Introduction

Given the long-lived nature of urban infrastructure, the way in which we build, rebuild, maintain and enhance the world’s growing cities will not only determine their economic performance and their citizens’ quality of life; it may also define the trajectory of global GHG emissions for much of the rest of the century. This chapter takes stock of cities’ increasing contribution to both economic growth and climate change, examines the dominant patterns of development today, and presents an alternative pathway, as well as the policies needed to support and scale it up.

We focus in particular on three categories of cities:

• Emerging Cities are 291 rapidly expanding middle-income, mid-sized cities in China, India and other emerging economies, with populations of 1–10 million, and per capita incomes of US$2,000–20,000.
• Global Megacities are 33 major knowledge-, service- and trade-based urban hubs with populations above 10 million and per capita incomes over US$2,000, including capital cities such as London, Beijing and Tokyo.
• Mature Cities are 144 prosperous, established, mid-sized cities in developed countries, with per capita incomes above US$20,000, such as Stuttgart, Stockholm and Hiroshima.

Research carried out for the Commission shows that, on current trends, these cities combined will account for 60% of global GDP growth between now and 2030. They will account for close to half of global energy-related GHG emissions. Some 300 emerging cities, with populations between 1 million and 10 million, will account for over half of this growth. The question for mayors, as well as for policy-makers in economics, finance, urban planning and environmental ministries, is how to plan urban development in a way that improves economic performance and quality of life while reducing GHG emissions.

A large share of urban growth around the world involves unplanned, unstructured urban expansion, with low densities and high rates of car use. If current development trends were to continue, the global area of urbanised land could triple from 2000 to 2030, ⁸⁰ the equivalent to adding an area greater than the size of Manhattan every day. At the same time, the number of cars could double, from 1 billion today to 2 billion. ⁸¹

This sprawling pattern of expansion has major costs. It can double land used per housing unit, increase the costs of providing utilities and public services by 10–30% or more, and increase motor travel and associated costs by 20–50%. ⁸² In fast-growing low- and middle-income countries, sprawled patterns can actually double or triple many costs, because they often have to import construction equipment. Sprawl also results in greater congestion, accident and air pollution costs; locks in inefficiently high levels of energy consumption, and makes it harder to implement more efficient models of waste management and district heating.

New modelling for this report shows that the incremental external costs of sprawl in the United States are about US$400 billion per year, due to increased costs of providing public services, higher capital requirements for infrastructure, lower overall resource productivity, and accident and pollution damages. ⁸³ Costs can be even more acute in rapidly urbanising countries where resources are more limited. In China, urban sprawl has reduced productivity gains from agglomeration and specialisation, and led to much higher levels of capital spending than necessary to sustain growth. ⁸⁴ Research from 261 Chinese cities in 2004, for example, suggested that labour productivity would rise by 8.8% if employment density doubled. ⁸⁵

New analysis reviewed by the Commission shows that even in this context, cities around the world have significant opportunities in the next 5–10 years to boost resource productivity and reduce GHG emissions through economically attractive investments in the buildings, transport and waste sectors. However, without broader structural shifts in urban design and transport systems, the benefits of those measures would quickly be overwhelmed by the impacts of sustained economic and population expansion under business-as-usual patterns. In fast-growing Emerging Cities in particular, the evidence suggests energy savings and emission reductions could be erased within five years or less. ⁸⁶

Thus, to unlock a new wave of sustained, long-term urban productivity improvements, we need a systemic shift to more compact, connected and coordinated development. Cities that meet these criteria are more productive, socially inclusive, resilient, cleaner, quieter and safer. They also have lower GHG emissions – a good example of the benefits of pursuing economic growth and climate change mitigation together. Figure 6, for example, contrasts the land use and GHG implications of urban development patterns followed in the US city of Atlanta and in Barcelona, Spain.

Figure 6

Energy and emissions vary widely between cities with similar income levels, depending on past infrastructure and planning decisions: Atlanta vs. Barcelona

Bertaud, A. and Richardson, A.W (2004), Transit and density: Atlanta, the United States and Western Europe, Figure 17.2 on p.6, available at http://courses.washington.edu/gmforum/Readings/Bertaud_Transit_US_Europe.pdf.

Kenworthy (2003), Transport Energy Use and Greenhouse Gases in Urban Passenger Transport Systems: A Study of 84 Global Cities, Third Conference of the Regional Government Network for Sustainable Development, Notre Dame University, Fremantle, Western Australia, September 17-19, 2003. Figure 1 on p.18 cited in Lefevre, B. (2009), Urban Transport Energy Consumption: Determinants and Strategies for its Reduction, S.A.P.I.EN.S 2(3): 1–32. Figure 6, available at http://sapiens.revues.org/914]. The reference year is 1995, with the exception of the population data which is from 1990.

A better model for urban development

The alternative to unplanned, unstructured urban expansion is a more efficient urban development model, based on managed growth which encourages higher densities, mixed-use neighbourhoods, walkable local environments, and – in Global Megacities and Mature Cities – the revitalisation and redevelopment of urban centres and brownfield sites, complemented by green spaces. This model prioritises high-quality public transport systems to make the most of compact urban forms and to reduce car dependence and congestion. It also boosts resource efficiency through “smarter” utilities and buildings. It has the potential to reduce urban infrastructure capital requirements by more than US$3 trillion over the next 15 years. ⁸⁷ Fast-growing Emerging Cities and small urban areas have a particularly important opportunity to adopt this model from the outset, learning from others’ experience.

Shifting towards this alternative model would unlock significant medium- to long-term economic and social benefits. It would boost infrastructure productivity through the agglomeration effects of greater density, improve air quality, and deliver substantial cost savings in the transport sector. Estimates for the United States suggest that transit-oriented urban development could reduce per capita car use by 50%, reducing household expenditures by 20%. ⁸⁸ At significantly lower fuel prices, sprawling Houston spends about 14% of its GDP on transport compared with 4% in Copenhagen and about 7% in many Western European cities. (Notably, Houston is now making ambitious efforts to overcome the legacy of sprawl through urban renewal and sustained investment in public transport systems.) ⁸⁹

Adopting a compact, transit-oriented model in the world’s largest 724 cities, new analysis for the Commission shows, could reduce GHG emissions by up to 1.5 billion tonnes CO₂e per year by 2030, mostly by reducing personal vehicle use in favour of more efficient transport modes. While achieving such savings would require transformative change, it would lay the foundation for even greater, sustained resource savings and emission reductions over the following decades.

In fact, such a shift is already happening. Re-densification is taking place in cities as diverse as London, Brussels, Tokyo, Hamburg, Nagoya and Beijing. More than 160 cities have implemented bus rapid transit (BRT) systems, which can carry large numbers of passengers per day at less than 15% of the cost of a metro.⁹⁰ The BRT in Bogotá, Colombia, for example, carries up to 2.1 million passengers per day, complemented by a citywide network of bicycle paths that connect residents to public transport, community spaces and parks. ⁹¹ China will have 3,000km of urban rail networks by 2015.⁹² Nearly 700 cities had bike-sharing schemes at the end of 2013, up from five in 2000.⁹³

From Copenhagen, to Hong Kong, to Portland, Oregon, in the US, cities are also showing how they can build prosperity, improve air quality, reduce GHG emissions all at once through more compact, connected and coordinated urban growth models. Stockholm reduced emissions by 35% from 1993 to 2010 while growing its economy by 41%, one of the highest growth rates in Europe. ⁹⁴ Curitiba is one of the most affluent cities in Brazil, but has 25% lower per capita GHG emissions and 30% lower fuel consumption than the national average due to its groundbreaking approach to integrated land use and transport planning. ⁹⁵

A strategic approach to managing urban growth at national level

Countries need to prioritise better-managed urban development and increased urban productivity as key drivers of growth and climate goals. This is especially the case for countries with rapidly urbanising populations, as current institutional arrangements often result in urban development being driven by other national priorities. Here, coordination and cooperation between national and regional governments and city leaders is essential.

Several countries are already making major policy changes to promote more compact, mixed-use land development, contain urban sprawl, maximise resource efficiency, and curtail the negative externalities of pollution, congestion and CO₂ emissions. A high-profile example is China’s New National Urbanisation Plan, which places urban policy at the heart of Chinese decision-making. ⁹⁶

The Commission urges all countries to develop national urbanisation strategies in conjunction with city governments, with cross-departmental representation and assigned budgets, overseen by the centre of government and/or Ministry of Finance.

They should also provide greater fiscal autonomy for cities, potentially linked to economic, social and environmental performance benchmarks, and consider setting up a special-purpose financing vehicle at the national level to support cities’ efforts to become more compact, connected and coordinated, with appropriate private-sector participation. Existing infrastructure funding should be redirected to support this transition.

Stronger policies and institutions to drive compact, connected and coordinated urban development

Building better, more productive cities is a long-term journey. It requires persistence in several key areas to shift away from business-as-usual urban expansion, with countries, regions and cities working together. As a first step, cities should seize some of the numerous opportunities available to boost resource productivity in the short- to medium term, in sectors as diverse as buildings, transport and waste management. The evidence suggests that these smaller steps could build momentum for broader, longer-term reform, especially in capacity-constrained cities.

To drive the broader structural transformation of cities, governments should prioritise strengthening strategic planning at the city, regional and national levels, with a focus on improved land use and integrated multi-modal transport infrastructure

Only about 20% of the world’s 150 largest cities have even the basic analytics needed for low-carbon planning. ⁹⁷ These efforts should be supported by regulatory reform to promote higher-density, mixed-use, infill development, and new measures such as efficient parking practices.

It is also crucial to change transport incentives.

The Commission recommends that governments reform fuel subsidies and introduce new pricing mechanisms such as road user charges to reduce and eventually eliminate incentives to fossil-fuelled vehicle use.

They should also consider charges on land conversion and dispersed development, and measures that place a higher price on land than on buildings such as land taxes and development taxes. These reforms can raise revenue to invest in public transport and transit-oriented development.

In addition, there is a need for new mechanisms to finance upfront investments in smarter urban infrastructure and technology, such as greater use of land value capture, municipal bond financing, and investment platforms to prepare and package investments to attract private- sector capital. This should be complemented by more effective and accountable city-level institutions. The chapter discusses these topics in detail.

The role of the international community

The international community also has a key role to play in fostering better-managed urban growth, both by building and sharing knowledge about best practices, and by steering finance towards compact, connected and coordinated urbanisation, and away from sprawl.

The Commission recommends developing a Global Urban Productivity Initiative to promote and assist in the development of best practices in boosting urban productivity and support countries’ and cities’ own efforts.

The initiative should: build on the existing work of key international organisations already working in this field, including city networks such as C40 and ICLEI (Local Governments for Sustainability), and involve rapidly urbanising countries, mayors and business leaders. Key activities could include reviewing institutional options for systematic collection of city-level data, developing urbanisation scenarios and best practice guidance, creating an international standard for integrated municipal accounting, and targeted capacity-building.

In addition, a global city creditworthiness facility should be set up to help cities develop strategies to improve their “own source” revenues and, where sovereign governments allow it, increase their access to private capital markets.

Only 4% of the 500 largest cities in developing countries are now deemed creditworthy in international financial markets; every US$1 spent to correct this can leverage more than US$100 in private-sector finance. ⁹⁸ The new facility should build on and scale-up the existing programme of the World Bank, and assist cities in both developing and developed countries.

Finally, it is crucial that multilateral development banks (MDBs) rapidly phase out the financing of investments that lock in unstructured, unconnected urban expansion.

The banks should work with client and donor countries to redirect overseas development assistance and concessional finance towards supporting integrated citywide urban strategies and investment in smarter infrastructure and new technology. Greater consideration should also be given to redirecting overall MDB funding to account for the growing importance of cities in economic development in rapidly urbanising countries, as well as the scaling-up of support to help cities prepare and package urban infrastructure investments.

Introduction

The next 15 years offer an opportunity to create better energy systems that also reduce future climate risk. Achieving this will require a multi-faceted approach. The starting point must be to get energy pricing right, implementing energy prices that enable cost recovery for investment and less wasteful use of energy, and removing subsidies for fossil fuel consumption, production and investment. Other, complementary initiatives also will be required. One key task is to increase resource efficiency and productivity – to make the most of our energy supplies. Some countries have already made significant gains in this regard, but there is much untapped potential. It also will be necessary to expand our energy supply options. Innovation in technology, as well as business models, financing systems, and regulatory frameworks, is already doing this, from unconventional gas and oil, to the rapid growth of renewable energy technologies.

A changing outlook for coal

Coal has been abundant and affordable for many generations, and in several fast-growing economies, it remains the default option for rapid expansion of the power supply and for heavy industry. But conditions are changing, driven by fast-rising demand and a sharp increase in coal trade. Prices are twice the levels that prevailed historically,¹³⁸ with projections for continued high levels in the range of US$85–140 per tonne, even as other options, notably shale gas in the US and renewable energy sources globally, have fallen in cost. The future security advantage of coal is also less clear than before. India has imported more than 50% of new coal requirements in recent years, and may face still higher import dependence without a change of course. ¹³⁹

Figure 9

Ranges for domestic coal production and coal demand scenarios in India and China, 2012-2030, absent change in policies.

Note: Main ranges for demand scenarios do not assume policy changes to encourage steps towards lower coal use (China) or are based on a range of different energy efficiency developments for a given rate of economic growth (India). The broken line for China (IEA 2013, New Policies Scenario) illustrates a possible demand trajectory based on Chinese policies to curb coal demand growth. The figure includes all types of coal, not adjusted for calorific content.

Sources: China demand (non-broken lines) based on the range spanned by US Energy Information Administration, 2013; IEA, 2013, Current Policies scenario; Feng, 2012; and Wood MacKenzie, 2013. India demand scenarios are based on the trajectories in the India Energy Security Scenarios (IESS) in Planning Commission, 2013. China production is based on an analysis of depletion trajectories of the ultimately recoverable domestic coal resource. India production numbers span the range considered in the Planning Commission’s IESS for future feasible extraction of domestic coal. ¹⁴⁰

The damage from air pollution has proven substantial and hard to address once coal-based infrastructure is built out; in China, mortality from air pollution is now valued at 10% of GDP. ¹⁴¹ In many countries, properly accounting for the cost of pollution erodes the cost advantage of coal. For example, coal-fired power has a financial advantage in much of Southeast Asia, at costs of US$60–70 per MWh. But properly accounting for air pollution can add a cost of US$40/MWh or more, enough to bridge or exceed the cost gap to alternatives. ¹⁴²

Coal is also the most carbon-intensive of fossil fuels, accounting for 73% of power sector emissions but only 41% of generated electricity. ¹⁴³ Reducing coal use is an essential feature of pathways to reduce CO₂. For example, the IEA 450 scenario sees coal-fired power generation falling to 60% of 2011 levels by 2030, and total reductions in coal emissions of 11 Gt CO₂. ¹⁴⁴ Analysis carried out for the Commission suggests that as much as half of this reduction could be achieved at zero or very low net cost, once the changing cost of alternatives, and reduced health damages and other co-benefits are taken into account. ¹⁴⁵

Given the known risks associated with coal, it is time to reverse the “burden of proof”, so coal is no longer assumed to be an economically sound choice by default.

Instead, governments should require that new coal construction be preceded by a full assessment showing that other options are infeasible, and the benefits of coal outweigh the full costs.

A new era for renewable energy sources

Renewable energy sources have emerged with stunning and unexpected speed as large-scale, and increasingly economically viable, alternatives to fossil fuels, particularly in the power sector. ¹⁴⁶ Over a quarter of the growth in electricity generation in 2006–2011 came from renewables. ¹⁴⁷ Hydropower has long been a major energy source, but rapidly falling prices are also making wind and solar power increasingly cost-competitive with coal and gas in many markets. ¹⁴⁸ In Brazil, for example, wind power was the cheapest source of new power at recent auctions, and South Africa has procured wind power at costs up to 30% below those of new coal-fired power. ¹⁴⁹

Solar photovoltaic (PV) power remains costlier than wind, but now costs half as much as in 2010, ¹⁵⁰ as module prices have fallen 80% since 2008. ¹⁵¹ The world’s largest, unsubsidised solar PV plant, 70 MW in Chile’s Atacama Desert, was contracted in 2013. ¹⁵² At least 53 solar PV plants over 50 MW were operating by early 2014, in at least 13 countries, and several planned projects are now considered competitive without subsidies. ¹⁵³ Small-scale solar is also already competitive with retail electricity in many countries, and is rapidly becoming cheaper than other off-grid options such as diesel generators. ¹⁵⁴ Biomass, geothermal and nuclear power are also proven technologies. Overall, a sea change in expectations has taken place. Even baseline scenarios now foresee wind and solar power contributing large shares of new power in the next two decades, ¹⁵⁵ and zero-carbon sources overall can be a mainstay of meeting future energy needs.

Figure 10

Indicative levelised costs of solar PV electricity over time, and estimated lowest utility-scale costs to date, compared with a global reference level for coal and natural gas

Note: Solar PV costs can vary by ~50% or more up or down, depending on solar resource and local non-technology costs, and even more with variations in capital and financing costs. Assuming 9.25% WACC, 17% capacity factor for solar PV, US$70/t coal price and US$10/MMBtu natural gas price. The estimated lowest 2014 utility-scale cost is based on a recent power purchasing agreement by Austin Energy, Texas (adjusted for subsidies).

