In a recent International Monetary Fund (IMF) podcast, Ulrich Volz urges us to be vigilant: the covid-19 pandemic, he insists, is but a prelude to the looming climate crisis. The director of the Centre for Sustainable Finance at the University of London says that there is no trade-off between choosing a sustainable recovery and economic progress — crisis response measures need to amount to a transformative policy response. As much as possible, Volz emphasizes, we need to use economic stimulus and recovery measures to foster increased resilience. We also need to be keenly aware that many countries lack the means to finance a recovery and to undertake critically needed investments in climate adaptation and mitigation.
Covid-19 has uncovered vulnerabilities of our health and social systems, fragility of our economies, and the need for better disaster preparation. Increased resilience is one of the main guiding principles when rebuilding our economies and societies after the pandemic crisis, Volz suggests, if we are to ensure we are better prepared to withstand future pandemics and the climate crisis. He continues that short-term crisis responses aimed at protecting jobs and boosting global recoveries need to be coupled with longer-term, strategic goals of mitigating climate change and addressing climate change adaptation.
Despite long-standing and plentiful warnings from scientists about the risks of a pandemic, the world was woefully unprepared for the covid-19 crisis. The same is true for the climate crisis. Scientists have long been sounding alarms about the existential climate crisis. In 2019, more than 11,000 scientist signatories from around the world announced “clearly and unequivocally that planet Earth is facing a climate emergency.” The Intergovernmental Panel on Climate Change stated we have about a decade left to achieve a low-carbon transition and bring the world economy to a trajectory limiting global warming to 1.5°C above preindustrial levels.
The climate crisis continues to accelerate, as evidenced by recent climate catastrophes:
- wildfires in Australia and California
- thaw of permafrost in the Arctic
- increase in the number and intensity of storms, floods, droughts, and other climate-related natural disasters
But opportunities in mature clean energy technologies are all around us. Here are some interesting facts about a green recovery.
- Low-carbon energy is, in most cases, cheaper now than fossil-fuel-based energy.
- Recent evidence suggests that well-designed green projects can generate more employment and deliver higher short-term returns per dollar spent, compared with conventional fiscal stimulus.
- Today’s investment in climate change mitigation and adaptation generates substantial long-term returns and cost savings. The Global Commission on Adaptation calculated that every dollar invested in building climate resilience could result in between $2 and $10 in net economic benefits.
Steps taken now to mitigate climate change represent an investment that will generate dividends into the future, Volz outlines, while continued inaction will give way to disastrous global warming and much greater costs down the line.
How to Generate Increased Resiliency to Battle the Climate Crisis
The most efficacious way to assist many countries to respond effectively to the pandemic crisis, Volz says, is to “undertake meaningful investment to climate-proof their economies” as well as to “align all public expenditures as well as the tax system with the climate goals.” He outlines a series of ways to accomplish these goals.
- Phase-out of all fossil fuel subsidies. According to IMF estimates, global fossil fuel subsidies amounted to $5.2 trillion, or 6.5% of world GDP in 2017. Putting an end to these would not only deliver significant public savings but also lower emissions.
- Implement carbon taxes. The IMF’s October 2019 Fiscal Monitor indicates that meaningful carbon taxes of $75 per ton of CO2 would be a powerful tool to reduce carbon emissions and generate additional environmental benefits, including lower mortality from air pollution.
- Link finance and green development. Align finance flows with a pathway toward low greenhouse gas emissions and climate-resilient development, as stipulated in Article 2.1c of the Paris Agreement.
- Recognize fiduciary climate risks. Fully integrate climate risks into prudential and monetary frameworks. Monetary and financial authorities need to move ahead swiftly in implementing a comprehensive framework for addressing climate-related risks.
- Make risk transparent. Require the disclosure of climate and other sustainability risks to be mandatory across the financial sector to help with better risk analysis. Financial institutions should conduct regular climate stress testing that considers multiple transition scenarios.
- Balance financial solutions across multiple dimensions. Align current crisis responses to avoid locking in a high-carbon recovery while fulfilling their mandates for financial stability.
- Strengthen instruments that forecast climate risks. The implementation of prudential instruments that account for climate risks should not be delayed, but, rather, strengthened to minimize the potential buildup of additional risks in portfolios.
International financial institutions can support capacity building and lead by example in developing best practices for integrating climate risks in all aspects of their own operations. For multilateral development banks, Volz states this means “aligning their own portfolios with the Paris Agreement and completely phasing out any high-carbon lending and investments.” Banks of all kinds can also assume an important role by providing countercyclical lending that supports economic activity and employment in the short term, while contributing to the transition to a more sustainable low-carbon economy.
Volz reminds us of the real danger that climate-vulnerable developing economies will enter what he calls “a vicious circle” in which greater climate vulnerability raises the cost of debt and diminishes fiscal space for investment in climate resilience. International support for increased funding in climate resilience and mechanisms to transfer financial risks is urgently needed, he says, and could help these countries to enter a “virtuous circle.” Increased resilience funding could reduce both vulnerability and the cost of debt, providing these countries with extra room to scale up investments to tackle the climate challenge.
Final Thoughts about Increased Resilience
Just as the COVID-19 virus has spread across borders, the impacts of climate change will be felt across the world, not least through an increase in migration in the context of disasters and climate change.
Volz reminds us:
“The stakes are high. We have a decade to transform our economies and avoid catastrophic global warming. Collective efforts at all levels—locally, nationally, and internationally—and across all sectors—public and private—are needed to tackle climate change and build more resilient societies and economies. The challenges are enormous. But this crisis also provides an opportunity to rethink our economies and societies. We’d better choose wisely.”