The world has witnessed great efforts of global co-operation in the past six months to meet the targets of the 2015 Paris agreement – from the establishment of the loss and damage fund at COP27 last year to the endorsement of the high seas treaty in March.
However, the path to achieving these targets is fraught with tension, with increased protectionism in the global economy and a lack of converging environmental, social and governance standards hindering progress towards a green transition. There are also inherent tensions between advanced and emerging economies. While emerging economies are not major contributors of carbon emissions, they bear a disproportionate burden of the impacts of climate change.
At the OMFIF Sustainable Policy Institute symposium, held in London, a panel of experts spotlighted climate geopolitics and international co-operation against the backdrop of an increasingly fragmented political system.
Bolstering international co-operation involves managing supply chains, trade and working with high-emitting sectors to ensure a sustainable economy. As political frictions mount around the world, these efforts risk being derailed. A study by the World Trade Organisation simulated the economic impact of a global economy divided into two blocks and found that there would be a gross domestic product loss of 5% in the long run.
International co-operation and financing are also cited as key requisites to achieving the goals of the Paris agreement in the most recent synthesis report by the Intergovernmental Panel on Climate Change. Panellists at the symposium agreed with the report, but they noted that difficulties persist. As Marina Petroleka, global head of research at Sustainable Fitch, succinctly put it, ‘there is a spirit of collaboration, but it would be remiss not to mention the palpable tensions’.
National versus global efforts
The discussion highlighted the need to address seemingly conflicting goals of achieving a green transition at national levels, while maintaining an open and global trading system. One of the key challenges posed by the panel was the tilt towards protectionism, especially with regard to decarbonisation agendas. Countries introduce domestic subsidies in order to ‘keep things local’. However, as Petroleka also mentioned, protectionism creates strain and raises costs. High trade barriers translate to an increase in costs as well as costs of capital, which could negatively impact the viability of green investments. Raising trade barriers can also be especially harmful for emerging economies and exacerbate existing inequalities.
Jean-Marie Paugam, deputy director general of the WTO, concurred, noting that the WTO can be a space to leverage tariffs as brown tariffs are still lower than green in many instances. He also suggested that there is a lot of scope for movement in liberalising pro-sustainability goods and technologies.
Another key concern was the lack of global ESG standards and convergence between countries’ approaches to incentivising decarbonisation. Paugam raised the point that there are more than 70 carbon pricing regimes in the world and it is difficult to establish equivalence between them. The WTO, along with the International Monetary Fund and Organisation for Economic Co-operation and Development, is working to create a global framework on carbon pricing to address this.
Setting the tone for frictionless financing
Along with international organisations, supranational bodies such as the European Union have a key role to play, according to Marcel Haag, director for horizontal policies, directorate-general for financial stability at the European Commission. As the first major jurisdiction to have developed a comprehensive finance agenda, the EU is a principal mover in developing a set of standards.
The sustainable agenda includes a taxonomy and framework on reporting and disclosures, which serve as fundamental building blocks of other instruments. Haag reiterated the EU’s commitment to an international agenda working towards making systems interoperable. He pointed to the Carbon Border Adjustment Mechanism, agreed in December 2022, which is a measure for addressing global carbon emissions and establishing equivalence across different systems.
The lack of global standards was also identified as one of two main challenges for investors by Maya Hennerkes, director of green financial systems at the European Bank for Reconstruction and Development. The lack of converging standards in countries, especially emerging markets, makes it difficult to invest in green projects.
The second challenge she identified was the lack of bankability of potential investment objects, as the risk perception of such projects can be very high. Creating a more conducive environment for investment domestically, with support from the private sector to structure projects, and from the government in terms of clear legislature, will go a long way to address the issue.
There was consensus among the panellists around the impact of war on the sustainability agenda. Haag noted that the political focus on reducing dependency on Russian fossil fuels ties in with the goal of making the shift to renewable energy. Panellists observed that there is a detrimental short-term impact on ESG targets and the climate agenda more broadly, meaning countries have had to delay efforts in working towards the Paris goals.
No sign of relapsing with renewables
The transition to renewable energy has slowed in many countries, such as the UK, with delays to closing coal plants. However, despite the slowdown, there has been no backsliding. Hennerkes pointed out that, according to International Energy Agency data, 2022 was a record year for Europe in commissioning renewable energy projects. While there will be a lag between commissioning and implementation, the key point is that there is still progress being made towards net-zero targets.
As global tensions and temperatures continue to rise, governments, companies, investors and international organisations must address key challenges in order to make meaningful progress towards the goals of the Paris agreement.
Arunima Sharan is Senior Research Analyst at OMFIF.