Sources: Historical solar PV costs: Channell et al., 2012, and Nemet, 2006; illustrative fossil fuel range based on US LCOE for conventional coal from US EIA, 2014 (upper range) and capital cost assumptions from IEA, 2014 (lower range). ¹⁵⁶

There is significant potential to go further. Costs are still falling, and virtually all countries have resources that they can exploit. But there also is strong inertia and specific challenges. Harnessing this potential will require active effort and support for these new ways of supplying power. Renewable energy can compete only where institutions and markets are set up to accommodate it. The benefits of energy security and lower pollution need to be accounted for. Markets and financing arrangements now set up for fossil fuels will need to be adapted. In addition, the variability of solar and wind power output leads to some additional costs of grid integration and the need to adjust electricity system planning as the share increases. Pioneer countries that are now increasing their share of variable renewables to high levels have a key role to play in developing the solutions that will enable others to reach high shares in decades to come.

Nonetheless, with the right mechanisms in place most countries can give renewables a central role in new supply for the next 15 years. Yet on current course there is a risk that the potential is not realised.

The Commission recommends that countries raise the ambition for renewable and other zero-carbon energy.

All should articulate and evaluate an energy strategy with significant contributions from renewable and other zero-carbon energy, and adapt electricity system planning, market and financing arrangements, and support systems to enable these options to fulfil their potential in meeting future power needs.

Natural gas as a ‘bridge’ to low-carbon energy and the role of CCS

Natural gas also is changing its role. Outside a few countries dependent on coal, it already is a dominant source of new energy. ¹⁵⁷ In the United States, cheap shale gas has swung the pendulum strongly away from coal, and there are potential reserves in many other countries. Gas has also been discussed as a potential “bridge” to lower-carbon energy systems, because it can quickly displace coal, reducing both CO₂ and local air pollution. ¹⁵⁸ In addition, gas can support power systems with higher shares of variable renewable energy.

However, the potential for gas as “bridge” fuel is not guaranteed. ¹⁵⁹ Strong accompanying policies will be needed, such as attributing to coal its full social cost, regulating production to limit fugitive methane emissions, putting a price on carbon emissions, and supporting low-carbon technologies so their development and deployment are not slowed down.

The Commission also urges prompt action to address non-CO₂ GHG emissions from energy, starting by accelerating efforts to identify and curtail fugitive methane emissions from oil and gas production.

Carbon capture and storage (CCS), meanwhile, offers the potential to reduce CO₂ emissions while continuing to use some fossil fuels. Many scenarios to limit global warming to 2°C rely on some level of CCS deployment, and estimate that costs would be higher if this option were not available. ¹⁶⁰

Yet although CCS is a proven technology in the upstream petroleum sector, in the power sector, it is still in the early stages, and investment is a fraction of what the IEA estimates is needed. ¹⁶¹ Scaling up CCS so it becomes a realistic option will require both a social license to operate and long-term, stable climate policy: support for demonstration projects, as well as mechanisms to create demand, underpin investment in infrastructure, and enable the development of new business models.

Making the most of our energy supply

The greatest opportunity to benefit from modern energy is for the 1.3 billion people who have no access to electricity, most of them in Africa and Asia, and the 2.6 billion who lack modern cooking facilities. ¹⁶² Furthermore, in many urban and peri-urban areas in the developing world, large numbers of people have only partial or unreliable access to electricity.

Proven routes to electricity access through urbanisation and grid extension are now complemented by the potential for off-grid and mini-grid solutions. Falling costs, new business models, and technological innovations are making these increasingly cost-effective. In addition to finance and policy, more innovation and experimentation are needed, not least to ensure these solutions prove their ability to supply low-carbon electricity as demand grows beyond lighting and low-power appliances. There is also a need to accelerate the pace of providing access to better cooking facilities. ¹⁶³

To advance these efforts, the Commission recommends launching a platform for public-private collaboration for innovation in distributed energy access.

Another large opportunity involves improving in energy efficiency and productivity (the economic value created per unit of energy input), which effectively provides the world with an additional fuel. In developed countries, energy efficiency improvements have cut the effective demand for energy by 40% in the last four decades ¹⁶⁴. No other source of energy has contributed as much.

Focusing on energy efficiency as the “first fuel” has large benefits in terms of balance of payments (from avoided fossil fuel imports), growth potential, local air pollution, greater levels of energy services, and lower carbon emissions. It can also be highly cost-effective compared to increasing the supply of energy. Even with “rebound” effects, efficiency thus is an essential contributor to meeting energy needs. Exploiting efficiency opportunities will be particularly important to emerging economies, as they rapidly grow their energy demand. India’s energy requirements in 2030, for example, are 40% greater in a scenario of low energy efficiency than in one with high energy efficiency. ¹⁶⁵

On a global scale, the energy required to provide energy services in 2035 could vary by the amount of energy used today by the OECD, depending on whether a high or low efficiency path is struck. ¹⁶⁶ And large untapped efficiency opportunities remain – across buildings, vehicles and industry. Yet energy efficiency is held back by a combination of ineffective energy pricing, policy distortions, lack of awareness, poorly aligned incentives within key markets such as housing, and low prioritisation of energy efficiency by many businesses.

Thus, the Commission recommends that governments develop national roadmaps to identify and capture the potential for energy demand management measures.

These should include specific targets and sector-based opportunities, as well as policy measures addressing the barriers that prevent the development of energy-productive economic activity and energy-efficient end use.

Introduction

Even before accounting for climate action, the global economy will require substantial investments in infrastructure as the population and the middle class grow: an estimated US$89 trillion by 2030 across cities, land use and energy systems. ¹⁷² For a good chance of keeping global warming below 2°C, a large share of those investments will have to be reallocated. Improving the energy-efficiency of buildings, industry and transport, for example, could require an additional US$8.8 trillion of incremental investment, as analysis for the Commission shows. Deploying low-carbon technologies including renewables, nuclear and carbon capture and storage (CCS) could require another US$4.7 trillion. Yet a low-carbon scenario could also save money in other areas, such as US$5.7 trillion saved in fossil-fuelled power plants and along the fossil fuel supply chain, and up to US$3.4 trillion from building more compact, connected cities and reducing sprawl (see Figure 2).

Overall, the net incremental infrastructure investment needs from a low-carbon transition up to 2030 could be just US$4.1 trillion, if these investments are done well. ¹⁷³ In this case, the infrastructure capital needed for a low-carbon transition would be only 5% higher than in a business-as-usual scenario, helping to limit future climate impacts and adaptation costs. Other studies have suggested even lower investment needs, given some of the potential synergies in fuel and infrastructure savings. ¹⁷⁴

Between public and private sources, there is already sufficient capital available to finance a low-carbon transition. Many new industries and market structures are already emerging in both the developed and developing world. However, current industry and financial structures often allocate capital inefficiently, with risk, reward and geographic preferences that do not match well with an effective low-carbon energy transition. Accessing the necessary capital will require the right long-term policies, including carbon pricing and regulation. At present, however, the ambiguity, inconsistency and lack of predictability in policy settings creates high government-induced uncertainty, especially for long-lived assets, increasing risk and raising the cost of capital. Government-induced uncertainty is the enemy of jobs, investment and growth.

Policies to reduce finance costs for low-carbon energy

Predictable regulatory regimes are critical to providing the basis for stable revenue streams. These shape market expectations and can accelerate change and lower the costs of the transition to a low-carbon economy. Mixed and inconsistent signals can stifle investment and innovation and prevent us from realising vast potential benefits. Recent sudden changes in renewables policies in some European countries, for example, have been a major deterrent to investors and have significantly raised financing costs, to which renewable energy is particularly sensitive.

The Commission recommends that governments provide clear, long-term policy signals possibly including carbon pricing, resource pricing and regulation.

These will ensure that there is a robust business case to invest in a low-carbon economy. ¹⁷⁵

Significant, near-term opportunities exist to reduce the costs of finance for low-carbon energy. In high-income countries, where there are deep pools of institutional capital in pension and insurance funds, new vehicles for low-carbon investment have been developed in recent years – including so-called “YieldCos”, municipal finance, crowd-sourcing and “green bonds”. When structured appropriately, these instruments could reduce the financing costs for low-carbon electricity by up to 20%. ¹⁷⁶ They provide a way for institutional investors to invest directly in illiquid infrastructure assets and earn predictable inflation-hedged returns (well-matched against long-term liabilities) with greater liquidity.

These investment vehicles depend on the quality of the regulatory regime, the emergence of clear specifications and intermediaries to structure and refine the asset class, and the capacity of investors to treat them as part of diversified portfolios. With the right regulatory regime and financial intermediation in place, the intrinsic riskiness of low-carbon assets may prove to be lower than that of more volatile fossil fuel assets.

In many middle-income countries, using lower-cost public capital can significantly reduce financing costs for low-carbon energy. Financing costs are otherwise so high that they wipe out much of these countries’ cost advantage from lower labour and construction costs. (For example, financing in India adds 25% to the cost of solar power.)

China and Brazil already use variations on subsidised, low-cost financing for renewable energy. National development banks, national sovereign wealth funds and investments made from national budgets or state-owned enterprises (SOEs) under administrative direction fund substantial percentages of the world’s low-carbon investment, overwhelmingly in their own domestic markets. The China Development Bank, for instance, is the largest development bank in the world and has supplied over US$80 billion to renewable energy projects. ¹⁷⁷ As of June 2012, 87% of wind projects and 68% of solar projects in China were built and owned by SOEs and their subsidiaries. ¹⁷⁸ In Brazil, meanwhile, the national Brazilian Development Bank (BNDES) sets a separate long-term interest rate for loans to infrastructure projects. BNDES has committed about US$50 billion so far to low-carbon energy projects. ¹⁷⁹ The lower financing costs sharply reduce the cost of renewable energy; in recent auctions in Brazil, for instance, the average price of wind power was only US$58/MWh. ¹⁸⁰

In low-income countries, even those now exporting oil and other natural resources, mobilising capital for energy investments, whether low- or high-carbon, is still a major challenge. Given the lack of long-term domestic or international private capital for these classes of investment, multilateral banks and development finance institutions continue to play a central role in financing infrastructure. The extra capital costs of low-carbon energy present a challenge to multilateral banks, given many other demands on their balance sheet capacity. Fortunately, new initiatives, funding vehicles and programmes, special-purpose funds and institutions dedicated to providing energy in low-income countries are proliferating. These include securitised microfinance and small-scale mechanisms such as prepayment cards as used in mobile telephones.

The Commission recommends that regulators and investors work together to develop financing arrangements and industry structures that better match the characteristics of low-carbon assets.

This includes developing commercial investment vehicles that provide investors direct access to low-carbon infrastructure, such as YieldCos, direct finance by national, regional or municipal governments, and crowd-sourcing. In middle-income countries, national development or infrastructure banks can play a key role in lowering finance costs.

In low-income countries, multilateral and bilateral development bank assistance is a crucial source of finance for energy systems and infrastructure, and development cooperation should be enhanced to support country-led domestic policy and regulatory reforms aimed at fostering low-carbon energy growth.

The Commission recommends that development banks also review their policies to ensure that their investments are consistent with a low-carbon transition, including the phase-out of high-carbon projects.

Creating new value and reducing stranded-asset risks

From a broader financial perspective, the global economy could create value from the transition to low-carbon energy. Low-carbon infrastructure has significantly lower operating expenses and a longer expected lifespan than fossil fuel assets. ¹⁸¹ Low-carbon infrastructure also has the potential to achieve lower costs of capital, if financing and energy systems can be structured to take advantage of low-carbon energy’s inherently lower risks. Analysis for the Commission shows that in the power sector, these two factors together can offset the increased capital investment required to switch from coal to renewables (see Figure 12).

Figure 12

Increased investment in low-carbon technology is offset by avoided operating and financing costs

Source: CPI and NCE analysis based on data from IEA, 2012; IEA, 2014; Platts, and Rystad. ¹⁸²

Taking into account the full financial picture, including operating savings,the full investment impact of a low-carbon transition in the electricity sector would be an estimated net financial benefit of up to US$1.8 trillion over the period 2015–2035. ¹⁸³ This accounts for all investment impacts of a transition to a 2°C scenario from “business as usual”, including the decline in value of some fossil fuel assets, or “stranding”. ¹⁸⁴

Clear policy signals can reduce stranded-asset risks by discouraging new investment in fossil fuels that would be at risk of stranding. Notably, the potential stranding of investment in the coal sector is less than for oil and gas, because coal produces less economic value per tonne of CO₂ emitted, and there is comparatively less sunk investment in coal production, including coal-fired power plants. Over the next 20 years, reducing the use of coal can achieve 80% of the required energy-sector emissions reductions at only 12% of the total potential stranded-asset cost, supporting a focus on coal in climate policy.

The Commission recommends that governments develop transition arrangements that account for and minimise the impact of asset stranding.

Our work shows that three key actions are needed to reduce stranded-asset risks. The first is to send unambiguous signals, including through strong, predictable carbon pricing, about future economic direction, so those who invest in high-carbon assets understand that they are high-risk. Second, it is critical to limit further coal expansion in the power sector. Absent major investments in CCS, developed countries need to retire their existing coal plants as they age and not build any new plants. For developing countries, limited building of new coal-fired power generation may be needed, but only where cleaner alternatives are not economically viable. Third, governments should analyse the extent to which they are exposed to significant asset stranding risk, across coal, oil and gas value chains, and start to make necessary contingency and diversification plans.

Introduction

Yet there is much greater potential. This chapter focuses on the role of international cooperation in supporting the transformation of the global economy. Although most policy-making for low-carbon and climate-resilient growth will occur at the national and sub-national levels, five key forms of international cooperation can strengthen it. They are: a new international climate agreement, increased flows of international climate finance, improved trade agreements, various kinds of voluntary initiatives at the sectoral level, and changes to the rules and norms of the global economy.

A new international climate agreement

A new legal agreement on climate change is essential to drive the investment and innovation in low-carbon, climate-resilient growth needed to keep global warming below 2°C. An agreement cannot force countries to tackle climate change; they act of their own volition. This is recognised in the current negotiations on a new agreement under the United Nations Framework Convention on Climate Change (UNFCCC), which rest on the foundation of “nationally determined contributions.” ²⁰⁹ But what an agreement can provide is a global framework of rules and commitments, which can make stronger action much likelier.

Countries need to feel confident that all are doing their fair share, so it is important that the new agreement be equitable. A majority of the greenhouse gases in the atmosphere today were emitted by developed economies. ²¹⁰ Yet developing countries’ emissions now exceed those of high-income countries, driven primarily by fast-growing upper-middle-income economies, and their share is increasing. ²¹¹ Slowing emissions in developing countries is thus essential to avoiding dangerous climate change. The question is how to do this fairly, as these countries still have significant populations living in poverty, and they rightfully wish to continue developing their economies. Most also have much lower per capita emissions than developed economies. ²¹²

What this means is that developed countries will have to make earlier and deeper absolute cuts to their own emissions, on a path to near-complete decarbonisation of their economies by mid-century. They will need to provide strong examples of how good policy can drive economic growth and climate risk reduction together; support the development and dissemination of new technologies; share know-how, including in collaborative ventures; strengthen funding sources and financial institutions to bring down the cost of capital; and provide strong climate finance to developing countries, for adaptation, mitigation and capacity-building.

By ensuring that all major economies put in place ambitious national targets, policies and laws within the same time frame, a new legal agreement will expand the scale of markets for low-carbon goods and services, and increase confidence that they will be sustained. It thus has the potential to act as a powerful macroeconomic policy instrument, sending clear signals to businesses and investors about the future low-carbon direction of the global economy.

The Commission recommends that governments work to produce an agreement at the UN Climate Change Conference in Paris in December 2015 that can provide such signals.

The inclusion in the agreement of several core features would strengthen this economic impact:

• A clear long-term directional goal. The Commission supports the proposal that this should be to reduce net GHG emissions to near zero or below in the second half of this century.
• A predictable and synchronised five-yearly cycle under which countries would strengthen their emissions reduction commitments. To provide a clear direction for economic policy, an agreement could oblige all major economies to publish long-term strategies which integrate their economic growth and climate action plans.
• Measures to strengthen countries’ incentives and capacities to address climate risks and reduce vulnerability through national adaptation plans.
• Commitments of support to developing countries, both from public sources and by leveraging significant flows of private-sector capital into lower-carbon and climate-resilient development strategies.
• Common rules for measuring, reporting and verifying commitments, to ensure their credibility and transparency.

Increasing international finance flows

Global flows of finance directed at low-carbon and climate-resilient investments in 2012 are estimated at US$359 billion. ²¹³ Around a quarter (US$84 billion) of these climate flows were international, flowing across national boundaries. Of these, an estimated US$39–62 billion (46–73%) was directed at developing (non-OECD) countries from sources in developed (OECD) countries; 80–90% of this “North-South” financing came from public sources. ²¹⁴

International climate finance flows need to increase sharply if climate risk is to be reduced and developing countries are to achieve lower-carbon and more climate-resilient development paths.

The developed countries will need to set out a pathway to show how they will achieve their agreed goal of mobilising US$100 billion per year in public- and private-sector finance by 2020.

Development finance institutions (DFIs), including multilateral development banks, national development banks, and bilateral and regional financial institutions, play a key role, disbursing about a third (US$121 billion) of climate finance in 2012. ²¹⁵

These institutions should adopt lending targets and principles, and expand their balance sheets to mobilise a substantial increase in global funding for low-carbon and climate-resilient development.

