Paris has fallen. If the 200 countries gathered in Glasgow for the COP26 Climate Change Conference in November hit their agreements to reduce greenhouse gas emissions – and that doesn’t look likely – global temperatures would still barrel past commitments made six years ago in Paris to hold temperatures to less than 1.5ºC degrees above 1850 industrial levels according to the IPCC.1 In their Fifth Assessment the IPCC reported that we were already at 1.1ºC in 2017 and running at a pace likely to hit 1.5ºC in ten years (IPCC 2018). The airy narrative by some that we could save the world, create high paid jobs if only everyone committed to doing so and developing countries gave up on coal was always a weak reed. An expensive goal without a financial plan. The quicker we recognise the failure and its causes and develop a workable plan, the better for humanity's survival. Here’s how to save Paris.
We need a global settlement – not global aspiration attached to a village hall budget. There are three dimensions to the problem Paris is trying to solve. First, 1.5°C was not plucked out of nowhere. But critically, there is a dangerous likelihood that temperature rises close to that level could be a tipping point for the earth’s biological, chemical, and physical systems. Once the largest ice sheets start to melt, it would be hard to stop that, and sea levels will accelerate exponentially submerging many tropical islands and low-lying coastal areas (van der Ploeg and De Zeeuw 2014). We have an urgent problem that, if not solved, soon could set in train processes that will prove hard to reverse.
Second, the warming of our climate comes from the stock of greenhouses gases (GHGs) in the atmosphere. The level of carbon dioxide in the atmosphere was between 275 and 285 parts per million (ppm) for millennia, but by the 1910s it had reached 300ppm. In 2020 it was 412ppm (Ritchie and Roser 2020). To stop the stock of GHGs rising, the net flow of emissions must fall dramatically. It’s a stock problem because many GHGs are long-lived. Nitrous oxide can stay in the atmosphere for 121 years, methane for 12 years. Carbon dioxide’s lifetime cannot be represented with a single value because the gas is not destroyed over time, but cycles through the ocean–atmosphere–land system. Some carbon dioxide will remain in the atmosphere for thousands of years and the melting of the glaciers could release into the atmosphere previously trapped carbon.2
A third dimension to the problem is that the benefits and costs of a warmer climate are distributed unevenly across history, geography, and income. Those who have contributed most to the stock of GHGs and hence global warming – Europe is at 33% and the United States at 24% (Ritchie and Roser 2020) – and, as a direct result, have the greatest resources today to reverse it are not the ones most adversely impacted. They may even be benefitting as growing seasons widen in cold climates (Cruz and Rossi-Hansberg 2021a). To illustrate this, the South Downs in Kent, England are two degrees higher in latitude than the Champagne region of France, but English vineyards are rapidly benefitting from warmer climes. English sparking wine production has grown from 210,000 litres of pure alcohol in 2010 to 910,000 litres in 2019. Industrialised countries are in the frontline of the contribution to GHGs but, for now, they are in the backline of consequences. Which is why the bad behaviour continues despite the repeated promises of better – as every parent could tell you without reading anything about Alfred Pigou and welfare economics.3
The unpleasant economics of climate change is that to meet Paris, the world would have to eliminate 53.5 billion metric tonnes of carbon dioxide each year for the next 30 years. There are a range of estimates of how much that would cost, but the investment bank Morgan Stanley put it at an additional $50 trillion split between five key areas of zero-carbon technology.4 One of the most promising new technologies is using hydrogen to provide clean fuel for power, cars, and other industries. Morgan Stanley estimate a further $20 trillion of cumulative investments will be required to help make the gas, increase capacity to power plants, and manage its safe storage. Solar, wind, and hydro will require $14 trillion of investment to deliver 80% of global power by 2050 and electric vehicle take-up will require $11 trillion to build the factories and infrastructure and develop battery technology. Biofuels, like ethanol, could be important for future global transportation alongside hydrogen and could eventually spread to aircraft, but to develop this would require a further $2.7 trillion of investment. Carbon capture and storage could play a critical part in the energy transition but a further $2.5 trillion is needed for development. An investment bank might be tempted to overstate the opportunity for new investments, and there is plenty of scope for fiscal policy to induce the right private investment without much public investment (Caselli et al. 2021), but there are few smaller estimates of the cost of halting climate change and many larger ones, and these numbers don’t even include the high costs of adaptation to an already warmer climate.
Compare the $50 trillion price tag to the barely $100 billion that it has taken six years for countries to scrounge together. The driver of this takes us back to Alfred Pigou. The cost of not making this investment is not yet material in those countries that could finance the investment and have made the greatest contribution to GHGs. The loss and damage from the devastating floods in Germany this year is less than 0.1% of GDP and the overall GDP impact given insurance payouts and cash transfers will likely prove positive. Compare that with what is happening in countries lying between the tropics of Cancer and Capricorn. There, temperatures could become intolerable, and sea levels will rise the most seeding more devastating hurricanes. Twenty to forty percent of the human population already live in regions that have experienced warming of more than 1.5°C for some period of time (Caselli et al. 2021). In the 2017 Atlantic hurricane season, there was an unprecedented phenomena of two category 5 hurricanes in the space of just two weeks. Dominica, hit by Maria on 17 September 17, lost 226% of its GDP in four hours.5
China and India have to be part of any meaningful global settlement; they are the first- and third-largest emitters today.6 Yet measured in terms of GHG emissions per head of population, they are around 40th and 140th,7 and measured in terms of their stock of GHGs per capita they are one-tenth of the level of Europe. These are relevant measures of equity. It’s why, when the US and Europe call on today’s emitters to make the greatest sacrifices, they get rebuffed (Furceri et al. 2021). To revive Paris, we need to reach a settlement that treats climate change as if equity matters. And that requires a new financial instrument that gets us the scale we need while tying together the changing geography of current emissions, the historic contributions to the stock of greenhouse gasses, and the need for climate adaptation for frontline states. Here’s one candidate.
