Global carbon price “corridor” key to mobilising climate finance -French commission

Published 19:27 on June 23, 2015  /  Last updated at 16:57 on October 8, 2018  /  Climate Talks, EMEA, International, New Market Mechanisms  /  No Comments

Introducing a global carbon price “corridor” is one of ten recommendations put forward by a commission assembled by French President Francois Hollande and tasked with advising the government - hosts of this year’s high-level climate summit - on how to scale-up international climate funding at the talks from both public and private sectors.

Introducing a global carbon price “corridor” is one of ten recommendations put forward by a commission assembled by French President Francois Hollande and tasked with advising the government – hosts of this year’s high-level climate summit – on how to scale-up international climate funding at the talks from both public and private sectors.

Recognising the ongoing budgetary constraints of governments worldwide, the report looks at ways of further developing the use of innovative financial mechanisms in order to meet a rich-nation commitment of channelling $100 billion per year to poor nations to help them combat and adapt to climate change.

The report, entitled “Mobilizing Climate Finance: A Roadmap to Finance a Low-carbon Economy”, was authored by the Canfin-Grandjean Commission, which is headed by France’s former minister of development Pascal Canfin and economist Alain Grandjean.

The authors note the report and its recommendations fall outside the scope covered by UNFCCC negotiations, but contend that it supports the negotiations and can contribute to the success of the pact to be agreed at the COP-21 summit in Paris this December.

The report identifies the first challenge as the global phasing out of fossil fuel subsidies, which it said “act in many ways as a negative carbon price”.

An IMF paper published last month estimated that these subsidies are equivalent to $10 million per minute – well above the total subsidies targeting renewable energy.

“Given the intense international discussion prior to COP-21, we propose that developed and emerging countries agree on a voluntary basis – and outside of the scope of the UNFCCC international agreement – to a ‘carbon corridor’ with a minimum target price of $15-20/ton of CO2 in 2020, and a maximum target price of $60-80/ton in 2030/2035,” the report said.

“This carbon corridor would allow governments at COP-21 to transmit the necessary common political message, as well as the needed flexibility in price levels to gather countries with different levels of development.”

The remaining nine recommendations to put the world on a path to financing a low-carbon economy, as set out by the report, are as follows:

1) Establish a monitoring process for the low-carbon financial roadmap to ensure its longevity beyond COP-21. The IMF and the World Bank could be charged with the supervision and implementation of this roadmap, in coordination with the institutions deemed relevant to perform this task, particularly within UNFCCC. The objective will be to monitor, in particular, the development of the carbon price signal (including phasing out fossil fuel subsidies), the reforms allowing the removal of barriers to investment in low-carbon infrastructure, the ‘2C roadmaps’ of development banks, the integration of climate risk in financial regulation, the relative volume of ‘green’ investments compared with total global investments in infrastructure and the evolution in the decoupling of GDP and greenhouse gas emissions.

2) Integrate climate in macro-economic models. The integration of a 2C scenario throughout the macroeconomic forecasts and models of international institutions (IMF, OECD, etc.) and finance ministries in order to ensure a better coherence between short-term analysis and forecasts, and long-term low-carbon objectives. Any model or forecast, for example energy market forecasts, that is incompatible with the 2C limit should be explicitly identified as such.

3) Development of national strategies to finance the decarbonization of the economies. Governments, beginning with developed countries, should produce national decarbonization strategies for their economies, covering the needed financing, both public and private. France has adopted the principal of such a strategy in its law on the energy transition for green growth; the G7 countries also committed to this principal in June 2015.

4) Request that each development bank develop a ‘2C investment roadmap’ compatible with the 2C limit. This roadmap should specify how the development banks intend to contribute to the fulfillment of the 2C limit agreed to by the international community. A joint monitoring process by multilateral, regional and bilateral development banks could be established, with a public report presented every two years during General Meetings of the IMF and the World Bank.

5) Increase the use by development banks of instruments and tools with high leverage ratios, such as guarantees, subordinated debt or credit enhancement, to increase climate finance at comparatively low costs. France could request development banks to estimate their capacity to mobilize additional climate finance through an increased use of these tools.

In the particular case of France, the Agence Française de Développement (AFD) is today the only international development finance institution subject to Basel 3 prudential regulation. According to our estimations, if aligned with the prudential frameworks used by other development banks, the AFD could increase its activity by €1 to 2 billion.

6) Include in the 2016 G20 work program the forthcoming recommendations of the Financial Stability Board (FSB), which was mandated in April 2015 by G20 finance ministries to analyze the potential impacts of climate change on financial stability.

7) Request that the Bank for International Settlements (Basel Committee) define methods to include climate risks in stress tests for banks and insurance companies. This should include methodologies to assess the performance of assets held by banks and insurance companies in the +4C scenario as developed by the International Panel of experts on Climate Change (IPCC). France, in partnership with other countries, could formally request the Basel Committee on this issue.

8) Establish a public monitoring system for financial actors’ engagements that have multiplied in recent months, including: the integration of climate risk; measuring greenhouse gas emissions induced by their financial activities; and increasing financing for the green economy. The UNFCCC’s Nazca Platform, which centralizes these commitments, can be used and further developed by COP-21 in order to increase the visibility of progress in this area within the broader ‘Agenda of Solutions.’ These commitments could be comprised in an annual public report.

In the particular case of France, the recently voted provisions of the energy transition for green growth legislation require institutional investors to measure the greenhouse gas emissions linked to their financial activities and to explain how they address the 2C scenario. These same provisions could be usefully extended to private banks concerning their lending activities.

9) Adopt the methodology developed by the OECD in June 2015 to analyze the alignment of public policies with low-carbon development. This is a key means of assessing the integration of progressive decarbonization targets in all public policies. We propose that France be part of the first countries to commit to apply this framework internally and urge other member countries of the OECD and OECD key partners to do so before the COP-21.

In the particular case of the European Union (EU), the financing of the Juncker Plan totalling €315 billion could be made conditional on climate co-benefits criteria and projects related to the implementation of the low-carbon transition could be prioritized (energy efficiency and technology projects). France could communicate broadly on its recent legislative developments to integrate climate issues into financial regulation. The French government could propose to its European partners to move forward in this direction. France could therefore request that the European Commission addresses this issue and proposes a plan of action for the next 2 to 3 years to be delivered ahead of COP-21.

The English version of the 94-page Canfin-Grandjean report can be read here.