Particular efforts need to be made to devise and use public finance and policy instruments to mitigate the risks faced by private investors, in order to leverage greater flows of private capital. Direct public finance, in the form of grants and concessional loans, continues to be important for adaptation and mitigation, including performance-related funding to prevent deforestation and forest degradation, and to support increased deployment of renewable energy. ²¹⁶

The role of trade agreements

Tariffs on low-carbon and environmental goods raise their costs and slow down their diffusion. Proposals to eliminate such tariffs have been made in the World Trade Organization (WTO) by countries accounting for 86% of global trade in these goods. ²¹⁷ Yet at the same time, some of the same countries have become embroiled in serious trade disputes over specific low-carbon products in which there is particularly fierce competition. It is estimated that roughly 14% of WTO disputes since 2010 relate at least in part to renewable energy. ²¹⁸ Many concern renewable energy subsidies and “local content” requirements which countries and states have used to support domestic industrial sectors; there are also several disputes over the pricing of low-carbon exports such as solar panels, which have led to increases in import duties. These disputes have raised prices, damaging the deployment of renewable energy sources.

WTO members need to agree to new rules for the faster settlement of disputes that hinder low-carbon trade.

At the same time, new regional trade agreements, such as those between the US and Europe and in the Asia-Pacific region, offer the potential to support low-carbon growth through new common standards, and the liberalisation of trade in sectors such as construction and urban planning where innovation can support the move to lower-carbon growth.

Voluntary cooperative initiatives

International cooperative initiatives – among groups of governments, cities, businesses and/or civil society organisations – are playing an increasingly high-profile role in promoting and supporting climate action in specific fields and sectors. Examples include the coalitions of cities undertaking climate action in the C40 Climate Leadership Group and ICLEI (Local Governments for Sustainability); the en.lighten initiative to phase out inefficient lighting, and the Partnership for Clean Fuels and Vehicles.

One notable development has been the emergence of business-led initiatives in sectors of the global economy where a large share of products are internationally traded, making it particularly difficult to manage the related GHG emissions. Examples in the consumer goods sector include the Global Protocol on Packaging Sustainability, and the Tropical Forest Alliance 2020 (TFA 2020). The TFA 2020 is a partnership of businesses, governments and non-governmental organisations committed to reducing deforestation driven by production of palm oil, soy, beef, and paper and pulp. In the case of palm oil, companies participating in the initiative have 15% of the total consumer market by volume, and well over 50% of the global trade in the commodity, which it is believed may make it possible to tip the entire global market towards sustainable palm oil.

The Commission sees potential for similar voluntary international initiatives in other key sectors, including oil and gas, steel and cement.

One important initiative, the Climate and Clean Air Coalition to Reduce Short Lived Climate Pollutants (CCAC), is already stimulating reductions inmethane and hydrofluorocarbons (HFCs).

Bringing HFCs under the provisions of the Montreal Protocol, and phasing them out of production by 2020, offers significant benefits for emissions reduction (up to an estimated 200 billion tonnes of CO2e avoided by 2050) at low cost. ²¹⁹

Changing the rules and norms of the global economy

Establishing a long-term transition to a lower-carbon model of growth and development will also require a more systemic shift. All major economic actors – national governments, sub-national and city authorities, private- and public-sector companies and financial institutions – will need to integrate climate risk management into their core economic and business strategies. Each can do this for itself – but many more will do so if it is required by the rules and norms under which they operate. In a global economy, such rules and norms are increasingly determined at an international level.

Business reporting provides an important example. In recent years, more than 4,000 global companies have been reporting their GHG emissions at the behest of their major investors. ²²⁰ But these reports are not part of these businesses’ mainstream financial reports, and are not treated in the same way, either by the companies or by their shareholders. Few companies report systematically on the climate risks they face: the extent to which business assets, activities and future profits are made vulnerable by climate change and climate change policy. These need to be understood as an increasingly significant additional risk factor facing most major businesses, requiring specific actions to limit exposure and strengthen resilience.

There is a strong case for business reporting on GHG emissions and climate risk, along with other environmental and social impacts, to be integrated with financial reports and standardised.

This will motivate company boards to pay closer attention to these issues and to give higher priority to their management.

The same applies to investors, whose asset portfolios are also subject to climate risk, including the risks of devaluation or “stranding” arising from changes in climate policy and fossil fuel prices. In the last few years a number of investors have begun to recognise this and conduct more systematic and integrated assessments of their portfolios. ²²¹

By requiring investors to conduct climate (and wider environmental) risk assessments of their portfolios as part of their fiduciary duty, stock exchanges and financial regulators could drive significant behaviour change throughout the global economy.

The management of climate risk and the transition to low-carbon and climate-resilient development and growth paths should also now become standard issues for international economic organisations and forums concerned with managing the global economy.

The International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), and the multilateral development banks should reflect climate risk assessment and reduction in their surveillance processes and policy assessments as relevant to their mandates.These issues should also become a standing item on the agenda of the G20.

Economic growth and climate risk are intertwined; institutions and forums charged with fostering economic cooperation should be engaging deeply with the challenges and opportunities discussed in this report.

Introduction

This is a time of huge opportunity. In the second half of 2015, world leaders will agree on new Sustainable Development Goals and how to finance them, and negotiate a comprehensive new climate change treaty. Technology is advancing rapidly, redefining what is possible. New economic trends and opportunities, combined with new leadership commitments, have built real momentum for change. This was already evident when the Global Commission published Better Growth, Better Climate last year; it has kept growing since.

A goal once seen as distant – to end extreme poverty, achieve broad-based prosperity and secure a safe climate together – is increasingly within reach. More and more governments, businesses and communities are actively pursuing it. But significant challenges and obstacles still stand in the way.

This report focuses on how international and multi-stakeholder cooperation can accelerate progress and help overcome key barriers. Such cooperation can take many different forms: it includes partnerships between governments, but also among businesses, investors, states and regions, city and local authorities, international organisations, civil society organisations and communities. Over the last few years many such partnerships have emerged. This report identifies some of the most promising ones and suggests ways to scale them up further. It also identifies areas where new initiatives are needed. As such, it provides a menu of options for different actors to contribute to delivering both economic and climate outcomes.

Better Growth, Better Climate showed how countries at different levels of development can achieve stronger economic growth, reduce poverty, advance development goals, and reduce climate risk at the same time. It focused on the three major economic systems where growth and emissions are concentrated – cities, land use and energy – and called for consistent and credible policies around three key drivers of change – resource efficiency, infrastructure and innovation (see Box 1). It showed that the economic and social benefits alone would make many low-carbon policies and approaches worth pursuing. But it also recognised that the challenges that countries face in tackling these issues are deeply shaped by their history and their political and economic circumstances. Low-income countries in particular need robust international support to make progress on these fronts – and some actions are difficult for any country to take on alone.

This is why international cooperation is so crucial. It is a key lever to strengthen and more effectively distribute the flow of new ideas and technical capacity. It can mobilise and scale up finance, particularly to developing economies. It can help overcome concerns about loss of competitiveness, reduce trade barriers and increase the scale of markets. By working together, countries, businesses, cities and others can move faster and achieve greater gains.

Further international and multi-stakeholder cooperation could also significantly enhance and complement the ambition of countries’ commitments under the expected new climate agreement. The pledges made to date (“intended nationally determined contributions”, or INDCs) are important steps forward, but it is now clear that they are unlikely to add up to a level of emissions reduction consistent with keeping global warming under the internationally agreed limit of 2°C. The INDCs are therefore just a starting point; to avoid even more severe impacts on human well-being and economic growth than are already expected, ambition will need to rise steadily over the next 10–15 years. Cooperative action can make that easier and more cost-effective.

Part 1 of this report outlines some of the major emerging developments and trends which are creating new opportunities to achieve stronger growth and climate action together, as well as continuing challenges. It then looks at how stronger international and multi-stakeholder cooperation can advance and accelerate progress and help tip the balance towards low-carbon global growth. It discusses these different forms of cooperation, and places them in the context of the international climate negotiations. Part 2 then explores 10 areas where there are large, immediate opportunities to galvanise such partnerships, summarising in-depth analyses set out in a series of Working Papers which will accompany the report.

The international meetings taking place in the remainder of 2015 – in particular the International Conference on Financing for Development in Addis Ababa in July, the UN Summit to adopt the post-2015 Sustainable Development Goals in New York in September, the G20 Summit in Antalya in November, and the Paris Climate Change Conference (COP21) in December – are critical moments for the international community. The world’s leaders must rise to the challenge. Failure to seize these opportunities would set back the cause of development and poverty reduction for years. But success could unleash a new era of international cooperation for better growth and a better climate. The Commission hopes this report can contribute to that success.

Box 1. Better Growth, Better Climate – Key Insights

The Global Commission on the Economy and Climate’s 2014 report, Better Growth, Better Climate, is addressed to economic decision-makers across the world, in both the public and private sectors. It examines the large structural and technological changes already occurring in the global economy, and shows that through targeted policies and investments, countries at all levels of development can build stronger economies while substantially reducing climate risk.

A key insight of the report is that many of the policy and institutional reforms needed to tackle climate risk are also crucial for revitalising growth, fostering development and improving well-being. The opportunities for such reforms are increasing, as emerging and developing economies experience rapid urbanisation and structural change, innovation reduces the cost of a low-carbon transition, and the costs of the current economic growth model become more apparent. Many reforms can generate multiple economic, social and environmental benefits: improved economic performance and faster poverty reduction, as well as cleaner air, more liveable and vibrant cities, and greater resilience to climate change.

The report examines three key drivers of change: efficiency of resource use, infrastructure investment, and innovation. All three offer potential for both improving growth and reducing climate risk. Progress will be especially important in three key socio-economic systems that underpin a large share of the world’s economic activity and greenhouse gas (GHG) emissions: cities, land use, and energy. Credible and consistent policies are needed in each, taking into account the unique circumstances, varying capacities and differing needs of countries at different levels of development.

Cities and urban areas are home to half the world’s population, and account for about 80% of global economic output and around 70% of global energy use and energy-related GHG emissions. Nearly all of the world’s population growth in the next two decades will occur in urban areas, primarily in developing countries; by 2050, two-thirds of the global population will be urban. How cities develop is thus critical to the future path of the world economy, development and climate. A large share of urban growth today involves unmanaged sprawl, leading to congestion, rising air pollution, and high economic, social and environmental costs overall. As discussed in Section 2.1, pioneering cities around the world are demonstrating the benefits of a different approach: more compact, connected and coordinated urban forms built around mass transit. Adopting this model not only leads to more attractive and competitive cities, but higher quality of life, sustained resource savings and lower GHG emissions.

Land use is a key development concern, as roughly a quarter of the world’s agricultural land is severely degraded, and forests continue to be cleared for conversion to crops and pasture, and for timber and mining. Key ecosystem services are being compromised, and the natural resource base is becoming less productive. Yet by 2050, the world’s farms will need to produce 70% more calories than in 2006, due to population growth, rising incomes and changing diets. There is considerable scope to increase agricultural productivity and resilience through new methods of crop and livestock management and the restoration of degraded land, and at the same time to reduce the estimated 25% of food that is wasted globally. Better Growth, Better Climate recommends international cooperation to restore 500 million hectares of degraded forests and agricultural land through scaled-up investment and adoption of landscape-level approaches. It also recommends a scale-up of programmes to protect and restore forests, including reaching at least a US$5 billion investment in REDD+ financing per year. Section 2.2 highlights recent initiatives that can help to deliver this.

Energy use has grown by more than 50% since 1990. Energy services will need to keep rising rapidly to support continued development and bring modern energy access to the 1.3 billion people who lack access to electricity and the 2.7 billion who lack modern cooking facilities, mostly in sub-Saharan Africa and South Asia. Energy production and use already account for two-thirds of global GHG emissions, so how this new demand is met is a crucial determinant of climate risk. Better Growth, Better Climate stresses the need to sharply boost energy efficiency, encouraging governments to treat it as the “first fuel” – a topic discussed further in Section 2.4. It also urges an expansion of low-carbon energy production, particularly renewables, noting their falling costs and the benefits to energy security, air quality and public health. And it calls for an end to new unabated fossil fuel power: in developed countries immediately, and in emerging economies by 2025, while acknowledging the specific needs of lower-income countries. Energy markets and financing methods also need to be adapted to accommodate renewables at scale; this is discussed in Section 2.3.

Cutting across and shaping these three socio-economic systems are three major drivers of change:

Resource efficiency is essential for achieving both better growth and emissions reduction. There are numerous opportunities to boost efficiency in the use of energy, water, land, capital and other crucial resources through reforms to tackle market failures and poor policies. Better Growth, Better Climate recommends that governments introduce strong, predictable and rising carbon prices as part of fiscal reform strategies, prioritising the use of the revenues to offset impacts on low-income households or to finance reductions in other, distortionary taxes. Effective policies will need to be tailored to each country’s circumstances. As discussed in Section 2.5, there has been considerable momentum towards both carbon pricing and fossil fuel subsidy reform in the last two years. In rural areas water, fertiliser and power subsidy reforms are likewise needed to encourage more efficient and sustainable agricultural practices.

Infrastructure investment – in transport networks, power plants and transmission systems, buildings, water and telecommunication systems – is a crucial driver of development, providing critical services and raising the overall productivity of the economy. The nature of infrastructure investment will also determine to a great extent whether economies can shift to a low-carbon path or are locked into high levels of fossil fuel use and inefficient, sprawling cities. The global economy will require about US$90 trillion in infrastructure investments by 2030 across cities, land use and energy systems, especially in developing countries. A low-carbon transition will require a shift in the allocation of this investment, with perhaps a 5% increase in upfront capital needs – about US$270 billion per year. These higher capital costs could potentially be fully offset by lower operating costs, such as from reduced expenditure on fuel. Section 2.6 examines how infrastructure planning can be made both more resilient to climate impacts and compatible with climate mitigation goals.

Innovation is central to economic growth and productivity. Innovation, and the rapid diffusion of clean technologies between countries, is also essential to achieve low-carbon development models, making it possible to continue economic growth in a world of finite resources. Advances in materials science, digitisation, the circular economy and business models are now reshaping industrial production, and creating opportunities for developing countries to “leapfrog” over less efficient, more polluting stages of development. Better Growth, Better Climate argues that public support for energy research and development (R&D) should be at least tripled in major economies by the mid-2020s, to well over US$100 billion per year. It also encourages the use of pricing mechanisms, regulatory standards and public procurement to create market “pull” for low-carbon technologies. Section 2.7 highlights key areas where international partnerships to share costs and knowledge could greatly enhance national efforts, particularly to support growth and emissions reduction in emerging and developing countries.

By pursuing these approaches, Better Growth, Better Climate argues that economic growth, development and climate outcomes can be achieved at the same time: countries need not choose between them. The multiple benefits of climate action include reductions in the health impacts of air pollution, in traffic congestion and accidents; lower risk of locking-in stranded assets; less vulnerability to volatile fossil fuel prices and potential fuel supply disruptions; enhanced productivity of agricultural and forested lands, and associated increases in rural income; as well as the benefits of reduced climate impacts. In terms of air pollution, for example, fossil fuel-related emissions lead to an estimated 3.7 million premature deaths globally each year, with millions more suffering from respiratory illnesses.

Yet Better Growth, Better Climate also stresses that shifting to a low-carbon, climate-resilient economic pathway will not be easy, and will entail additional investment in the short term. Not all climate policies are win-win, and some sectors and businesses will lose out, even where there are overall net gains to the economy. Governments will need to commit to a “just transition”, providing support for displaced workers, affected communities, and low-income households. And the mix of policies used will need to be adjusted to suit different country circumstances. Strong political leadership and the active engagement of civil society and business will be crucial. Broad international cooperation is also vital, particularly to support developing countries in moving towards a lower-carbon and more climate-resilient growth model. A new international climate agreement, including robust financial commitments, is essential to lay a strong foundation for ambitious action in countries at all levels of development.

A time of rapid growth

The world is changing before our eyes. As discussed in Better Growth, Better Climate, new patterns of international production and trade, demographic change and technological advances have dramatically altered the shape of the global economy over the last two decades. “Business as usual” is thus no longer an option. Structural change is inevitable – but that change can be steered to make economies at all levels of development stronger, more equitable, more sustainable and more resilient.

Several emerging trends and developments offer new opportunities to accelerate the transition to low-carbon growth and prosperity. In this section we highlight six: rapid innovation and declining costs of clean energy technologies; the fall in oil prices as an opportunity to advance carbon pricing and fossil fuel subsidy reform; growing international attention to infrastructure investment, particularly in the context of low interest rates; heightened awareness of climate risks in the financial sector; rising interest in low-carbon growth pathways in emerging and developing economies; and an acceleration of the decline in the carbon intensity of the global economy.

These trends and developments are happening at all levels, from the global, to the regional and to the local. They are being spurred by leading companies, major cities and enlightened governments. None is decisive in itself, and in each case, major barriers and challenges still need to be overcome to achieve large-scale and lasting change. But as discussed in Section 1.2, international and multi-stakeholder cooperation can play a key role in helping overcome these challenges.

