COP26: Goal Three – Eye-wateringly expensive but achievable

COP26: Goal Three – Eye-wateringly expensive but achievable

In our previous blogposts, we have examined the first two goals for COP26. We concluded that Goal 1 (the climate goal proper) was too little, delivered too slowly. Goal 2, we said, was victim to what happens when ambition meets politics. Goal Three is the finance goal.

An all-important problem with the transition to a green economy is not necessarily what we do. We know what we have to do – we have to stop producing carbon and greenhouse gases, transfer to renewal energy (and nuclear, which is a vital component of the energy mix for the foreseeable future). We have to capture and isolate as much ofthe existing atmospheric carbon as we can. The problem is how we do it fast.

This is not going to be cheap. As The Economist says, “achieving net-zero carbon emissions will be eye-wateringly expensive.”

Goal Three is:

3. Mobilise finance

To deliver on our first two goals, developed countries must make good on their promise to mobilise at least $100bn in climate finance per year by 2020. 

International financial institutions must play their part and we need work towards unleashing the trillions in private and public sector finance required to secure global net zero.

Since it has already been broken, let’s examine the broader question of financing the energy transition.

The costs of the energy transition

Ignore, for a moment, the fact that we are in 2021 and that,therefore, one hopes that the date in the goal is a typo caused by the delay of COP26 due to the pandemic. $100bn in climate finance per year does not seem very much. As we have said before, these statements are politically acceptable,and presumably, this is the minimum figure. However, we are now in 2021. Assume that we meet this goal, and between now and 2050, the aim is to raise $2.9 trillion between now and 2050. ($2.9 trillion at today’s value. This figure will go up the further away from today we are).

We know this goal is not going to be reached this year. Which means it’s now going to be two years late. And, as Mohamed Adow, the director of the Power Shift Africa thinktank in Nairobi, points out, it is less than the UK intends to spend on HS2.

Climate finance is a highly complex topic. Writing this blogpost embedded us in figures, none of which agree; policies, none of which are complementary; and aspirations, few of which are funded. A splendid piece from Irina Slav in one of the leading oil and energy newsletters, Oil Price, looks at the true cost of the energy transition. Slav’s analysis is as comprehensive as one can be at the time of writing (November 2020) and remains useful:

$15 trillion in new power capacity, of which 80% will go into renewables
$14 trillion into investment in energy grids
$1 trillion in investments in several vital metals (for instance, demand for silver going from 24k tons a year to up to 700k tons).
Massive growth in energy storage (100GW in 2015 to 500GW by 2050)
And so on, and so forth

And on top of that, Tuesday’s report from the United Nations Environment Programme makes clear that on our current plans, we’re heading for a 2.7C increase: almost double the Paris aspiration of 1.5C. The subhead of the report, “A world of climate promises not yet delivered”, could easily be the title of this series.

So whatever we have projected is wrong and insufficient.

…and how to pay for them

There is, though, a “however”.

The International Energy Agency’s World Outlook 2021shows that (a) renewables are the future and (b) investment in renewables will pay itself back. (There is an excellent dismantling of the old fossil fuel arguments using the IEA’s report at Carbon Commentary, for those who want to win the next “oil is here to stay” argument).

Hertz is spending $4.2 trillion to buy 100,000 Tesla cars to move a significant portion of their fleet to electric within 14 months.

Organisations like BP are talking about “greening at scale”.

At a recent conference I chaired, the Natural Resources Forum’s ESG Week, participants showed the sweeping change in the extractives industry. They know they need the social licence to operate that climate-friendly business delivers. Thischange is demanded by their investors, mandated by their regulators, and wanted by their customers.

And it is here that we are finally, in this series, able to deliver a positive. Climate finance will happen, not because governments are going to deliver it, but because business is. The OECD has a helpful guide. As far as governments are concerned, the problems are too large, too far away, and too expensive. Governments need to spend their money as climate change mitigators of last resort – places where businesses, companies and investors cannot find a return sufficient for them to engage.

But where governments have a role is in setting the legal and regulatory environments within which companies can operate. Because it is the companies that have the money, the access to funding, and the motivation to make a real difference, and they are only just starting to do so.

As one of the participants at ESG Week said, “we need government to set the regulatory environment and then get out of the way. We can do the rest”.

It’s not ideal. It doesn’t meet another broken COP26 goal. But it provides a hope that the vast amount of money needed for the climate transition is available. It just isn’t available from governments.

Written by Jonathan Blanchard Smith, SAMI Fellow and Director

The views expressed are those of the author(s) and not necessarily of SAMI Consulting.

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