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Money: the secret ingredient needed to make Paris Agreement flourish

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By Santiago Lorenzo and Mark Lutes

This year countries must do much more than sign and ratify the Paris Agreement. If they are serious about meeting the goals of the Agreement, they must demonstrate a renewed willingness to accelerate actions and cooperation on various fronts, including finance. Indeed, if the year 2015 turns out to be a turning point for efforts to confront climate change, it will be due largely to efforts on the finance front.

At the level of concrete finance commitments coming from Paris, there is not much news (in fact, the outcome is rather disappointing). The commitment from developed countries to mobilise $100 billion annually per year by 2020 was extended to each year from 2020 to 2025, and new targets will be negotiated for the period thereafter.

The Paris Agreement recognises a role for financial contributions from countries beyond “developed” countries. The question of who will be responsible for meeting agreed financing goals after 2025 that period is not entirely clear, although developed countries should increase their levels of financing beyond this point, and be joined by others as part of a global effort.

What counts towards the $100 billion target?

The biggest problem with the $100 billion commitment, other than its modest scale compared to any estimate of needs, is that there is no definition of what can count towards it. Contributing countries have indulged in a wild west of accounting approaches, often designed to inflate the figures for financial flows. Starting this year, the UNFCCC’s Subsidiary Body for Scientific and Technical Advice has been tasked with attempting to identify what financial flows are eligible to be counted towards the 100b figure.

If successful, this effort can help ensure that only new and additional financing that actually contributes to developing country priorities in building resilience, reducing emissions and shifting to low emission development is counted. There must be agreed rules for accounting for only the concessional value of loans, for example, as well as for Export Credit Agency finance and private finance.

This year all countries must demonstrate a new determination to agree on what can and cannot count towards the $100 b commitment, and developed countries in particular must step up their financing efforts and show in concrete terms how they will meet this commitment.

The $100 billion figure will certainly not be sufficient, but if it is real, additional and well-targeted funds can have a substantial impact.

As important as transfers of finance for concrete activities on the ground is, ensuring proper macro-level financial frameworks, incentives and disclosure are at least as important.

It is extremely encouraging that governments agreed on the basic purpose of the Paris Agreement of “Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate resilient development”. This provides a broad mandate for a range of actions, many of which have already gotten under way in recent years and gained considerable momentum in the past year in the lead up to Paris.

An example of such actions is a decision by the Green Climate Fund (GCF), part of the financial mechanism of the UNFCCC and the Paris Agreement, to assess the overall portfolios of accredited entities. This assessment should cover the carbon footprints of the lending portfolios of private, public and multilateral banks, for example, along with a range of positive and negative climate-related impacts of the portfolio.

This sends a clear message that if such institutions wish to remain partners of the GCF, they must demonstrate that their portfolios are increasingly supportive of the climate objectives, rather than undermining them through, for example, financing fossil fuel technologies.

In an important parallel development, the Financial Stability Board (mandated by the G20) established the Task Force on Climate-related Financial Disclosures, which is developing guidelines for assessing carbon footprints and other climate-related risks and making recommendations for harmonising and deepening practices and methodologies for disclosing wider portfolio risks.

Shifting the trillions

Although we are seeing indications of change, governments are still not acting quickly enough to confront climate change. This is despite increasing evidence that the cost of not acting decisively will sharply increase over time.
All countries, independently of their development stage, should accelerate efforts to “shift the trillions” towards low carbon resilient societies. An estimated 2 trillion of additional investments per year are needed by 2030 in low or zero emission renewable production and energy efficiency.

The cost of shifting the trillions is negligible compared with the social, economic and environmental costs that 3°C or more of global warming will carry. Many investments in low carbon solutions are already cost competitive with traditional comparable investments, and countries could start with those. Additional investments are needed in other areas, like low carbon agriculture, forest protection and restoration, etc.

In addition to signing the Paris Agreement, leaders and their governments must align financial flows with the 1.5°C goal on multiple fronts – government budgets, public and public interest financial institutions, investments in infrastructure, financial sector regulation, etc. All financial decisions must be based on a proper assessment of climate related risks and the need for economies of scale in climate solutions.

Carbon pricing must be expanded, but always accompanied by the proper compensation policies to protect the most vulnerable negatively affected by such measures.

All this is in the hands of all signatory governments. We need more than ink on paper, we need more than nice speeches and ceremonies. We need real coherence and commitments from the world leaders. The decisions they take at home will be the best test of the Paris Agreement and success in fighting dangerous climate change.

Santiago Lorenzo is the head of Green Finance and Mark Lutes is Senior Global Climate Policy Advisor, both with WWF International’s Global Climate and Energy Initiative.

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The cost of transitioning to a climate-resilient world is negligible, compared to the price of inaction.

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