Rapid growth and record-low prices for clean energy and energy storage technologies

In November 2014, a new price benchmark for solar photovoltaics (PV) was set in Dubai: a bid of just under US$60 per MWh in response to a tender from the state utility DEWA.¹ While these are record lows, the cost of solar power systems globally has fallen by 75% since 2000, while that of energy storage has fallen by 60% since 2005 alone. In a wide range of geographies, utility-scale solar PV is being procured for about US$80/MWh.² This corresponds to natural gas prices in the range of US$7–10 mmbtu – still higher than the US$2–3/mmbtu seen in the shale-rich US in early 2015, but lower than the US$9–10/mmbtu prevailing in Germany and US$14–15 mmbtu in Japan.³ This means that in an ever-growing number of countries, solar PV is now competitive with fossil fuels. A similar story can be told for wind power.⁴

As a result of these falling costs, every dollar invested in renewables buys more capacity than ever: the US$270 billion invested in 2014 bought 36% more capacity than the US$279 billion invested in 2011.⁵Experts predict that a further rise in the competitiveness of renewable energy is now only a few years away as a result of plunging energy storage costs. The recent emergence of advanced low-cost batteries for homes, industry and utilities,⁶along with the rapid development of smart systems using digital and information technologies, is enabling the sophisticated management of demand at every level from the grid as a whole to individual homes. Radical new energy business models are now in prospect, with the potential to lead to a step-change in overall energy productivity.⁷

One result of these trends is that the share of new renewables (excluding hydropower) in electricity generation worldwide is rising – from 8.5% in 2013 to 9.1% in 2014, when renewables contributed 48% of the world’s newly-added generating capacity (see Figure 1).⁸It is still not enough, but almost everywhere in the world renewable investment is growing rapidly.

Yet investment in fossil fuels also continues: in 2014, more than 1,300 GW of coal-fired capacity was in construction or pre-construction stages around the world, and major investments are being made in new sources of oil and gas.⁹At the current rate of increase of about 0.6–0.7 percentage points a year, the share of renewables in total electricity generation would still only reach 20% by 2030 – considerably less than the 41% which the IEA suggests is needed to hold global warming to under 2°C.¹⁰The speed of change is inhibited by several factors: continuing challenges raising the financing needed to invest in renewables; the difficulty of reforming energy markets and regulatory arrangements to enable the integration of intermittent renewables into electricity systems at scale; and continuing fossil fuel subsidies and weak or absent carbon prices, which keep fossil fuel energy prices artificially low. But in turn these challenges are spurring new efforts at overcoming them, in both national policymaking in many countries and through various forms of international cooperation. We discuss these below and in Part 2.3.

Figure 1. Annual additions to global power generation capacity (GW)

Source: Liebreich, M., 2015.¹¹

A plunge in oil prices – and a chance to accelerate energy price reforms

Global oil prices fell by half between the middle and end of 2014 (Figure 2). At first sight, this might not seem like an opportunity for lower-carbon growth. In fact, it has raised demand for oil and gas to some extent. However, lower oil prices have also created an opportunity to pursue much-needed policy reforms. Low prices make it easier in particular for governments to reform fossil fuel consumption subsidies and adopt more efficient frameworks for energy taxation, while still keeping fuel prices affordable.

It is unclear how long this opportunity will last. There are multiple causes for the recent fall in prices, including the growth in unconventional sources such as shale oil, sluggish world demand, changes in the Organization of the Petroleum Exporting Countries (OPEC) price determination policy and a stronger US dollar. Empirical analysis suggests that supply factors played the biggest part in the recent price drop.¹² Modelling suggests that the oil price decline may increase global GDP by 0.3–0.7% in 2015, and by 0.2–0.8% in 2016.¹³ However, there is little consensus on the medium-term direction of oil prices, and price predictions are in any case frequently inaccurate. What can be said is that large swings in the oil price of 25–50% over a short period are quite common, and such volatility is likely to continue. Volatility and the increased uncertainty it brings are economically harmful in their own right, delaying business investment and requiring costly reallocation of resources.¹⁴

Figure 2. Crude Oil Price. Source: FRED Federal Reserve Bank of St. Louis Economic Database.¹⁵

Initially, there were understandable fears that the drop in oil prices might halt the rising demand for alternatives to fossil fuels, such as improved energy efficiency, renewables and electric vehicles. But this now looks unlikely, given the momentum of innovation and falling costs in renewable energy and energy efficiency. Indeed, greater energy efficiency and reliance on clean energy will provide an important hedge against the risk of much higher oil prices in the future. Nevertheless, countries may need to adjust their support for clean energy in the near-term to ensure that its long-term benefits are not disrupted by the near-term decline in oil prices.¹⁶ Enhancing international efforts to bring down the cost of capital for renewable energy and raising energy efficiency standards, as we discuss in Sections 2.3 and 2.4, will be particularly important.

A number of countries are taking advantage of the low oil prices to accelerate fossil fuel consumption subsidy reforms and the adoption of carbon pricing through carbon emission trading schemes (ETS) or carbon taxes. These reforms can help offset the near-term incentives for more fossil fuel consumption created by low oil prices, while yielding important long-term benefits for economic efficiency, energy security, government budgets, cleaner air and reduced climate risk, especially given the high volatility and uncertainty of oil prices in the future.¹⁷ With the right approach and flanking policies to address social impacts, these reforms can be maintained even if oil prices increase. This is discussed further in Section 2.5.

As of 2015, about 40 countries and 20 sub-national jurisdictions representing almost a quarter of global GHGs have explicit carbon pricing policies in place or planned.¹⁸ Taken together, the carbon pricing instruments in these jurisdictions currently cover about half of their GHG emissions, equivalent to 7 Gt CO₂e, or about 12% of global GHG emissions – triple the 4% covered in 2005. Important recent developments include the successful operationalization of pilot trading schemes in seven cities and regions in China, with a national ETS to be launched in 2016; the introduction of Korea’s ETS in 2015; and the successful linking and expanding of the regional trading schemes in California and Quebec in 2014. They will be joined this year by Ontario.¹⁹ Chile and Portugal have adopted carbon taxes, and South Africa plans to introduce one in 2016. India has increased excise taxes on diesel and petrol, representing an increase in implicit carbon prices.

It is clear that these reforms, while nationally determined, are mutually reinforcing, each making it easier for others to be introduced, as fears over competitiveness impacts are reduced and a sense of a “new policy normal” is created. As we note in Section 2.5, the various international initiatives now under way to build political support for carbon pricing, including among businesses, have the potential to expand its use much further.

Fossil fuel consumption subsidies in emerging and developing economies totalled US$548 billion in 2013, while fossil fuel exploration, production and consumption subsidies in OECD countries amount to US$55–90 billion a year.²⁰ But some 28 countries are now undertaking energy subsidy reforms, with reductions in consumer subsidies in countries such as Mexico, Egypt, Indonesia, Ghana, and India. Several others are considering additional steps, including Morocco and Jordan.²¹ Lower oil prices have made this easier, though the political challenges remain formidable. In terms of production and exploration subsidies, low oil prices have, if anything, increased the pressure to maintain support. What countries undertaking reforms have almost all found, however, is that, while fossil fuel consumption subsidies are often introduced as a form of social protection, they are in practice regressive, with the richest 20% of the population typically capturing 40–50% of subsidy benefits, while the poorest 20% usually get much less than 10%.²² Well-targeted cash transfers provide more effective and efficient social protection for the poor, and many countries are now benefiting from the learning of others as policy practice spreads internationally (see Section 2.5).

A growing interest in new infrastructure investment and finance

Infrastructure investment has risen to prominence on the international economic agenda in recent years. At its Brisbane Summit in 2014 the G20 established a new Global Infrastructure Initiative, along with an implementing “Infrastructure Hub”, with the aim of catalysing both public and private investment.²³ Around the same time, the World Bank launched a Global Infrastructure Facility with other multilateral development banks and private sector investors to help deliver major infrastructure projects in low- and middle-income countries.²⁴ New multilateral and national development banks are being established with a specific infrastructure focus, notably the Asian Infrastructure Investment Bank²⁵ and the New Development Bank.²⁶ There is increasing interest in catalysing private financing of new infrastructure, particularly among institutional investors such as pension funds and insurance companies.²⁷ This is also a growing focus of the international discussions around Financing for Development, as we discuss below.²⁸

Better Growth, Better Climate estimates that the world will need some US$90 trillion of infrastructure investment in 2015–30 (an average of US$6 trillion a year), concentrated in cities, energy and land use systems. But it points out that the choice of infrastructure is critical. Many forms of infrastructure, including roads, public transport systems, power plants, water management systems and urban buildings make significant contributions to GHG emissions, and they are also particularly vulnerable to the rising incidence of extreme weather events. If long-lived investments are made without attention to wider impacts, such as on energy security, air pollution, GHG emissions and resilience to climate damage, the world will become locked into a carbon-intensive development path with severe risks to both growth and climate. Building low-carbon infrastructure would require not much more capital, perhaps an additional US$4 trillion of investment (around 5% more), and this could well be largely or completely offset by longer term operational savings on fossil fuel costs.

Extremely low long-term real interest rates in many advanced economies provide an extraordinarily favourable financing environment for infrastructure investment. In March 2015 the real interest rate on 10-year US government borrowings was less than 0.3% (as reflected in yields on inflation protected securities). In Germany and Japan the nominal yields on 10-year government bonds were below 1% (Figure 3), which, given inflation expectations, constitute effectively zero or negative real interest rates. Given the likelihood that interest rates will rise over coming years, this presents a major and probably time-limited opportunity to finance new infrastructure at very low cost. ²⁹

Increasing investment in infrastructure is a powerful way to boost global economic growth, which remains mediocre. It can stimulate short-term demand in economies where it is weak, and ease supply bottlenecks and expand potential output elsewhere. Recent estimates by the International Monetary Fund (IMF) indicate sizeable and long-lasting impacts of public infrastructure spending on private investment and output. These effects are significantly larger during periods of slow growth and in countries with high public investment efficiency, which is critical to ensure that resources are not squandered on “white elephant” projects. Other studies document the impact of infrastructure in reducing poverty and distributional inequity in developing countries.³⁰

Given the critical need to replace old and often crumbling infrastructure in the developed world, and the huge deficit in infrastructure spending in most developing countries, this creates a major opportunity to drive global growth. Calderon, C., and Serven, L., 2014. Infrastructure, Growth and Inequality: An Overview. World Bank Group, Washington, DC. Available at: https://openknowledge.worldbank.org/handle/10986/20365.[/footnote] But it has to be “climate-smart” – both low-carbon and climate-resilient. As we discuss in Section 2.6, it would be extremely short-sighted to build infrastructure which is immediately vulnerable to climate change impacts and/or to more stringent climate policy in the future.

Figure 3. 10 Year Government Bond Yields (%). Source: Federal Reserve Bank of St. Louis Economic Database.³¹

The low real interest rates that advanced economies are enjoying are not being seen in most developing countries, which continue to face significantly higher market borrowing costs or are excluded from international capital markets altogether. Thus a major priority is to strengthen international collaboration on expanding the flow of climate-smart infrastructure finance to developing countries, as well as to tackle specific institutional and policy problems and uncertainties that inhibit private infrastructure investment.³² These efforts should include technical and other assistance to help low-income countries strengthen their public investment management frameworks and capacities.³³

Heightened attention to climate risks – and opportunities – in the financial sector

There is growing interest in climate risk within the financial sector. This is perhaps unsurprising in the global insurance industry, where climate risk is now widely integrated into both underwriting products and investment strategies. To increase risk transparency, the industry has embarked on a “1 in 100” initiative to develop climate risk metrics for one-in-100-year catastrophic events to be applied across private and public sector actors.³⁴ In the US, insurance regulators in several major states are implementing an annual Insurer Climate Risk Disclosure Survey.³⁵ But action is now spreading. Central banks, financial sector regulators, capital market authorities and finance ministries are also now beginning to include consideration of climate risks in the rules governing financial systems. The aim is to send clearer signals to financial markets, better aligning incentives for private investors with the true social cost of investment in fossil fuels and the benefits of clean investments.

The Bank of England, for example, is studying the impact of climate risks on the UK financial system, including both physical risks (such as catastrophic weather events) and transitional risks (related to the speed of transition to a low-carbon economy), while the Bank’s Prudential Regulation Authority is reviewing the implications of climate change for the safety and soundness of insurance companies. Brazil’s Central Bank has issued requirements for all banks to introduce systems for assessment of climate and other socio-environmental risks. A small but growing number of countries now have legal requirements for institutional investors to report on how their investment policies and performance are affected by environmental factors, including South Africa and, prospectively, the EU.³⁶ Concern about the risks of a “carbon bubble” – that highly valued fossil fuel assets and investments could be devalued or “stranded” under future, more stringent climate policies – prompted G20 Finance Ministers and Central Bank Governors in April 2015 to ask the Financial Stability Board in Basel to convene an inquiry into how the financial sector can take account of climate-related issues.³⁷

Investors more generally are starting to become engaged. Following the passage of shareholder resolutions requiring BP and Shell to disclose their climate risks and strategies in spring 2015,³⁸ 62 institutional investors representing nearly US$2 trillion in assets called on the US Securities and Exchange Commission to push for better disclosure of such risks by oil and gas companies in general.³⁹ Others are now divesting from fossil fuel assets, particularly coal. Over the past three years more than 220 institutions, including colleges and universities, cities, religious institutions, pension funds, foundations and others have committed to such divestment.⁴⁰ In May 2015, Norway’s sovereign wealth fund, one of the top 10 investors in the global coal industry, announced it would withdraw up to US$10 billion of investment from companies heavily reliant on coal.⁴¹

At the same time as attention to climate risk has been rising, there has also been increasing concern to ensure that financial systems are adequately structured to invest in the low-carbon economy. The UN Environment Programme’s Inquiry into the Design of a Sustainable Financial System is conducting a two-year examination with the support of central banks and financial regulators across the world.⁴² China is already working on a comprehensive framework for a “green financial system”, including strengthening legal frameworks, improving information, increasing fiscal and financial policy incentives and developing its national development banks as leaders in green finance.⁴³

Countries and jurisdictions such as Brazil, China, the European Union and India are also reforming regulations and incentives in order to promote the development of markets for “green bonds” and other investment vehicles for environmental and low-carbon infrastructure and assets. Issuances of green bonds (corporate, municipal or institutional bonds with proceeds earmarked for an environmentally-friendly project, or project bonds issued specifically with the backing of clean energy projects) have grown rapidly in recent years, from less than US$5 billion per year in 2007–12 to US$11 billion in 2013 and US$37 billion in 2014. Other investment vehicles are also expanding rapidly. In just two years, 15 “YieldCos” (publicly-traded companies paying dividends to shareholders from portfolios of owned renewable energy projects) have been set up in the US, Canada and Europe, with a total market capitalization of well over US$20 billion.⁴⁴ Several major global banks have made public commitments to increasing their investments in environmental and climate-related projects, including Bank of America and Citigroup.⁴⁵

These are positive trends, yet they remain small relative to total global financial flows. There is thus great scope to scale up international financial initiatives to increase the capital allocated to low-carbon investment. We discuss this further in Section 2.3.

National development strategies are integrating green growth and climate resilience

A growing number of developing and emerging economies are building “green growth” and environmental sustainability into their national development and poverty reduction strategies. This reflects a recognition that countries in a wide range of economic circumstances can achieve their development goals through more sustainable approaches than others have pursued in the past.⁴⁶

Rwanda, for example, a least developed country, adopted a Green Growth and Climate Resilience Strategy in 2011, aiming to mainstream climate goals into its economic development and poverty reduction plans. It aims for Rwanda to become a developed country by 2050, based on its renewable energy resources, particularly geothermal; integrated soil fertility management in its agricultural sector; and the development of high-density, “walkable” cities.⁴⁷

Ethiopia, another least developed country, adopted a Climate Resilient Green Economy (CRGE) Initiative as part of its Growth and Transformation Plan (GTP) for 2010–25.⁴⁸ It seeks to secure “triple wins”: simultaneously raising productivity, strengthening climate resilience and reducing GHG emissions, and tries to address trade-offs between these objectives. It includes initiatives to disseminate efficient cookstoves, and to introduce new soil management methods and agricultural technologies to raise yields and reduce emissions from agriculture, which will also reduce deforestation pressures. At the same time, as part of the drive to achieve middle-income status by 2025, the GTP aims to dramatically increase power generation capacity and energy access by exploiting the country’s considerable renewable power potential, through hydroelectric power, wind, geothermal and biofuels.

Increasing energy production to achieve universal access and also support economic growth is a key development challenge for almost all countries in sub-Saharan Africa and for several in Asia, including India. In its 2015 report, the independent African Progress Panel led by Kofi Annan argues that the huge need to expand energy production in Africa will inevitably require continuing use of fossil fuels, including coal.⁴⁹ But the report also finds that Africa could “leapfrog” over the fossil fuel-based growth paths of developed countries and should aim to become a leader in low-carbon development, exploiting its abundant – and still barely utilised – renewable energy resources. This would require a significant increase in energy investment, amounting to around 3.4% of Africa’s GDP. Countries such as Brazil have shown how energy supply can be increased rapidly; others such as Kenya and Bangladesh are pioneering new approaches to financing decentralised solar power.⁵⁰ For example, Grameen Shakti operates a microcredit model that has financed more than 220,000 solar home systems and 30,000 energy-efficient cookstoves in Bangladesh.⁵¹ But achieving the UN goal of universal access to energy by 2030 will require the support of the international community, including a significant scaling-up of finance and technical assistance. We discuss this further in Section 1.3.

