12 Dec 2015 Blog post Green economy

After the agreement in Paris: What next?

12 December, 2015 - The adoption of the Paris Agreement on 12 December marked a turning point in international climate discussions. Although the Agreement is not perfect and reflects some of the compromises needed to reach consensus among 195 countries, it is an important milestone which helps to renew faith in a multilateral response to the climate challenge, recognises the socio-economic opportunities of addressing climate change and provides a framework for action in the years ahead.

As the euphoria around the agreement settles, policy-makers now need to turn to the more challenging task of putting in place concrete actions to support the transition to a low carbon, climate resilient and inclusive green economy. According to the 2015 UNEP Emissions Gap Report, fully implementing Intended Nationally Determined Contributions (INDCs) submitted to the UNFCCC would put the planet on track to a temperature rise of around 3°C by 2100. Although this is an improvement on previous projections, efforts need to be stepped-up on all fronts if we are to meet the agreed objective of limiting global warming to well below 2oC, let alone 1.5oC. The agreed cycle to review and update INDCs by 2020 and every five years thereafter provide an opportunity for ratchetting up ambitions as technology advances and experience accumulates.

There is also an urgent need to mobilise additional financing for climate mitigation and adaptation. The Paris Agreement reaffirms the leading role of developed countries in mobilizing finance to support climate action in developing countries and encourages other countries to provide such support voluntarily. The importance of public funds is highlighted in the Agreement and the existing commitment by developed countries to mobilise USD100 billion per year by 2020 and its extension to 2025 noted in the preamble. Meeting these commitments will require a significant scaling up of current investment flows. According to a recent OECD assessment of climate finance, USD62 billion of public and private financing was mobilized for climate action in 2014, which is an increase from USD52 billion in 2013 but still far short of the USD100 billion goal.  International climate financing flows for developing countries need to be increased. Biennial reporting by developed countries on the amount of climate financing mobilised will help to enhance transparency on financing flows and maintain pressure to meet commitments.

At the same time, additional domestic resources need to be mobilised to support climate action within all countries. In this context, green fiscal policies deserve more attention given their potential benefits not only in terms of reduced greenhouse gas (GHG) emissions, but also in light of their revenue raising potential. For example, according to the latest report on the State and Trends of Carbon Pricing by the World Bank and Ecofys, the combined value of regional, national, and sub-national carbon pricing instruments (carbon taxes and emission trading systems) in place in 2015 is just under USD50 billion globally. According to recent research on global energy subsidies by the IMF, eliminating fossil fuel energy subsidies would raise government revenue by USD2.9 trillion. Such revenues can be used for different purposes, for example to contribute to climate financing commitments; support investments in sustainable energy, clean technologies and adaptation capacities; leverage private financing for climate investments; mitigate impacts on vulnerable groups such as low-income households; or to enable broader fiscal reform in the economy.

Revised price signals from fiscal policies (which internalise externalities) can also shift investment and consumer behavior towards low-carbon activities, helping to catalyse innovation in new, clean technologies. The carbon tax in the Canadian province of British Columbia is an often-cited example of this effect. Such fiscal incentives can complement efforts at different levels, for example commitments by public and private actors at the COP21 to increase investment for clean energy research and development. Fiscal policies can also lead to social benefits, for example reducing premature deaths from air pollution, mobilising funds for investment in education and health, improving access to electricity services. These multiple benefits highlight how green fiscal policies are in many countries’ own interest and provide a compelling argument for further consideration of such policies.

There is growing recognition of the role of fiscal policies for climate change and increasing experience with such instruments across the world. Green fiscal policies, in particular carbon pricing, attracted significant high-level attention at the COP21 from governments and business leaders alike. The Paris Agreement recognises the need for incentives to reduce emissions through tools such as carbon pricing and paves the way for a market-based mechanism to help mitigate GHG emissions. This increased attention and accumulating experience is welcome, and adds to growing support for such instruments among climate scientists, economists and policy experts. This momentum needs to be translated into further action. Taking advantage of the positive impetus from Paris, heightened attention on climate change, and favourable conditions such as the slump in oil prices, countries should consider the adoption of more ambitious green fiscal policies and other instruments as they start to review and update their INDCs. Such concerted action will support the transition to a low carbon, climate resilient, inclusive green economy and ensure the Paris Agreement really is the turning point it is claimed to be.