Walk it like you talk it: The Paris Climate Deal

After ducking and dodging, pausing and procrastinating, and finally stumbling and struggling, the European Union ratified the Paris climate agreement. This landmark accord will now enter into force on 4 November 2016. This is history in the making. In the past, climate conference after climate conference crushed hopes. With the momentous deal in Paris, the world community pledges to keep the increase in global average temperatures to well below 2ºC (aiming to limit it to 1.5ºC).

But now the real work begins. Emission-reduction promises need to be raised. Thus far, the ambition doesn’t add up. The currently submitted emission-reduction promises would still lead to a warming in excess of 3ºC – a catastrophic scenario. And that’s just the ambition on paper.  It’s time to move from words to deeds. That means investing in the transformation towards a low-carbon economy. Infrastructure is key here.

More than 60% of the world’s greenhouse gas emissions are associated with the current infrastructure stock. Meanwhile, Europe’s infrastructure is crumbling. Mobilising investments into sustainable, hi-tech infrastructure would kill two birds with one stone: make Europe’s infrastructure fit for the 21st century as well as climate-friendly. In addition, it would give a much needed economic boost. According to economist Lord Stern strong investment in sustainable infrastructure is “the growth story of the future”.

The current economic context is also favourable. We are living at a time of great technological development – it’s an opportunity to upgrade as well as build infrastructure with the latest technologies. Second, the low interest rate environment is a boon for such an investment drive. Germany, for example, is currently making money with its debt due to negative interest rates. It is irresponsible to not make use of this situation to renew Germany’s ailing infrastructure! Instead German Finance Minister Schäuble is dogmatically sticking to his austerity policies while floating short-sighted tax decreases.

Infrastructure investment is the talk of the town. The IMF and World Bank raised it in their annual meeting last week, both Hillary Clinton and Donald Trump have called for massive new infrastructure spending, the European Commission is going for it by doubling its Investment Plan, former President of Mexico, Felipe Calderón, has called for it with a major new report from the Global Commission on the Economy and Climate, and so on.

This investment drive into sustainable infrastructure needs to happen on two fronts. First, the EU and particularly those EU Member States who can (read: Germany) need to increase infrastructure investments. In spite of the European Investment Plan, the EU’s investment figures are still below pre-crisis levels. An intergovernmental investment fund – as proposed by the Jacques Delors Institute and the Bertelsmann Foundation – could for example also be established. In addition, it is important to note that only some EU Member States benefit from the low interest rate environment – other economies, most notably in Europe’s South are struggling with high rates. Mechanisms and facilities that would promote usage of low interest rates in the latter economies would be of great importance. In this context, the think tank Agora Energiewende has come up with the innovative proposal of an “EU Renewable Energy Cost Reduction Facility”. At the moment, the cost of capital for investments in renewables varies from country to country (for example, 10% in Spain, 12% in Greece, 6% in France, 4% in Germany). Such a programme would protect renewable energy operators from specific risks, which would reduce the cost of capital and thereby could, in their calculations, reduce the cost of expanding renewable energies by around €34 billion.

Second, private investments in sustainability need to be mobilised and the financial sector must be included in this task. A carrot and stick approach is required: financing climate solutions needs to be made easier and more attractive, while financing climate problems should be made more difficult. Many public actors are now realising the importance of making finance more sustainable by, for example, mandating climate risk disclosure standards for investments or defining clear criteria for green bonds. The G20 is working on it, the Financial Stability Board is working on it, as are China, the UK, France, and so on.

But the EU has been remarkably blind to these developments. Sustainability had been completely ignored in its Capital Markets Union. Only now the European Commission is waking up, aiming to establish a sustainable finance expert group that should develop a strategy. It’s unclear, however, whether this is a strategic shift or just a tactical delay. Is the European Commission really wanting to push the issue of sustainable finance? Or is it proposing an expert group to postpone taking action? If this committee is only established in 2017 and comes out with a strategy 2018, then it might be too late to draw any concrete legislative consequences this term, given that elections for a new European Parliament and Commission will come up in 2019. It reminds me of the saying by Charles Kettering: “If you want to kill any idea in the world, get a committee working on it.” Ingrid Holmes, Director of the E3G London Office, has come out with an excellent paper grading the progress made on sustainability in the Capital Markets Union, in this regard.

Simultaneously, investments in fossil fuel infrastructure need to be disincentivised. Such investments carry an economic risk as they are incompatible with a climate agenda and would therefore at some point or another lose their value. A whole range of actors starting with the Carbon Tracker Initiative and Bank of England to the ECB’s European Systemic Risk Board, have highlighted the risk of such a “carbon bubble”. End of this year, the European Commission will look at its Capital Requirements Regulation. This could, for example, be an occasion to discuss whether investors such as banks should hold particular capital buffers in place against the fossil fuel assets that they own – risk premiums for fossil fuel projects must be higher than for low carbon alternatives.

Last but not least, the global divestment movement has been incredibly successful in driving the climate agenda forward and getting institutions to divest from fossil fuels. So far over 50.000 individuals and 590 institutions, totalling $3.4 trillion in assets have divested from fossil fuels. This pressure must be kept up but simultaneously there should also be pressure on companies to switch to renewable energy sources themselves, thereby lifting demand for such renewable infrastructure. A bunch of initiatives, such as the Renewable Energy Buyers Alliance (REBA) or the RE100 are committing companies to go 100% renewable for their business operations. RE100, for example, so far includes 81 companies. Out of these, however, only three are from Germany (Commerzbank, BMW, SAP). Shouldn’t there be more companies in the land of the Energiewende that pledge to source all of their electricity needs from renewables? I could imagine, for example, that this might be worthy of a NGO campaign.

With the Paris deal, there’s now – on paper – a historic momentum on tackling climate change. This must now be galvanised into action by putting money where our mouths are and investing in the necessary climate infrastructure.

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