China offers perhaps the most striking example of new policies. It has now embarked on a historic structural transformation that has global implications: both directly, because of China’s role in the world economy, and indirectly, by the lessons it provides to other developing countries. China is moving away from a development model based on rapid growth in capital accumulation and energy-intensive export industries, powered largely by coal. It is seeking to move towards an economy based on growth in domestic consumption and services, with stronger innovation and more efficient resource use, powered increasingly by cleaner forms of energy. At the same time it is trying to reverse old patterns of urbanisation, which resulted in sprawl and rising air pollution. China’s leaders have listed what they describe as building an “ecological civilisation” as one of the country’s five top priorities guiding reforms. Severe air pollution is a key driver. In September 2013 China banned construction of new conventional coal-fired power plants in major economic areas, and in 2014 it instituted a national cap on coal consumption. Coal consumption in 2013–14 is estimated to have grown by only 0.1%, and may now have peaked.⁵²

At the same time, strong measures are being implemented to promote energy efficiency and expand nuclear, hydro, solar and wind power generation; China now has the most installed wind power and second most solar PV in the world.⁵³ Among the seven “strategic emerging industries” prioritised for economic growth in the government’s 12th Five Year Plan (2011–16), five are environmental sectors, including new energy sources, energy conservation and clean vehicles.⁵⁴ China remains heavily coal-dependent, and its global growth is a major source of rising GHG emissions, but this is a serious shift in the form of its economic development.

These examples – and others in very different contexts, such as in Colombia, Costa Rica, South Korea and Indonesia – are indicative of a more widespread shift in the understanding of development paths. An increasing number of developing and emerging economies are coming to view environmental sustainability and climate action as integral elements of their growth strategies. But international cooperation – through increased flows of knowledge, financing and other resources – will for most developing countries be critical if these strategies are to be realised.⁵⁵

The carbon intensity of the global economy is falling

The International Energy Agency (IEA) estimates that global CO₂ emissions from fossil fuel combustion held steady at about 32 Gt in 2014, the first time in 40 years that a halt or reduction in global emissions has not been associated with an economic crisis.⁵⁶ Global GDP, meanwhile, grew by just over 3%. This means that the CO₂ intensity of global GDP also fell by just over 3%. Examining these trends and future options, the IEA observes that, while definitive conclusions cannot be drawn from a single year, there are now positive signs that climate change mitigation efforts have the potential to decouple growth from emissions over the coming period.⁵⁷

Although detailed information is not yet fully available, declines in China’s coal consumption and CO₂ emissions in 2014 appear to have been an important contributor to the apparent halt in global emissions growth, the result of strong policies to reduce air pollution, curb coal use, promote energy efficiency and expand low-carbon power generation capacity.⁵⁸ Efforts to increase carbon pricing, boost energy efficiency and shift to renewable energy are also helping to decouple CO₂ emissions from growth in both advanced and a range of emerging and developing economies. The reduction in the CO₂ intensity of global GDP adds to the growing body of evidence that countries can reduce GHG emissions while sustaining economic growth.

However, climate risk is still rising. The level of emissions remains extremely high, and it is still too early to conclude that it has stabilised. The IEA’s 2 degrees scenario (2DS) – defined as an emission pathway which gives at least a 50% chance to keep the mean temperature increase below 2°C – provides a measure of the challenge ahead. The specific pathway explored by the IEA would entail reducing CO₂ emissions from energy consumption by almost 60% to reach 14 Gt CO₂ by 2050, with a decline to zero net emissions in the second half of the century. To get there, the IEA estimates that the world energy-intensity of GDP (broadly reflecting energy efficiency) and the carbon-intensity of primary energy consumption (broadly reflecting the share of fossil fuels in the energy mix) would both need to fall by 60% from 2012 to 2050, or by around 2.6% per year. The sum of these two measures is reflected in the CO₂-intensity of GDP. In the IEA’s 2DS scenario, which assumes an average annual global growth rate of just over 3%, the CO₂-intensity of GDP would need to fall by close to 85% from 2012 to 2050, or by a global average of 5.3% a year.⁵⁹ For developing countries, improving emissions intensity allows for strong GDP growth while total emissions peak and then ultimately decline.

Table 1 documents recent trends in world CO₂ emissions and three drivers: GDP growth, the energy-intensity of GDP and the CO₂-intensity of energy. Carbon dioxide emissions growth did slow significantly, from 3.2% per year in 2000–2010, to 1.9% in 2010–2014. Notably, a little over half of this decline was due to an accelerating decline in the CO₂-intensity of GDP, to an estimated average of -1.3% per year in 2010–2014. Because of incomplete data, we are less certain about recent trends in the components of the CO₂-intensity of GDP. Nevertheless they are moving in the right direction. The pace at which the energy-intensity of GDP is falling appears to have picked up modestly, to perhaps -1.4% a year in 2010–14. The CO₂-intensity of energy – the “dirtiness of the energy fuel mix” – was actually rising by around 0.7% a year in 2000–2010, primarily due to rising fossil fuel use in developing countries. However, CO₂-intensity growth appears to have slowed significantly in 2010–2014, and may even have stabilised. But the challenge is clear. Although GHG emissions are gradually being decoupled from growth rates, they are not doing so at anything like the rate required to put the world on a 2°C path.

This makes the need for both low-carbon and climate-resilient development strategies even more urgent. Growth in developing economies has steadily decelerated from 2010 to the present, and remains weak in advanced economies. World trade is growing at less than half its pre-crisis trend,⁶¹ and there are concerns that global poverty reduction, which accelerated in the first decade of the 21st century, is now slowing down.⁶² A billion people still live on less than US$1.25 a day, now largely concentrated in sub-Saharan Africa and South Asia, with around 2.4 billion on less than US$2 a day.⁶³ Yet the continued rise in climate risk is most threatening to the global poor, who are particularly vulnerable to the impacts of climate change. Indeed, the warming towards which the world is currently headed, of 3°C or 4°C or more, could effectively reverse much of the development progress made over the last half century.⁶⁴ Adaptation programmes designed to increase resilience to climatic changes must therefore be an integral part of development and poverty reduction strategies, and need much greater attention and financing.⁶⁵ Yet adaptation alone is not enough, for without strong and early mitigation action, temperatures will continue to rise.

Both the need and the opportunity are therefore very great. By instigating a step-change in the rate of investment, particularly in infrastructure, and by ensuring that this is both low-carbon and climate-resilient, the international community has the potential to achieve multiple goals at once. It can stimulate global growth, restore progress on development and poverty reduction, and tackle climate risks. This will require serious and sustained attention to policy reform. Major obstacles – the protracted effects of the global financial crisis, the inheritance of deeply embedded market failures, weaknesses in policies and institutions, and the momentum of a high-carbon economic model built up over the last 150 years – all continue to inhibit stronger economic performance. But the potential, and the prize, are large.

The potential of international cooperation

These six recent trends and developments are all encouraging, but it is clear that none is yet occurring at a scale or pace sufficient to create a decisive shift in the direction of the global economy. As argued in Better Growth, Better Climate, national governments need to focus attention on the policies and institutions which can drive the necessary reforms: increasing resource efficiency, raising infrastructure investment and stimulating innovation, particularly in the three economic systems of cities, land use and energy. Box 2 summarises lessons learnt from different countries about best practices in policy-making for low-carbon growth.

Box 2: National policy-making for growth and emissions reduction

Both the World Bank and the OECD have recently published studies bringing together learning and experience of successful policy-making for low-carbon growth.⁶⁶ The World Bank identifies three core principles. First, policy-makers need to plan with an eye on the long term. There are different ways to achieve short-term emissions reductions. But if the end goal is decarbonisation, it is vital that decisions now do not lock in high emissions in the future. Understanding the multiple economic, social and environmental benefits of low-carbon action, as Better Growth, Better Climate argues, can help long-term decision-making.

Second, carbon pricing is important, but has to be part of a wider policy package that triggers far-reaching changes in investment patterns, technologies and behaviours. The OECD shows how better alignment and integration of national policies and regulatory frameworks across ministries and sectors offers huge potential to achieve stronger impacts and reduce costs.⁶⁷ In many countries, misaligned policies are common, making policy goals much harder to achieve. A case in point is the continuing subsidisation of fossil fuel production and consumption even in countries with climate change mitigation policies. But there are many other areas where better alignment is possible, from financial prudential frameworks that inadvertently discourage long-term investment, to the continued decline in funding for energy RD&D as a share of total RD&D spending. Aligning policies in specific sectors is also important – for example, in electricity markets and urban public transport.

Third, managing the political economy of change is critical. As Better Growth, Better Climate argues, governments need to ensure that the shift towards a low-carbon economy is a “just transition”. Not all climate policies are “win-win”: although many jobs will be created, and there will be larger markets and profits for many businesses, some jobs will also be lost or need to evolve, particularly in high-carbon sectors. The human and economic costs of the transition should be managed through local economic diversification plans and support for displaced workers, affected communities and low-income households. Adequate social protection will be needed, along with active labour market policies to assist retraining and redeployment where necessary. Social dialogue and democratic consultation of social partners (trade unions and employers) and communities is important to ensure acceptance and trust. National transition plans are a valuable first step.⁶⁸

National policy is critical. But the impact of national action can be greatly amplified when markets become global. The story of solar power provides an illustration. The dramatic reduction in the cost of solar PV over the last decade arose not just from advances in technology, but from governments’ policy choices. The introduction of a solar feed-in tariff in Germany in 1991 led to a rapid rise in demand over the following two decades, while investment in solar manufacturing in China enabled costs to fall and supply to be expanded. The result has been the creation of a global market, expected to be worth around US$75 billion in 2016 (up from just US$40 billion just five years before),⁶⁹ with solar power in various uses now affordable throughout the world.

These and other examples – such as the comparable reduction in the costs of LED (light emitting diode) lighting over the last decade, and the rapid spread of mobile phones in Africa, which are making landlines increasingly obsolete – show how the creation of global markets and new business models can help transform individual technologies and national policies into dramatic agents of change, reducing costs, driving innovation and catalysing widespread dissemination.

Many of these processes have occurred without a deliberate process to drive them. But in many other cases, cooperation among governments and multiple other stakeholders – businesses, international organisations and civil society – has played a crucial role in scaling up and accelerating transformative change.

First, such cooperation can be a powerful way of expanding markets and reducing costs. For example, over the last two years, international trade negotiations have moved towards reducing tariffs on low-carbon goods and services.⁷⁰ Convergence of national energy efficiency standards for appliances and industrial equipment can equally expand the available markets for national producers and reduce the transaction costs of exporting. Collective procurement of low-carbon goods and services by a number of city authorities and governments – in fields such as electric buses or low-carbon construction materials – offers another cooperative route to scaling up demand and cutting costs.

Second, for countries concerned that standards, carbon pricing or other climate policies could affect their international competitiveness, international cooperation can help overcome these anxieties. If multiple countries – particularly competitors – act together, this can help keep the playing field level. The same is true among businesses in globally traded sectors, which may find it difficult to take ambitious action alone. In both business and the public sector, leadership associations and “clubs” have helped support pioneers to take bolder action, both spurring them on and protecting them against internal criticism. When there is public scrutiny, the power of example can begin to change the norms of behaviour even where action is voluntary. Yet public policy reinforcement is also needed; for example, it is notable that the Tropical Forest Alliance 2020, which is working to eliminate deforestation from commodity supply chains, is not just a business coalition, but also involves governments in both forest and importing countries.

A third key benefit of international and multi-stakeholder cooperation is that it can enable extensive knowledge-sharing and capacity-building, and help identify and disseminate best practices. Opportunities for action on climate change are constantly developing, leading to a lot of “learning by doing”. Many international cooperative initiatives are already facilitating the exchange of information on technologies, standards, policies and business models for climate action. They have particular value in scaling up solutions, and in transferring knowledge across countries and sectors. While historically, this has mostly involved North-South cooperation, there has been a rapid rise in South-South cooperation in recent years.

Fourth, and crucially, international cooperation is essential for expanding finance flows, particularly to the poorest countries and to sectors and activities that may not, on their own, attract sufficient private investment. This is one of the most important forms of intergovernmental cooperation, and another area where South-South cooperation is growing.⁷¹ The multilateral development banks, UN agencies and other international organisations and partnerships are particularly important institutional vehicles for financial flows and capacity-building, with their strong capabilities in technical assistance. Achieving new agreements for future flows of both public and private finance to support sustainable development is a vital priority for both the Financing for Development and COP21 processes in 2015 (see Box 3). As we discuss in Section 2.7, financial cooperation is also important in the field of research, development and demonstration (RD&D), allowing countries and businesses to share the costs of accelerating and disseminating new technologies.

Box 3: Better finance for growth and climate

The major international meetings being held this year – the International Conference on Financing for Development in July, the United Nations Summit to adopt the post-2015 Sustainable Development Goals (SDGs) in September, the G20 Summit in November, and the UN Climate Change Conference (COP21) in December – provide critical opportunities to scale up investment to deliver both development and climate objectives.

In all these arenas it is crucial to take an integrated approach to building finance frameworks, so they can deliver both development and climate objectives together. While there are important differences of emphasis between the two agendas, the draft SDGs under discussion recognise significant synergies, and these need to be fully realised. Key areas in which the financing framework must be properly integrated include delivery of low-carbon infrastructure; promoting energy efficiency; building climate resilience and adaptation; halting deforestation and reversing land degradation; and fostering innovation.

Scaling up finance that supports both development and climate objectives will entail expanding domestic resource mobilisation, both public and private: this is an important need in many developing countries. But it also requires much larger international flows, in particular to developing countries, from both public and private sources. The role of multilateral and regional development banks in infrastructure, climate and other development financing needs to be significantly expanded, along with their support for efforts to establish and strengthen domestic policy frameworks. This should include increasing their capital base, allowing greater flexibility in the management of their balance sheets and streamlining decision procedures, alongside wider efforts to mainstream both climate change into investment strategies and development objectives into climate financing. (This is discussed further in Sections 2.3 and 2.6.)

While clean energy funds and other development financing vehicles have expanded greatly in recent years, more can be done. Institutional and policy problems that inhibit private investment in infrastructure and low-carbon projects urgently need to be tackled. Developing bankable projects that have the right risk-return profile to attract private-sector finance remains a challenge. Some of the solutions include more stable policies to reduce investor uncertainty, as well as development of risk-sharing instruments, blended finance approaches and reform of financial sector regulations to increase the demand for clean infrastructure assets in institutional investor portfolios.⁷² (This is discussed further in Section 2.3.) This will require strengthening institutions and policies for both public revenue and expenditure, as well as promoting development of local capital markets and financial systems. The outcomes of the Addis Conference on Financing for Development, where countries will agree how to finance delivery of the SDGs, should launch efforts to deliver on this agenda.

It is within this broader context that countries meeting at the UN Climate Conference in Paris need to agree on a new climate finance package. In Copenhagen in 2009, and confirmed in Cancún in 2010, developed countries agreed to mobilise US$100 billion per year by 2020 for developing-country climate action, from both public and private sources.⁷³ The Green Climate Fund, an important vehicle for delivering this finance, was operationalised last year after achieving US$10 billion in (multi-year) pledges. But a clearly agreed path on how finance will be increased to US$100 billion per year from these levels is still needed.⁷⁴ Public finance flows remain critical, particularly for adaptation and strengthening resilience. These funds, in turn, must leverage far greater sums in private investment, both domestic and international.

Continued efforts are needed to improve definitions of climate-relevant investment, to measure, report and verify financial flows and identify mobilised finance, and to understand and improve the effectiveness of such investment on adaptation and mitigation on the ground. A new UNFCCC agreement, as well as collaborative action agreed in other forums, will be essential to trigger wider action to deliver more sustainable infrastructure investment in all countries. For example, it could reinforce commitments to reduce and rationalise fossil fuel subsidies, and strengthen the assessment of climate risks and opportunities in fiscal and financial systems.⁷⁵

A new international climate agreement

At the centre of international cooperation on climate change is the UN Framework Convention on Climate Change (UNFCCC). Despite slow progress in recent years, negotiations are now well on the way to achieving a comprehensive new climate agreement at the Paris Climate Change Conference (COP21) in December. If countries can reach an agreement involving universal participation, it will be historic, as it will mark the first time that all countries make climate action commitments under the UNFCCC.

Such an agreement is important to create an equitable, rules-based system for the global governance of climate change. But as Better Growth, Better Climate argues, a strong agreement will also provide a clear signal to businesses and investors that the global economy is moving towards a low-carbon pathway. This will help shape economic expectations, spurring investment and innovation in low-carbon and climate-resilient economic activity. It will therefore in itself act to scale up global markets and reduce costs, while at the same time making the risks attached to high-carbon investment more transparent.

Better Growth, Better Climate identifies key features of an agreement which would enhance this signalling effect, summarised in Box 4.

Box 4: A new international climate agreement

It is not the Commission’s role to recommend the specific design of a new international legal agreement. But building on the conclusions of Better Growth, Better Climate, there are some core features which would enhance the ability of an agreement to send a clear signal to businesses, investors and governments on the future low-carbon and climate-resilient character of the global economy. These include:⁷⁶

• A long-term goal that annual global emissions should fall to near zero or below in the second half of the century as indicated by the Intergovernmental Panel on Climate Change.
• A predictable and synchronised five-yearly cycle of commitments under which countries would review and update their emissions reduction plans. Countries’ “intended nationally determined contributions” (INDCs) should be seen as foundations for their climate ambitions, not limits to them, with the option of strengthening (but not weakening) them over time.

