Exploring the financial and investment implications of the Paris Agreement

Abstract

A global energy transition is underway. Limiting warming to 2°C (or less), as envisaged in the Paris Agreement, will require a major diversion of scheduled investments in the fossil-fuel industry and other high-carbon capital infrastructure towards renewables, energy efficiency, and other low or negative carbon technologies. The article explores the scale of climate finance and investment needs embodied in the Paris Agreement. It reveals that there is little clarity in the numbers from the plethora of sources (official and otherwise) on climate finance and investment. The article compares the US$100 billion target in the Paris Agreement with a range of other financial metrics, such as investment, incremental investment, energy expenditure, energy subsidies, and welfare losses. While the relatively narrowly defined climate finance included in the US$100 billion figure is a fraction of the broader finance and investment needs of climate-change mitigation and adaptation, it is significant when compared to some estimates of the net incremental costs of decarbonization that take into account capital and operating cost savings. However, even if the annual US$100 billion materializes, achieving the much larger implied shifts in investment will require the enactment of long-term internationally coordinated policies, far more stringent than have yet been introduced.Policy relevanceMaintaining momentum towards fulfilling Article 2 of the UNFCCC – avoiding dangerous climate-change – means keeping a sense of perspective on how key financial and investment indicators of progress relate to the underlying macroeconomic reality of the task that lies ahead. There is a wide gap between the level of rhetorical commitment to mitigating and adapting to climate change evident at the Paris COP 21 Climate Summit, and countries’ actual on the ground commitments to emission reduction and investment in climate resilience, and the policies to bring them about. In particular, major shifts in financial flows towards low-carbon energy (renewables and energy efficiency) will be required if this gap is to be reduced.