paid back over time to investors and consumers through saved energy bills. The present energy system also embeds large subsidies, both direct and indirect ones, pre-tax and post-tax. The International Monetary Fund (IMF) calculated in summer 2015 that fossil fuel subsidies are in the range of $US 5.3 trillion annually – or 6.5% of global GDP.

Citizens pay that bill, while suffering from significant health damages and climate impacts. In other words, a move to $US 2 trillion or even more annual investments for clean energy is cheaper to the world economy compared to our present practice.

The Paris agreement must be robust enough to signal to the global finance markets that it is time to divest from fossil fuel and invest in clean energy. If we come out of Paris with these signals, the trillions will be shifted and the decarbonised economy will become reality.

Geneviève Pons Deladrière is Director of the WWF European Policy Office.

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