• Encouragement to all major economies to publish long-term economic development and growth strategies outlining how they plan to move in a low-carbon and climate-resilient direction. Though different for countries at different stages of development, the domestic political and policy-making processes needed to draw them up would greatly help businesses, investors and the wider public understand and debate the possibilities, benefits and costs of the low-carbon transition.

• Strengthened incentives and capacities for countries to address climate risks and reduce vulnerability through national adaptation plans. These would ideally incorporate action by sub-national governments and city and local government authorities, and set out the requirements on businesses and others to understand and take action to address climate risks.
• Common rules for measuring, reporting and verifying national policies and their outcomes. Such rules will ensure the credibility and transparency of commitments, and can also play a valuable role in monitoring and managing domestic policy.
• A framework for increased financial flows into low-carbon and climate-resilient investment and development. This should include the obligations of the richest countries to provide support to developing ones, and mechanisms designed to facilitate increased flows of private-sector finance.

An international agreement will contain many other provisions; this is not intended to be a comprehensive description. But an agreement which included these elements would provide a major boost to international economic confidence.

Over the last 18 months, most countries have been preparing INDCs that set out their national targets, plans and policies beyond 2020 to be included in the Paris agreement; several have already been published.⁷⁷ In most countries the preparation process for these documents has required a serious – and in some cases unprecedented – analysis of how greenhouse gases are related to growth trends, and how these can be decoupled, absolutely or relatively. In many this represents an important step forward for the integration of climate considerations into mainstream economic planning.

Some INDCs represent historically ambitious commitments that will require considerable domestic effort to implement.⁷⁸ Nevertheless, initial assessments suggest that it is very unlikely that the mitigation actions pledged will add up to a global emissions reduction consistent with a 2°C pathway. Early estimates suggest that global emissions in 2030, if the current and expected INDCs are implemented, will be around 55–61.5 Gt CO₂e (up from 49 Gt CO₂e in 2010).⁷⁹ This would still be well above the median level of emissions (estimated to be around 42 Gt CO₂e) needed to have a more than 50% chance of putting the world on a 2°C path. Given the huge costs which would be involved in reducing emissions far more rapidly after 2030 – likely to involve the writing off of many assets – it may in effect risk putting 2°C out of reach.⁸⁰

Thus it is essential that the INDCs submitted in 2015 are not only as ambitious as possible, but are also seen as the starting point, rather than the limit, of countries’ climate ambition over the coming years.⁸¹ This would follow the logic of policy-making: it is evident that policies which affect emissions a decade or 15 years into the future will not cease being made in 2015. Indeed, given the trends discussed in Section 1.1, there are strong reasons to believe that low-carbon options will become increasingly affordable and accessible. As they do so, policy-makers should be encouraged to increase the ambition of their climate targets and policies.

Some have already done this. The EU’s INDC frames its 2030 target as a cut of “at least” 40% on 1990 levels, leaving room for deeper cuts in the context of a successful international agreement. Mexico has explicitly set two targets, one an “unconditional” GHG emission reduction of 25% below business as usual by 2030, the other a “conditional”’ reduction of 40%, which could be achieved subject to progress on a variety of issues such as an international carbon price, technical cooperation and access to low-cost financial resources and technology transfer.⁸² It would be helpful if this approach could be reflected in the general understanding that INDCs published in 2015 are “floors, not ceilings” – lower bounds to ambition which can be strengthened when circumstances change, either before or after the Paris conference.

Cooperation on climate beyond the UNFCCC

International cooperation on climate-related issues has also blossomed outside the UNFCCC – one of the most significant developments in recent years. This includes increased attention to climate action in other multilateral processes, such as the development of the SDGs (which include a proposed goal on climate change as well as others related to it), discussions on Financing for Development, and under the G7 and G20. But it also goes well beyond these intergovernmental processes. Multi-stakeholder initiatives have been launched on renewable energy, energy efficiency, transport, cities, agriculture, forests, short-lived climate pollutants, finance and adaptation, among others.⁸³ Many of these were showcased at the UN Climate Summit in New York in September 2014, an unprecedented gathering of government, business and civil society leaders.⁸⁴

At the Lima Climate Change Conference in December 2014, the Governments of Peru and France, in association with the UN Secretary General and UNFCCC Secretariat, launched the “Lima-Paris Action Agenda”, aiming to provide a platform for multi-stakeholder climate solutions at the Paris conference.⁸⁵ The UNFCCC Secretariat has established a portal where actions by non-state actors and international cooperative initiatives are registered and recognised, backed by an independently compiled database.⁸⁶ Serious efforts are now being made to produce methodologies by which these actions can be properly measured and assessed.⁸⁷

Many of these initiatives are relatively new and still in development, however, and participation remains relatively narrow. A major expansion of cooperation is both possible and vital, if the full range of opportunities for growth-enhancing climate action are to be realised. This report in particular highlights 10 areas of international and multi-stakeholder cooperation with significant potential. In some, there are already initiatives with considerable momentum, but which need wider participation to have significant impact. Others represent opportunities that have yet to be seized. The initiatives fall into four broad categories:

• Common commitments or intentions by governments for national action, in some cases supported by programmes of technical assistance, regular monitoring of progress, and peer review. In the case of infrastructure investment and energy efficiency standards, we propose enhanced cooperation among the countries of the G20, in association with others; in the fields of carbon pricing, fossil fuel subsidy reform, and support for low-carbon innovation, we argue for informal associations of “coalitions of the willing” and bilateral and plurilateral partnerships between interested countries.
• Common commitments by non-state actors, supported by standardised methodologies, the development of rules and norms, and mutual exchange of best practice. This model applies to our recommendations for actions by major cities and leading businesses.
• Multi-stakeholder financing partnerships. In a number of fields, governments can work with the private sector, international organisations and civil society to unlock flows of finance. This applies to our proposals to support degraded land restoration and forest conservation and to scale up investment in clean energy and energy access and for urban development.
• Multilateral market regulation under a multilateral treaty. This applies to our recommendations on reducing emissions in the aviation and maritime sectors and on phasing out hydrofluorocarbons (HFCs).

The areas identified in this report do not exhaust the full range of available opportunities for partnership or cooperation. But in each of them cooperative action could generate significant economic benefits and emission reductions – and there is potential for key commitments to be made this year or next. The first criterion is critical: in each case, there are powerful reasons for governments, cities, businesses and others to work together to implement the proposals, even without consideration of their climate impact. They will have economic benefits – both in terms of growth, employment and poverty reduction, and more broadly through improved air quality and public health, reduced congestion, improved quality of life, and more. In short, they can help generate “better growth” as defined in Better Growth, Better Climate.

The analysis here has also estimated their climate benefits, where possible. The methodology and numbers are explained in a separate Methodology Note.⁸⁸ It is of course not the international cooperation itself which has the mitigation potential; it is the policies and investments themselves. But cooperative partnerships can help catalyse and support that action. Some of the actions overlap with one another in terms of their impacts on emissions; these have been subtracted to arrive at the total potential.

Overall, if the recommended actions were implemented, the analysis suggests that global GHG emissions in 2030 would be 16–26 Gt CO₂e lower than under a “business as usual” scenario, i.e. if current trends were to continue with no new policies introduced. This represents between 59% and 96% of the reductions likely to be needed by 2030 to put the world on a pathway consistent with holding global warming to 2°C (see Figure 4).⁸⁹

Figure 4: The Commission’s recommendations could achieve up to 96% of emissions needed to keep climate change under 2°C. Source: New Climate Economy analysis.⁹⁰

This shows that the emissions reductions envisaged in INDCs are only a fraction of the economically beneficial options for climate mitigation possible over the next 15 years. This is not surprising, as INDCs generally reflect what countries believe they can achieve on their own, “nationally determined”. Enhanced action by a variety of other stakeholders and through international cooperation can enable them to do more.

This does not mean that the emissions reduction potential from these cooperative initiatives would all be “additional” to the commitments in the INDCs (except in international aviation and shipping, where emissions are not included in national inventories). Rather, insofar as countries are not yet planning to pursue the actions recommended here, the analysis indicates the potential to raise national commitments in the future. Multi-stakeholder action and international cooperation can thus help governments achieve considerably more mitigation than they now see as feasible.

In this sense the Paris climate conference, building on the Financing for Development and Sustainable Development Goal conferences earlier in the year, creates a much broader opportunity to promote action for growth and climate. Nationally determined commitments will be the bedrock of the new international agreement. But as this report shows, national action can be supplemented, in Paris and beyond, by many forms of international and multi-stakeholder cooperation. In all the fields outlined in this report, governments, states and regions, cities, businesses, and international and civil society organisations have the opportunity to bring forward new commitments to driving low-carbon and climate-resilient growth. These have the potential to enable countries to reduce emissions much further than they can on their own. They can bring the world as a whole much closer to the 2°C pathway. And they can bring all countries the benefits of stronger economic performance, development and poverty reduction.

Introduction

Global demand for agricultural and forestry commodities – food, fuel, fibre and timber – is rising rapidly, primarily in emerging and developing economies. This creates vital opportunities for economic growth, but it also puts pressure on natural resources. With the global population expected to grow by 1.2 billion by 2030 – and the global middle class to roughly double by 2030 – that pressure will only increase.¹¹⁴ About 70% more food calories will need to be produced by 2050, while demand for wood products will increase three- to fourfold.¹¹⁵

Countries face the simultaneous challenges of raising agricultural and forest productivity, preventing deforestation, improving the governance of natural resource use, and strengthening the resilience of land use systems to climate change and other threats. As argued in Better Growth, Better Climate, the linkages between these challenges require a holistic approach. Unless they are addressed together, fixing problems in one area will just shift them to others.

Agriculture and land use change, including change through deforestation, account for roughly a quarter of global GHG emissions. Both agriculture and forests are also already feeling the impact of climate change. Reducing emissions and increasing resilience while boosting productivity will require strong national policies and scaled-up international and multi-stakeholder partnerships to support them.

Better Growth, Better Climate examines multiple opportunities for public policy and land use practices to boost productivity and resilience while reducing emissions. This includes both supply-side measures, such as the use of new crop varieties and new techniques of livestock management, and demand-side measures, such as reducing food loss and waste. This report focuses on two critical areas that require much greater international cooperation, involving both public and private actors: investments to restore degraded agricultural and forest landscapes, and international finance to halt and reverse deforestation, supported by commodity supply-chain commitments.

An urgent challenge

A quarter of the world’s agricultural land is severely degraded,¹¹⁶ primarily in developing countries, and another 12 million hectares are lost each year due to poor soil and water management and other unsustainable farming practices.[117 The UN estimates that degradation of agricultural landscapes cost US$40 billion worldwide in 2014, not counting the hidden costs of increased fertiliser use and loss of biodiversity and unique landscapes.¹¹⁸

At the same time, 13 million ha of forest are being cleared each year.¹¹⁹ About 30% of global forest cover has been cleared,¹²⁰ and over a quarter is degraded; only 21% remains intact.¹²¹ The expansion of agriculture has played a key role in this. Global agricultural land area, including permanent pastures, grew by about 10% or 477 million ha in the 50 years up to 2013.¹²² In the past decade, most of the forest loss has occurred in the tropics, with commercial agriculture responsible for 71% of tropical deforestation worldwide in 2000–2012, much of it illegal.¹²³ Wood and pulp production and, in some places, mining have also contributed to natural forest loss and degradation.

The environmental and economic impact of these trends is enormous. In 1990–2010, carbon storage equivalent to about 15% of manmade global GHG emissions was lost each year.¹²⁴ Vital ecosystem services have been compromised. The ecosystem services provided by forests, including pollination and regulation of water flows that support nearby agricultural productivity, have been estimated at US$3,100–6,120 per ha per year. This implies an additional cost of annual gross deforestation of US$40–80 billion.¹²⁵

These trends can be reversed. Brazil has slowed deforestation by 70% since 2005, through a combination of economic incentives and law enforcement. Indonesia has extended its moratorium on new concessions for the conversion of primary forests. From China to Niger, landscape restoration projects using a variety of approaches, including “climate-smart agriculture” techniques such as no-till farming and agroforestry, are stopping erosion, re-greening land and restoring tree cover. These efforts are raising the incomes of agrarian and forest communities, boosting the productivity and resilience of land, and cutting net emissions. They are mutually supportive, making it critical that public policy reforms by national governments support the management of landscapes as a whole.

New partnerships

If these successes are to be scaled up, however, national policy in many countries will need to be supported by strong international cooperation. There is great momentum already. More than 175 governments (from tropical forest-rich countries and elsewhere), companies, civil society institutions and indigenous peoples’ groups have endorsed the New York Declaration on Forests launched at the UN Climate Summit in September 2014. They pledge to work together to cut natural forest loss in half by the end of the decade, end it entirely by 2030, and restore more than 350 million ha of forests by 2030.¹²⁶

The Global Alliance for Climate-Smart Agriculture (GACSA) was also launched at the Summit, the result of three years’ collaboration to increase investment in agricultural productivity and resilience and help reduce agriculture’s large carbon footprint.¹²⁷ The revamped Consultative Group on International Agricultural Research (CGIAR) and the new Global Research Alliance on Agricultural Greenhouse Gases are helping to advance and accelerate crucial research.¹²⁸And other initiatives are emerging, such as the business-led Low-Carbon Technology Partnership initiatives on forests and on climate-smart agriculture under the World Business Council on Sustainable Development (WBCSD).

Prominent regional initiatives are also making an impact. The Africa Climate-Smart Agriculture Alliance (ACSAA) aims to see 6 million smallholder farms in Africa practising CSA within seven years.¹²⁹ Initiative 20×20 in Latin America and the Caribbean, launched at the Lima Climate Change Conference in December 2014, set out to initiate restoration of 20 million ha of degraded agricultural and forest land by 2020. So far nine Latin American and Caribbean countries and two regional programmes have committed to restoring more than 21 million ha, and more commitments are expected.

Leading businesses are also now working to ensure more socially and environmentally sustainable practices.¹³⁰ Members of the Consumer Goods Forum (CGF), an industry association representing companies with more than US$3 trillion in annual revenue, pledged in 2010 to eliminate deforestation from their supply chains by 2020.¹³¹ In 2012, members of the CGF, including Unilever and Nestlé, partnered with a number of tropical forest countries and other governments, as well as environmental and other civil society organisations, to form the Tropical Forest Alliance 2020 (TFA 2020), a multi-stakeholder platform to eliminate deforestation from global commodity markets.¹³² Several major commodities traders – including Wilmar and Cargill – have now joined them. Overall, company commitments now cover more than 90% of the global palm oil supply chain.¹³³

These efforts are being supported by new technologies and tools that enable radical transparency in monitoring progress, for example Global Forest Watch, which provides near real-time data on tree cover change. By working together, governments, consumer goods companies, local producers, civil society organisations and communities have the potential to achieve change which would have been beyond any of them working on their own. The key now is to translate pledges into effective actions – from economic incentives, to effective monitoring of suppliers and improved transparency in supply chains. It is also critical to establish comparable commitments and partnerships in other commodities affecting forests, notably soy, beef and pulp and paper.

Financing land restoration

One of the greatest challenges is how to pay for large-scale restoration of agricultural land and forests. Human-caused degradation of whole landscapes today is mainly a challenge in developing-countries.¹³⁴ Governments in these countries often lack the resources to stop degradation, much less to restore land. And while commercial-scale operations are often the culprits, smallholders are also involved, and they have limited capital. Moreover, although farmers can benefit from restoration and investments in more sustainable management, through increased crop yields or new forest products to sell, some of the biggest benefits, such as better water retention, cleaner and more plentiful water supply, cleaner air, higher biodiversity and better pollination, are public goods that cannot be monetised easily by farmers and landowners.

Current global investment from all sources, public and private, in restoration and conservation of mixed landscapes is estimated at US$50 billion per year, of which about half is in emerging and developing countries.¹³⁵ On the other hand, global needs for investment in conservation and restoration have been independently estimated at US$200–300 billion per year.¹³⁶ This leaves an estimated shortfall of about US$150–250 billion per year. There is a pressing need to scale up both public and private investment, domestic and international, to fill this gap.

Official development assistance and existing private direct foreign investment in agriculture and forest-related activities in developing countries is currently less than US$7 billion per year.¹³⁷ Thus, most of the needed new investment will have to come from domestic sources and greatly expanded investment from the international private sector. The latter is likely to involve “impact investing” – private (typically internationally active) investors seeking to achieve social and/or environmental impacts along with financial returns.¹³⁸ Impact investing for landscape conservation and restoration is expected to reach at least US$6 billion total in 2014–2018, triple the level of the previous five years.¹³⁹ But much more finance is needed, and key barriers need to be overcome to ensure a good supply of deals with adequate collateral, sufficient prospects for future cash flow, and acceptable risk-reward profiles. Strong domestic policy frameworks aimed at addressing the key market and governance failures which help drive unsustainable land use practises – from agricultural input subsidies to inadequately defined and defended property rights – are crucial.