The only solution so far with the scale and equity to save Paris
The countries that contribute most to the stock of GHGs could issue an instrument that gives any investor in projects anywhere in the world that reduce GHGs the right to borrow from them at their overnight interest rates – which are currently near zero – and to roll over this borrowing for as long as the project delivers some minimum rate of reduction in GHGs per dollar invested. If the collective annual issuance of this near-zero cost funding were $500 billion, it would boost investor returns to such a degree that it would over 15 years crowd in private savings to the tune of the $50 trillion we need. The reason why this is the right instrument is that the near-zero cost of funding uniquely delivers investment on the scale required to transition emerging economies and others without sitting on the stressed balance sheets of developing country governments, it is not a politically difficult transfer from developed countries, and its use is conditional on achieving a decline in GHG emissions.
But $500 billion per annum sounds way out of reach, so let us put it into context. In the past twelve years, the same group of countries with high historic contributions to the stock of GHGs have purchased $25 trillion8 of government bonds in quantitative easing programmes designed to spur private investment. If instead these same countries had committed to purchasing private-sector bonds that financed projects that were independently rated to reduce GHGs, they would have kick started more investment than they did and they would give the world a fighting chance of defending 1.5ºC. A missed opportunity, but one that shows we do not lack the necessary ambition and scale – just aim.
As luck would have it, we don’t have to create a brand new instrument in which the countries which have historically contributed to the stock of GHGs give the right of others to borrow their currency at overnight rates and roll over the debt, because we already have one: the IMF’s Special Drawing Rights. The countries whose currencies make up the SDR are responsible for approximately 64% of the stock of GHGs.9 There is even a proposal on the table that countries who do not need their allocation in the $650 billion of SDRs issued in August 2021 should put $50 billion into an IMF-administered sustainability and climate finance trust for climate change adaptation. To reach the scale necessary, we need to add one more zero, make it annual, and allow private investors to compete to access these funds on the basis of how much climate mitigation and adaptation they can achieve across the world. The IMF may need to partner with an institution more used to working with private investment firms and climate technologies, such as the Green Climate Fund. This plan would also be an important fillip to the jobs and growth economies desperately need right now as the large policy support measures put in place during the pandemic are withdrawn and the recovery stutters.
Caselli, F, A Ludwig and R van der Ploeg (2021), “No brainers and low-hanging fruit in national climate policy”, VoxEU.org, 8 October.
Cruz, J-L and E Rossi-Hansberg (2021a), “The Economic Geography of Global Warming”, CEPR Discussion Paper 15803.
Forbes (2019), “Stopping Global Warming Will Cost $50 Trillion: Morgan Stanley Report”, 24 October.
Furceri, D, M Ganslmeier and J D Ostry (2021), “Design of climate change policies needs to internalise political realities”, VoxEU.org, 7 September.
IPPC (2018), Global Warming of 1.5 Degrees, Special Report.
Lemoine, D (2021a), “Incentivizing Negative Emissions Through Carbon Shares”, CEPR Discussion Paper 16039.
Pigou, A C (1920)., The Economics of Welfare, Macmillan.
Ritchie, H and M Roser (2020), "CO₂ and Greenhouse Gas Emissions", OurWorldInData.org.
van der Ploeg, R and A De Zeeuw (2014), “Climate tipping requires precautionary accumulation of capital and an additional price for carbon emissions”, VoxEU.org, 31 July.
1 Though industrialisation began worldwide a couple decades before 1850, our temperature records are not reliable much before (IPCC 2018).
2 See https://www.epa.gov/climate-indicators/greenhouse-gases
3 If we could internalise the social costs of this contribution to global warming into a system of taxes and subsidies we might better align private behaviour with better social outcomes (Lemoine 2021a, Pigou 1920).
4 As reported by Forbes (2019).
5 Estimate of loss and damage by the World Bank and others (see https://thedocs.worldbank.org/en/doc/7276af45227db85e778cd1586c68e040-0350082021/original/mpo-dma.pdf).
6 Emissions data comes from Ritchie and Roser (2020).
7 Source: Ritchie and Roser (2020), World Bank population data, and author’s calculations.
8 Data gathered from individual central bank balance sheets, and also reproduced by the Atlantic Council (see https://www.atlanticcouncil.org/global-qe-tracker/).
9 See https://www.imf.org/en/About/Factsheets/Sheets/2016/08/01/14/51/Special-Drawing-Right-SDR