Pervading most discussions was the acknowledgement that environmental risk and climate change should be embedded at the core of how we think about economic growth & risk. The sentiment was well illustrated by IMF Managing Director Kristalina Georgieva in her remarks on climate finance, saying that environmental risk must be at the center of all macroeconomic analysis and growth forecasting – and offering two crucial steps to get us there:
1. Establish credible carbon pricing and remove subsidies: a robust price on carbon, in addition to phasing out carbon subsidies, provides a critical market signal to producers and consumers in all sectors of the economy. Carbon revenues can help ensure a net-zero transition, compensating households for increased prices and helping businesses move from high to low carbon intensity activities. A mix of steadily rising carbon prices with forward guidance and green infrastructure investments could increase global economic growth by more than 0.7% per year for the next 15 years. Yet the average global carbon price is $2/ton – and this needs to rise to $75/ton by 2030 to curb emissions in line with the Paris Agreement targets.
She also argued that, for carbon prices to work, there needs to be an international carbon price floor for large emitters. One approach could be to focus on a minimum price among a small group of large emitters, while creating differentiated pricing structures outside of this core group based on a country's level of development.
2. Get non-financial reporting and the taxonomy right: for climate finance to work, there needs to be a green taxonomy and standardized reporting of financial risks. While some taxonomies exist and much progress has been made on their development (particularly in Europe), they are rarely standardized across regions, and need refinement, wider adoption, and better enforcement.
While differences on how best to tackle climate change continue to narrow, the larger story here is the impressive momentum moving into COP26 – I can't think of any other moment in history where global leaders have been so aligned on an issue. If climate change is a prime example of the "tragedy of the commons", the velocity and magnitude of action laid out at the Summit hints at a possible "triumph of the commons" to come – but crucially, only if commitments are kept.
Check out our Road to COP26 series for actionable insights & a range of perspectives on how manage the transition to a net-zero economy, or access our ESG Insights Hub for the latest analysis on sustainable finance.