Several further elements will be needed to overcome financing barriers to scale up private investment: capacity-building, concessional bridge funding for project start-ups, and catalytic first-loss equity investment, which can all be funded by targeted multilateral public and philanthropic cooperation. More public and private impact investment, and partnerships between them, will be needed to have results at scale.

To reduce financial risks, “capital stacking” could play an important role. This is a common risk-sharing approach in which institutional or philanthropic investors typically provide first-loss equity, impact investors provide preferred equity, and other private investors provide protected debt equity. Publicly-funded institutional investors may be able to leverage private capital on as much as a 10:1 basis by accepting a 10% first-loss for being the junior equity partner in a stacked capital deal.¹⁴⁰ The evidence suggests that pooling risks across institutional investors and developing expertise within one facility can lead to cost savings. Public investments will also be needed for capacity building and to underwrite start-up costs, especially in the case of smallholders. This approach is likely to be most fruitful when it is part of a broader unified approach, such as land restoration across a given region.

Making the most of REDD+

Another key area for enhanced cooperation is REDD+: reducing emissions from deforestation, forest degradation, conservation, sustainable management of forests and enhancement of forest carbon stocks. REDD+ is a system whereby forest countries make domestic commitments to maintain more forests, and are then supported by developed countries. International assistance can help forest countries develop strategies and build capacity to implement national policies and develop projects to reduce emissions. Those able to deliver deforestation reductions – and reliably measure, report and verify them – can enter into carbon finance agreements with advanced economies and multilateral development banks, with a “results-based payment” for emission reductions below the agreed reference level.¹⁴¹

Results-based REDD+ works most efficiently and equitably when strong governance is in place, including clear land rights, effective land use planning and strong law enforcement. Where there is political commitment to reduce deforestation, early direct investments can help to build these critical capacities and systems. Results-based payments are not the only option, and some forest countries and donors may choose other approaches. However, results-based REDD+ schemes are inherently efficient. If they fail to deliver large-scale results, the amounts paid will be much smaller. Many forest countries and subnational jurisdictions have started down this path.

Sixty-five developing countries have joined either (or both) the UN-REDD+ Programme or the World Bank’s Forest Carbon Partnership Facility (FCPF), 54 of which have had plans approved for funding.¹⁴² Funders are also stepping up, making funds for REDD+ readiness and results-based-payments increasingly available. The Green Climate Fund will be able to provide payments for REDD+ results through the UNFCCC process (as reflected in the Warsaw Framework for REDD+). Between 2008 and the end of 2014, US$2.8 billion had been pledged to five multilateral funds that support REDD+, with an increase of two-thirds in the value of overall project approvals since November 2013.¹⁴³ REDD+ agreements can also spur enhanced national action: a pledge of US$1 billion from Norway to Indonesia, for example, has supported the moratorium on clearing forests, and a mapping initiative to clarify property rights that has exposed significant overlapping and illegal forest holdings. This unprecedented transparency is helping to pave the way for private sector commitments.¹⁴⁴

All these efforts are closely interlinked, and need to be addressed cooperatively to achieve synergies and avoid conflicts. For example, boosting agricultural productivity could lead to increased deforestation on adjoining lands if protection of forests is not simultaneously enforced. Similarly, forest protection in one area can simply shift deforestation to another. Yet at the same time, climate-smart approaches such as agroforestry can add tree cover while also boosting food production. Deforestation-free supply chain efforts combined with REDD+ can also dramatically change economic incentives for farmers. Most importantly, a coordinated, integrated national approach to landscape management is needed which aims simultaneously to address resource conservation and restoration, boost the productivity of land, and promote rural economic development and poverty reduction.

The Commission recommends that governments, multilateral and bilateral finance institutions, the private sector and willing investors work together to scale up sustainable land use financing, towards a global target of halting deforestation and putting into restoration at least 500 million ha of degraded farmlands and forests by 2030. Developed economies and forested developing countries should enter into partnerships that scale up international flows for REDD+, focused increasingly on mechanisms that generate verified emission reductions, with the aim of financing an additional reduction of 1 Gt CO₂e per year from 2020 and beyond. The private sector should commit to extending deforestation-free supply chain commitments for key commodities and enhanced financing to support this.

Collectively, we estimate that these efforts can lead to emission reductions of 3.3–9.0 Gt CO₂e in 2030 while making agriculture more productive and resilient, and boosting the incomes of agrarian and forest communities in developing countries.

Introduction

The world’s energy systems have undergone an unprecedented expansion in the last 25 years, with energy demand growing by 50% to fuel an economy that has doubled in size.¹⁷⁹ Efficiency is an essential component of any strategy to deliver affordable, reliable energy systems, with an abundance of opportunities to reduce demand and improve the use of energy resources at a lower cost than equivalent supply-side options. It is thus increasingly referred to as the “first fuel”.¹⁸⁰ It can reduce the need to build new energy production infrastructure and, by reducing energy demand, it plays a key role in curbing GHG emissions from the energy sector.

Greater energy efficiency can benefit countries at all stages of development, but particularly fast-growing economies trying to achieve universal energy access with limited resources. Yet many opportunities go untapped because of misaligned incentives, lack of information and other market failures. This makes energy efficiency standards particularly important. As part of a wider policy package, they can be an effective means of changing consumer and business behaviour, and driving product innovation. International cooperation can amplify the benefits by aligning and gradually raising efficiency standards around the world. Converging towards “global best” standards in key sectors such as appliances and lighting, vehicles, buildings and industrial equipment would unlock energy and cost savings, expand global markets, reduce non-tariff barriers to trade and reduce GHG emissions.

Substantial international efforts to improve energy efficiency are already under way. The International Partnership for Energy Efficiency Cooperation (IPEEC), the Clean Energy Ministerial, the UN Sustainable Energy for All (SE4All) initiative, and the Global Best Practice Networks, among others, are providing platforms for collaboration, working to analyse energy efficiency options, to design model policies and to identify finance mechanisms. Through the “en.lighten” initiative, led by the United Nations Environment Programme (UNEP) and the Global Environment Facility (GEF), more than 60 countries have committed to reduce inefficient lighting by 2016. The Global Fuel Economy Initiative is helping more than 20 countries improve vehicle fleet efficiency. The IEA is also playing a prominent role, through its Energy Efficiency Working Party and the Energy Technology Network, which covers all sectors including its Energy Efficient End Use Equipment (4E) initiative. SE4All has identified 168 institutions and at least 145 initiatives around the world focused on energy efficiency.¹⁸¹

The G20, in collaboration with these major international initiatives, could provide a powerful platform for expanding and accelerating action. In November 2014, the G20 approved a plan for voluntary collaboration on energy efficiency, and IPEEC and other organisations are helping identify next steps for implementation.¹⁸² The G20 is strategically important because its members make up 80% of global energy consumption and dominate manufacturing and associated knowledge and capital. For example, 94% of vehicles are produced in G20 countries, so G20 action would have a major influence on uptake of efficient technologies worldwide.¹⁸³ The G20 is thus particularly well-placed to enhance the diffusion and stringency of energy efficiency standards and raise performance in key markets. The November meeting of the G20 in Turkey offers a major opportunity to act.

Energy efficiency has huge economic value that is increasingly recognised. It can reduce fuel and energy bills, spur economic growth, and lead to reduced air pollution and GHG emissions. Modelling for the International Energy Agency (IEA) shows that the global uptake of economically-viable energy efficiency investments could boost cumulative economic output by US$18 trillion to 2035. This has been assessed in macroeconomic models to increase growth by 0.25–1.1% per year, with associated increases in employment.¹⁸⁴ Energy efficiency increases output because it frees up resources for other, more productive investments, which is why the IEA estimates that efficiency measures yield benefits up to 2.5 times the avoided energy costs.¹⁸⁵

Some of these gains can be offset by the “rebound effect”, whereby consumers use part of the savings to buy more energy or other energy-using goods and services. Still, the overall benefits can be substantial. Between 1974 and 2010, energy efficiency saved more energy in IEA member countries than was provided by any single supply-side resource.¹⁸⁶ While 2010 energy use was 20% higher than in 1974, it would have doubled without energy efficiency measures. Energy efficiency is good for energy security as well. A more energy-efficient economy is less susceptible to supply disruptions or price shocks associated with volatile fossil fuel prices, and can serve to drive down energy prices.¹⁸⁷

Finally, energy efficiency can reduce GHGs cost-effectively;¹⁸⁸ in fact, it is crucial for tackling climate change. To stay on a 2°C path, the IEA shows the energy-intensity of GDP would need to decline by 64% by 2050,¹⁸⁹ meaning that if economic output triples, there would only be a 20% increase in primary energy use. Of the total energy-sector GHG reductions needed by 2050 for a 2°C pathway, the IEA envisions 38% coming from improved efficiency in end uses.¹⁹⁰ As shown in Figure 7, there is great untapped potential for energy efficiency across sectors.

Figure 7. Long-term energy efficiency economic potential by sector. Source: IEA¹⁹¹

Public policy has played a role in the reduction of energy-intensity of GDP observed in the last 10 years, and a clear picture is emerging of best practices. Key components of a good “policy package” to overcome market failures and other barriers include “getting prices right” for energy (e.g. through carbon pricing and phasing out fossil fuel subsidies); providing incentives for innovation; providing information to overcome habitual choices and ease decision-making; providing effective financing; and regulation through energy efficiency standards.¹⁹²

Countries vary significantly in their energy productivity (GDP per unit of energy used). Some variations are due to the different sectoral make-up of economies, and levels of development,¹⁹³ but the wide divergence between the stringency of energy efficiency standards is also a key factor. This means that significant economic savings are going untapped in those countries where standards are lower. Unaligned standards also add greatly to transaction costs for firms trying to sell into different national markets.

There are therefore strong economic grounds for countries to raise their standards over time, gradually converging towards the “global best”. This does not mean that all countries would have the same standards. There are likely to be differences for countries at different stages of development. Rather, the goal would be to converge toward a smaller number of standards.¹⁹⁴ Adoption of these standards would be voluntary, and they could be applied in different ways. In some cases, countries may require all products to achieve a minimum performance level, such as for new buildings. In others, such as for domestic appliances, minimum energy performance standards can be set, but labelling products can also be important, allowing consumers to choose. The US Energy Star labelling scheme provides an example.¹⁹⁵ Vehicle efficiency standards (such as in the US and EU) are often applied as an average across the range of models sold by individual manufacturers. In all cases an important principle is that standards should be subject to continuous improvement – the “global best” is not a static concept but a constantly evolving one. Japan’s “Top Runner” approach for appliances, for example, achieves this by basing future minimum standards in a given product class on the highest level of energy efficiency currently available.¹⁹⁶

Any design process for convergence will need to include strong coordination between relevant governments, best practice networks, domestic and international regulators, and industry. And it should be open to the widest possible membership, as a basis for policy exchange, dialogue and lesson-learning. Enforcement of standards, which is essential, is often a challenge for countries with limited resources; here, exchange of good practice can provide vital assistance. Lastly, the approach to standards should be part of a coordinated policy package for energy efficiency. International efforts should also incorporate issues such as support for building effective governance systems, delivering upfront finance for energy efficiency investments, and providing information to consumers.¹⁹⁷

The Commission recommends that G20 and other countries converge their energy efficiency standards in key sectors and product fields to the global best by 2025, and that the G20 establish a global platform for greater alignment and continuous improvement of standards.

To support further action on energy efficiency, international organisations, with business and national governments, should work towards internationally accepted product definitions, metrics for energy efficiency, test protocols, and better information provision. Institutions such as IPEEC, IEA and SE4All can help in the collection of comparable data, policy analysis, and to advise countries on setting energy efficiency standards.

A programme of gradual convergence to global best standards in appliances, lighting, vehicles, buildings and industrial equipment could save 4.5-6.9 Gt CO₂ in emissions by 2030, with significant financial savings and benefits to productivity. ¹⁹⁸

Introduction

Infrastructure is a foundation for economic growth. Robust, efficient power grids, water and sewer systems, transportation systems and communications networks are essential to modern economies and societies. They shape our economies in profound ways, determining whether people drive, walk, cycle or ride public transit, whether we remain dependent on fossil-fuelled power or move towards renewables, and whether heavy downpours cause devastating floods or landslides, or storm water is efficiently channelled out to sea.²²²

Emerging and developing economies face high demand for new infrastructure to support growing populations, increased consumption and new industry, and many also have major maintenance backlogs on existing infrastructure systems. Even in developed economies, much infrastructure is outdated and sometimes decaying due to chronic underinvestment.²²³ As Better Growth, Better Climate shows, around US$90 trillion in infrastructure investment is needed by 2030 to achieve global growth expectations.²²⁴ That is equivalent to around US$6 trillion per year, but current annual global investment is estimated at only around US$1.7 trillion. About 60% of the investment needed is in emerging and developing countries.

Most infrastructure assets last for 30–50 years or longer, so the choices made in the next 15 years, particularly about energy, transport and urban design, will shape the trajectory of economies for many decades. The challenge is thus twofold: to mobilise sufficient finance, and to ensure that infrastructure investments are chosen well to provide a foundation for sustained growth, prosperity and resilience. Getting these investments wrong will waste resources on assets which may not stand up to future climate change impacts, and exacerbate risks if they directly or indirectly lock in high emissions for decades. High-carbon investments may also increase dependence on price-volatile fossil fuels – and risk being devalued or stranded under future climate policies.

As shown in Figure 9, global aggregate infrastructure investment requirements to 2030 are projected to be around US$89 trillion. Shifting to low-carbon infrastructure would add about US$4 trillion in investments, an increase of less than 5%. The reason for the small increase is that the higher capital costs of investment in energy efficiency and low-carbon energy would be largely offset by capital savings from lower investment in fossil fuels, electricity transmission and distribution, and from a shift to better-planned and more compact cities. The additional upfront investment costs will of course need to be financed. But over their lifetimes, they could yield substantial savings – particularly from avoided fuel use – and other benefits that would largely offset any additional upfront capital investments. The case for ensuring that new infrastructure and upgrades alike are “climate-smart” – both climate-resilient and low-carbon – is thus very strong.

In recent years infrastructure investment has become a core focus of international economic cooperation, notably through the G20 and the development finance institutions (DFIs). The G20 established in 2014 a new Global Infrastructure Initiative, along with an implementing “Infrastructure Hub”, with the aim of catalysing both public and private investment.²²⁵  The World Bank now hosts the Global Infrastructure Facility (GIF), a platform to facilitate the development of public-private partnerships (PPPs) to mobilise private-sector and investor capital for infrastructure projects.²²⁶ The African Development Bank (AfDB) has established the Africa50 Infrastructure Fund, aiming to accelerate infrastructure development, and plans to raise US$3 billion in equity capital to begin operations.²²⁷ New multilateral and national development banks are being established with a specific infrastructure focus, notably the Asian Infrastructure Investment Bank (AIIB)²²⁸ and the New Development Bank.²²⁹

Yet the G20 Global Infrastructure Initiative largely ignores the close links between infrastructure investment and climate change, as do many national and local government planning processes: too often infrastructure and climate policies exist in separate silos. This creates potentially costly inconsistencies, sends mixed signals to investors, and heightens the risk of short-sighted infrastructure decisions.

Figure 9. Global investment requirements 2015-2030, US$ trillion, constant 2010 dollars. Source: Global Commission for the Economy and Climate, 2014.²³⁰ 

The importance of sustainable infrastructure for growth in developing countries makes it a priority for international financing, particularly by national and international DFIs. They can help to tackle market failures in the provision of private finance, for example by providing guarantees and other instruments to reduce policy or technical risks, by providing technical assistance and sharing best practices. As indicated in Section 2.3, there is a strong case for expanding the balance sheets and increasing the capital commitments of the multilateral development banks (MDBs), enhancing their capacity to mitigate risk and leverage greater private finance.²³¹

International cooperation can also help mainstream climate into infrastructure investment, particularly through the DFIs. For example, several DFIs, including the World Bank, the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), as well as a number of bilateral finance institutions, are committing to halting unabated coal project financing. The MDBs have worked together for some years on how to shift their own investments and leverage other finance for climate-smart infrastructure, and continue to draw out lessons of good practice, but this effort will need to extend to national development banks and the newer MDBs. Making best practices the norm, across all DFIs old and new, national and multilateral, will help ensure that all capital is deployed toward low-carbon investments.

Progress is already being made: for example, the MDBs and the International Development Finance Club (IDFC), a network of national and sub-regional development banks, have agreed to work together to track and develop best practices for greening finance.²³² Fully mainstreaming climate issues into infrastructure investments around the world will require rethinking policy and planning processes, overall and for individual projects. Approaches will need to be tailored to each country and financial institution, but should follow two high-level principles:

• All infrastructure policies, plans, and projects should build in resilience to the risks of climate changes projected during their lifetimes.
• All infrastructure policies, plans and projects should be consistent with countries’ adopted climate targets and policies and long-term ambitions, and able to be justified in the context of the global long-term goal of holding average global warming to under 2°

In particular, it would be sensible for the G20 to adopt these principles as part of its Global Infrastructure Initiative and its other related programmes, such as its Voluntary High-level Principles of Long-Term Investment Financing by Institutional Investors and in the work of the G20 Climate Finance Study Group.²³³ They would also be appropriate for adoption by DFIs, national development banks and sovereign wealth funds. And they could usefully steer the decisions of private investors, particularly those considering medium and long-term structural risk to project assets and portfolios, and those seeking ways to enhance long-term value creation.²³⁴

Integration of climate-smart principles into infrastructure decision-making needs to happen at three levels: in the design and alignment of overall strategy and policy, in the composition and balance of infrastructure plans and portfolios considered as a whole, and in relation to individual projects. Alignment of government policy is particularly crucial, as inconsistency between government policies inhibits investment and raises the cost of capital.²³⁵ Once the overall strategic direction is set, a range of methods and instruments are available to mainstream climate at the project level.²³⁶  This needs to happen at the technical assessment stage, where technological and process options and alternatives are considered that will achieve the project aim; at the economic assessment stage, which involves measuring net impacts of the project on welfare; and at the financial assessment stage, where costs and revenues of the project are assessed.²³⁷

The Commission recommends that the G20 and other countries adopt key principles ensuring the integration of climate risk and climate objectives in national infrastructure policies and plans. These principles should be included in the G20 Global Infrastructure Initiative, as well as used to guide the investment strategies of public and private finance institutions, particularly multilateral and national development banks.

