Funding Climate Change Efforts

Fighting climate change is expensive.

Unchecked global warming leads to climate disasters like sea level rise, ecosystem disruption, and intense drought. The United Nations Intergovernmental Panel on Climate Change estimates that it will cost around $2.4 trillion to stave off the worst effects of climate change.

The Paris Agreement outlines several courses of action to keep global temperatures below 1.5 degrees Celsius of warming, including adaptation and mitigation strategies. Initiatives that aim to fund these strategies are known as climate finance. Countries pledged $100 billion towards climate finance initiatives by 2020, but have fallen far short of their target. Climate finance flows need to increase by 590 percent in order to achieve the world’s 2030 climate objectives.

Currently, public finance makes up 51 percent of total climate financing efforts, amounting to $321 billion in 2019. The private sector contributed $310 billion in 2019, comprising the other half of climate finance efforts.

Scholars have presented a variety of methods to increase climate funding to the necessary levels. Suggestions about public finance include introducing disclosure and transparency requirements to sovereign donations, encouraging donations to funds like the Adaptation Fund that provide streamlined accreditation processing for countries to qualify, and creating climate health for public debt swap programs.

Suggestions in the private sector revolve around the incorporation of environmental, social, and governance (ESG) matters into business decisions. ESG initiatives include using green bonds that earmark bond profits for climate-related projects and incorporating climate vulnerability into sovereign debt ratings. Some experts, however, argue that allowing climate vulnerability to impact debt ratings creates a systemic risk for the global financial system.

Some activists argue that climate finance also needs to incorporate environmental justice considerations. They argue that historically high-emitting countries such as the United States should invest more in clean energy technologies and carbon reduction, and even treat past carbon emissions as debt based on the social cost of carbon.

This week’s Saturday Seminar discusses regulatory options for climate finance goals.

• In an article published in the American Business Law Journal, Stephen Kim Park of the University of Connecticut School of Business contends that “failure to address the strategic implications of climate change regulation will impose long-term costs on firms and society.” Park subsequently offers the idea that resilience as a measurement of firm value will equip firms to respond to regulation in ways consistent with underlying policy objectives. He further suggests that firms generate resilience by becoming adaptable in changing legal environments and strengthen their commitments to collective action.
• In a forthcoming chapter in Climate Change and Sustainable Finance: Law and Regulation, Megan Bowman of England’s King’s College London presents a legal framework for mobilizing finance to address climate change. She draws on Article 2.1(c) of the Paris Agreement, which calls for making “finance flows” consistent with green and sustainable development. To fulfill Article 2.1(c)’s promise, Bowman argues that legislators must enact regulations such as carbon pricing and green tax incentives. In addition to these new financial mechanisms, Bowman recommends regulators adopt non-financial complementary measures such as climate-related financial disclosures.
• In an article published by The European Corporate Governance Institute, Sebastian Steuer of SAFE and Tobias H. Tröger of Germany’s Goethe University examine the effectiveness of disclosure regulations in the green finance market. The authors consider a range of disclosures that reveal the climate-friendliness of investments. They argue that mandatory transparency can increase demand for green assets and make capital flows more sustainable but that it also creates barriers to market entrance and decreased competition. Due to the potential benefits of transparency, markets should consider either a mandatory, government-regulated approach or a voluntary, market-regulated approach, suggest Steur and Tröger.
• Central banks around the world have taken up the call to address climate change, writes Christina Parajon Skinner of the Wharton School of the University of Pennsylvania in an article published by Vanderbilt Law Review. In the United States, the Federal Reserve has responded with more reservation, argues Skinner. Skinner warns that certain climate-forward actions, such as encouraging banks to increase their green investments, could end up increasing the risk assumed by big banks. Instead, supervisory tools such as requiring consideration of climate risk and discussing data-driven model design can allow the Federal Reserve to take climate action within its statutory authority, Skinner argues.
• In a report published by the Organization for Economic Co-operation and Development, experts argue that cities play a key role in financing the world’s climate objectives, but that they face difficulties such as information asymmetries and a lack of access to international climate funds. Experts in the report offer several regulatory suggestions for both subnational and national governments. They recommend that subnational governments strengthen their data collection capacities, invest revenues from environmental taxes, and explore green bonds. They urge national governments to provide subnational governments with sufficient funds to fulfill their climate objectives and incentivize subnational sustainable investment.
• Implementing “carbon removal obligations” must be part of future climate finance regulations, argue Johannes Bednar of the International Institute for Applied Systems Analysis and several coauthors in a recent Nature article. Bednar and his coauthors argue that carbon debt should be treated similarly to financial debt. They envision a system in which emitters would face interest payments on each unit of emitted carbon. Using optimization analysis, Bednar and his coauthors argue that this approach would lead to greater near-term decarbonization than other economic policy instruments.