Governments, development banks and the private sector should cooperate to share experience and best practice in mainstreaming climate into infrastructure policies, plans and projects, including through the G20 Global Infrastructure Initiative.

Introduction

Major businesses generate a large share of global greenhouse gas emissions: nearly 15% come from the largest 500 companies alone.²⁶⁵ Yet businesses also drive technological innovation and low-carbon economic activity. And while major companies and business associations previously often opposed climate policy – some still do – many now demand it. Most recently, at the Business and Climate Summit in Paris in May, business associations whose networks represent 6.5 million firms called for strong climate action and a new international climate agreement.²⁶⁶

Companies are increasingly integrating climate change into their business and investment strategies. Tackling climate change is a huge business opportunity: the global market for low-carbon and environmental goods and services was estimated at US$5.5 trillion in 2011–12, and is growing at over 3% per year.²⁶⁷ Businesses are developing new products and services to seize this opportunity; identifying and addressing climate risks in their operations and supply chains; and reducing their GHG emissions. This is starting to happen across a variety of sectors, including energy-intensive ones such as cement, chemicals, and iron and steel, where emissions are large and significant reduction poses undeniable challenges.²⁶⁸

The corporate reporting initiative CDP²⁶⁹ estimates that in 2014, almost 1,400 companies reporting to it (59% of the sample) achieved an aggregate of 700 Mt CO₂e of emissions reductions through implementation of more than 90,000 projects.²⁷⁰ This is roughly equivalent to the 2012 emissions of France and the Netherlands combined.²⁷¹ In the past such actions were generally motivated by the requirements of policy, corporate social responsibility, or the anticipation of future policies. But increasingly they are driven by a clear business case.

Companies typically reduce their emissions by improving energy efficiency and adopting lower-carbon technologies, processes and operating methods. Such actions can unlock significant savings in energy, resource and fuel costs, and also boost productivity and innovation. Among the Fortune 100, 53 companies reported saving a combined US$1.1 billion in 2013 from energy efficiency, renewable energy and other emission reduction initiatives – an average of over US$10 million per company.²⁷² In an analysis for the We Mean Business coalition, CDP found that in 2013, the global average internal rate of return (IRR) on low-carbon projects by companies reporting to them was 11%, though there was significant variation by country and investment type, with some much higher.

²⁷³ Indeed, there is growing evidence that emissions reduction does not undermine profitability, and may even enhance it.²⁷⁴ The CDP Climate Leadership Index (made up of companies taking the strongest climate action) has outperformed the Bloomberg World Index of top companies by 9.1% over the past four years (see Figure 10).²⁷⁵

Figure 10: Companies taking ambitious climate action are outperforming the market. Source: Adapted from CDP, 2014.²⁷⁶

Shareholders, customers and other stakeholders are also pushing businesses to take climate action. A global survey in 2013 found more than 80% of asset owners and nearly 70% of asset managers viewed climate change as a material asset risk.²⁷⁷ Of the 2,345 companies reporting to CDP in 2014, 88% considered climate change a risk to their operations.²⁷⁸ In April and May 2015, shareholders of Shell and BP passed resolutions requiring the companies to report the actions they were taking in relation to climate change, including emissions management, asset resilience, research and development in low-carbon technologies, and support for public policy.²⁷⁹

Yet there is much greater potential.²⁸⁰ A large share of major businesses around the world have yet to adopt emissions reduction targets and plans,²⁸¹ and many of those that have are relatively limited in their ambition. Only a very small number of companies have set long-term (2030 or later) targets which can be considered to be in line with a sectoral 2°C pathway.²⁸² An analysis of 70 of the world’s largest publicly listed corporate emitters, across the aluminium, cement, chemicals and electric utilities sectors, found that 21 had targets up to 2020 which could be considered consistent with a 2°C sectoral pathway, but only 7 had targets to 2030 or later.²⁸³ Twenty others had non-2°C or “irrelevant” targets, and the rest had none at all. It is clear that efforts need to be extended and ambitions raised if businesses are to achieve a low-carbon transformation.

Raising businesses’ climate ambition

Most climate actions by businesses to date have been undertaken by individual companies acting alone. But in recent years, several business-led cooperative initiatives have emerged to set new norms and expectations for how businesses should respond to climate issues.

Some initiatives focus on establishing targets, or common commitments or standards. The GHG Protocol, for example, provides common international standards for business emissions reporting.²⁸⁴ The Science Based Targets initiative goes further, encouraging companies to set medium- and long-term emissions reduction targets consistent with a global 2°C trajectory. The initiative provides a rigorous methodology based on sectoral shares of total emissions, in order to give these targets independent credibility.²⁸⁵ Similarly, signatories to the RE100 initiative agree to source their electricity from 100% renewable sources, with a clear time frame for reaching their goal.²⁸⁶

In the finance sector, a growing number of initiatives aim to set standards for responsible behaviour. The Principles for Responsible Investment (PRI) includes around 1,400 asset owners, investment managers and service providers representing more than half the world’s institutional investment capital. PRI members report having engaged more than 1,660 companies in around 60 countries, seeking improvement in environmental, social and governance (ESG) policies and practices, including carbon emissions disclosure, targets and corporate lobbying on climate policies.

The market for investments including some form of ESG now represents around a third of all assets under management, and evidence and practice suggest that consideration of ESG factors can reduce risk and improve investment and business performance.²⁸⁷ Under the Montreal Pledge, meanwhile, asset owners and investment managers commit to measuring and disclosing the carbon footprint of their assets. The aim is to have at least US$3 trillion of assets covered by the pledge by the end of 2015.²⁸⁸ More radically, the Portfolio Decarbonisation Coalition encourages asset holders to decarbonise their investment portfolios.²⁸⁹

But individual business action is rarely sufficient to transform whole markets and sectors in a low-carbon direction. For this a critical mass of companies is needed to build economies of scale, shift demand, and advocate for consistent regulatory policies. A number of initiatives have emerged over recent years seeking to catalyse the low-carbon transformation of specific sectors, value chains, technologies or products in this way.

The Low Carbon Technology Partnerships initiative (LCTPi), for example, has brought together about 100 companies to accelerate the development and deployment of low-carbon technologies in key fields. Some LCTPi action plans are focused on energy-intensive sectors, such as the Cement Sustainability Initiative, and in chemicals; others focus on technologies such as carbon capture and storage and advanced biofuels. The LCTPi involves dialogue with governments on removing policy barriers and the formation of public-private partnerships for research, demonstration and development.²⁹⁰

Similarly, the Tropical Forest Alliance 2020 (TFA 2020) aims to transform markets for key agricultural commodities, with producers, traders and consuming companies all committing to eliminate deforestation from their supply chains. The aim is to extend current commitments for palm oil to other commodities such as soy, beef, and pulp and paper.²⁹¹ Under the Soft Commodities Compact of the Banking Environment Initiative, major banks representing 20% of the international financing of agricultural commodities are developing new financing solutions for sustainably sourced commodities.²⁹²

There is significant scope for such initiatives to be developed in other sectors, particularly among energy-intensive industries and the oil and gas sector.²⁹³

Wider attempts to transform the financial sector are also under way. The United Nations Environment Programme (UNEP) Inquiry into a Sustainable Financial System is working with central banks and financial regulators to examine how the financial system as a whole can help support the low-carbon transition. It argues for an expansion of the scope of risk management to include climate factors, and mechanisms to facilitate the flow of capital into low-carbon investment. Through the Focusing Capital on the Long Term initiative, a group of major investors is proposing ways to reorient investment practices away from “short-termism”, through changes in asset manager contracts, benchmarking, evaluation and incentives and clear statements of investment beliefs.²⁹⁴ The Climate Bonds Initiative aims to drive the expansion of new financial instruments for low-carbon investments.²⁹⁵

These initiatives have been accompanied by a rise in business-led climate advocacy. New coalitions are calling for clear, long-term and stable low-carbon policy signals to guide investment and innovation. Formed in 2014, We Mean Business brings together seven global associations to amplify the business voice.²⁹⁶ At the UN Climate Summit last September, the Global Investor Coalition brought together 350 investors with combined assets of US$24 trillion to call for stronger climate policy.²⁹⁷ Business advocacy could also play a crucial role, together with trade unions and community organisations, in working to ensure a just and efficient transition to a low-carbon economy, by helping affected workers and communities, for example in coal mining and energy-intensive sectors, to shift into new sectors of employment.

It is too soon to know how successful these initiatives will be. But they offer the potential to shift the huge resources of business investment and innovation towards driving a low-carbon transition. More broadly, there is a need to engage businesses all around the world, not just in developed countries. The prize is to align business interests more closely with the requirements of a 2°C pathway, to drive deeper emissions reductions and expand low-carbon markets.

The Commission recommends that all major businesses adopt short- and long-term emissions reduction targets and implement corresponding action plans, and all major industry sectors and value chains agree to market transformation roadmaps, consistent with the long-term decarbonisation of the global economy. Financial sector regulators and shareholders should actively encourage companies and financial institutions to disclose critical carbon and environmental, social and governance (ESG) factors and incorporate them in risk analysis, business models and investment decision-making.

The finance sector should expand long-term and responsible ownership and financing practices, and improve its capabilities, incentives, standards and rules in order to facilitate the decarbonisation of the global economy. Businesses should adopt common standards for measuring, reporting and verifying emissions data using best practice protocols, and include their results in integrated financial reports. Businesses should work to ensure that trade associations and other groups representing them do not act to block action on climate change, and speak out when they do.

Introduction

Hydrofluorocarbons (HFCs) are the fastest-growing group of greenhouse gases in much of the world, with emissions of major HFCs rising by 10–15% per year. Overall, HFC emissions are growing at a rate of 8–9% per year, but the focus of mitigation efforts is on widely used HFCs with high global warming potential (GWP), where emissions are growing faster.³⁵⁴ Developed to replace chemicals being phased out under the Montreal Protocol on Substances that Deplete the Ozone Layer, they are used as refrigerants in air conditioners and other products, to make insulating foams, and as solvents. They do not harm the ozone layer, but are potent greenhouse gases, with particularly large near-term climate impacts.³⁵⁵

Developed countries already include HFCs in national emissions inventories under the United Nations Framework Convention on Climate Change (UNFCCC). But to catalyse rapid action and mobilise finance, more than 100 countries now support amending the Montreal Protocol to phase down the production and use of HFCs with the highest climate impact. Such a phase-down could avoid 1.1–1.7 Gt CO₂e of HFC emissions per year by 2030,³⁵⁶ while driving significant energy efficiency improvements with both economic benefits through energy savings and climate benefits. The Montreal Protocol includes a Multilateral Fund which could help finance HFC phase-down in developing countries.

Momentum on HFCs is also building at the national level and in the private sector. The EU, the US and China have all committed to controlling HFCs more stringently and increasing the availability of alternatives. A diverse group of governments, businesses and others is tackling HFCs through the Climate and Clean Air Coalition to Reduce Short-Lived Climate Pollutants (CCAC). The Consumer Goods Forum, with more than 400 member companies, will start phasing out HFCs in refrigeration in 2015.³⁵⁷ Refrigerants, Naturally! – an initiative by Coca-Cola, PepsiCo, Red Bull, Unilever and others – is working to eliminate the use of HFCs in those companies’ operations.³⁵⁸

Driving these actions is a strong sense of urgency. The HFCs now used as substitutes for ozone-depleting substances (ODSs) can trap 100–4,000 as much heat in the atmosphere over 100 years, per tonne, as CO₂.³⁵⁹ And while proper handling and disposal can reduce emissions, every HFC-using device is a small “bank” of potential emissions for decades to come. Without fast action, the climate impact of HFCs could grow as much as 30-fold by 2050,³⁶⁰ eroding the benefits of global mitigation efforts.

Moreover, phasing down HFCs with high global warming potential (GWP) would cost relatively little. The US Environmental Protection Agency (EPA) estimates that HFC emissions could be reduced by more than 40% in 2030 through measures that are cost-effective today.³⁶¹

Though in some areas (e.g. medical and technical aerosols, fire protection applications), there are still no good alternatives to high-GWP HFCs, in most areas they are widely available and affordable.³⁶² The drinks manufacturer Heineken, which now uses non-HFC refrigeration where technically and legally feasible (about two-thirds of units worldwide), found HFC-free units cost about 15% more at first, but the price difference has narrowed as larger numbers were purchased. The new units are also 38% more energy-efficient than conventional ones, of which 10–15% is due to the refrigerant (hydrocarbons), and the rest to technological improvements.³⁶³ Coca-Cola, which had installed 1 million HFC-free coolers as of January 2014, reports a 40% improvement in its cooling equipment energy efficiency since 2000.³⁶⁴ Recent low-GWP refrigerant demonstration projects presented by the CCAC calculated energy savings of 15–30% and carbon footprint reductions of up to 60–85% for refrigeration in food stores.³⁶⁵

Overall, about 55% of HFCs used in 2010 were in residential, commercial and industrial refrigeration and air conditioning; another 24% were in mobile (vehicle) air conditioning; 11% in foams; 5% in aerosols; 4% in fire protection systems; and 1% in solvents.³⁶⁶ As in the food and beverage industry, HFC-free equipment in other sectors has been found to be more energy-efficient, reducing costs and GHG emissions.³⁶⁷

For motor vehicle air conditioning, for example, the replacement chosen by most automakers supplying EU, Japanese and North American markets costs about US$100 more per unit initially, and another US$2 each year. But the units save an estimated US$37–48 in fuel each year, paying for themselves in less than three years.³⁶⁸ Preliminary estimates by the Lawrence Berkeley National Laboratory (LBNL) also suggest that combining technically available energy efficiency improvements in room AC systems with a transition to low-GWP refrigerants would yield greater GHG emissions reductions than either measure alone.³⁶⁹ In India, the energy savings would be enough to avoid building 120 medium-sized power plants in the next 15 years.³⁷⁰

The Montreal Protocol has several advantages that would allow Parties to quickly and efficiently implement effective controls for HFCs, including a well-established infrastructure, expert panels, institutional experience phasing down nearly 100 similar chemicals, and dedicated implementation tools, including the Multilateral Fund.

The idea to bring HFCs under the Montreal Protocol was first proposed in 2009 by low-lying island states. Four proposals are now on the table, submitted by the Federated States of Micronesia, the Philippines, and six other island states; jointly by Mexico, Canada and the United States; by the European Union; and most recently by India, reversing its previous opposition. All focus on reducing HFC production and consumption under the Montreal Protocol, and leave accounting and reporting of HFCs under the UNFCCC.

The 2015 North American proposal suggests a staged phase-down, with developed countries starting right away and developing countries given a 10-year grace period, as was done with ozone-depleting substances. This measure could avoid an estimated 94–115 Gt CO₂e of cumulative HFC emissions by 2050.³⁷¹

A key strategy for slowing and reversing the growth in HFCs is to help countries that are currently phasing out hydrochlorofluorocarbons (HCFCs) under the Montreal Protocol to “leapfrog” over high-GWP HFCs and move directly to available low-GWP alternatives where feasible. Leapfrogging HFCs in the phase-out of HCFCs would be considerably less expensive than a conversion first from HCFCs to HFCs and then from HFCs to low-GWP alternatives. Combining this with energy efficiency improvements would provide added climate benefits – and cost savings – from reduced energy use.³⁷²

In April 2015, the Open Ended Working Group (OEWG) of the Montreal Protocol held an extraordinary meeting on HFCs, where countries agreed “to study the feasibility and ways of managing HFCs”, with a view to establishing a Contact Group at the OEWG meeting scheduled for 20–24 July in Paris. If progress continues, an HFC amendment could be adopted as soon as the Meeting of the Parties in Dubai in November 2015.

The UNFCCC could further speed the phase-down of high-GWP HFCs by encouraging Parties to include an HFC phase-down in their “intended nationally determined contributions” (INDCs) to the Paris climate agreement.³⁷³ The Parties could also extend HFC reporting and accounting requirements to developing countries.

The Commission recommends that the Parties to the Montreal Protocol approve an amendment to phase down the production and use of HFCs.

Countries that do not yet have regulations in place for phasing down HFCs should begin developing and implementing such regulations alongside appliance energy efficiency standards. Major companies should commit to phasing out HFCs through cost-effective cooperative action programmes such as those of the Consumer Goods Forum and Refrigerants, Naturally!. The UNFCCC should encourage countries to include HFC phase-down in their INDCs, and extend HFC reporting to all countries.