The Paris Agreement entered into force on 4 November 2016, committing governments to limit warming to well below two degrees. Did this signal a turning point? Are countries matching the decarbonisation pledges they made at the climate summit a year earlier?
“In 2015 the world economy decarbonised at a record 2.8%”
The results are positive according to PwC’s Low Carbon Economy Index, which tracks the carbon intensity of GDP growth (tCO2/$m GDP). In 2015 the world economy decarbonised at a record 2.8%. But this still falls far short of the rapid reductions needed to achieve the two degrees goal.
But to reach a 2°C scenario, countries need to reduce their carbon intensity by 6.5%/year from now to 2100
Overall, countries’ pledges under the Paris Agreement aim for a global average decarbonisation rate of nearly 3% per year – more than double the business as usual rate of 1.3% (2000-14). This suggests a step change in government policies to reduce emissions and support clean infrastructure investment. But this pathway is more closely aligned with a three degrees scenario. To reach a two degrees scenario, based on expected GDP growth of approximately 3% each year, on average countries will need to reduce their carbon intensity by 6.5% every year from now to 2100.
Countries are expected to address this ambition gap during the global stocktake review process over the next few years. Governments will need to engage with business to clearly make the link between their ambitious emissions targets, their policies – both sector specific and economy-wide – and investment in low carbon infrastructure and products.
“China came top of the Low Carbon Economy Index for the first time this year, with a 6.4% fall in carbon intensity”
China came top of the Low Carbon Economy Index for the first time this year, with a 6.4% fall in carbon intensity. This is welcome environmental good news for China, but can they sustain this performance in future years? It’s clear that in order to do that, they can no longer rely on high levels of GDP growth. Where GDP growth averaged 10% a year since the turn of the millennium, it has fallen from 9.3% in 2011 to 6.7% in the past year. PwC’s ‘World in 2050’ report forecasts this to slow further to an average of 4.6% per year from now to 2050.
So if China is to remain top of the chart, serious emissions reductions are the way to go, and China’s 13th Five Year Plan (FYP) 2016-2020 sets out how to achieve exactly that. Latest estimates from the Chinese government are that RMB 3-4 trillion (USD 440-590 billion) of green finance is needed in each year of the 13FYP, with 40% going to clean energy and transport, 40% environmental protection and 20% energy efficiency.
Whilst chairing the G20 for the first time in September this year, the Chinese government took the opportunity to spell out how they plan to green their financial system and to encourage other countries to do the same. Immediately prior to the G20 meeting, the People’s Bank of China (PBoC), along with six other government agencies (three ministries and three regulators), jointly issued the ‘Guidelines for Establishing the Green Financial System’ to set out a roadmap for implementation. The G20 Green Finance Study Group was co-chaired by the PBoC and the Bank of England. Their green finance options1 were officially welcomed by world leaders in the G20 communique of 4-5 Sept 2016.
Investors are demanding to know about the implications of climate & low carbon transition risks…
… and are also calling for better disclosure
We have increasingly seen investors demanding to know the implications of both climate impact risks and low carbon transition risks and calling for better disclosure. The G20 FSB Task Force on Climate-related Financial Disclosure is expected to issue guidelines on how they should do this. China has seized the momentum of the G20 FSB movement and leading Chinese companies will pilot the guidelines.
The G20 echoed green finance support and provided a series of recommendations to help businesses engage.
The opportunity is huge as China looks for international finance and expertise to displace brown growth with green growth – China issued USD 26.7 billion of green bonds from January to mid-October 2016, compared to USD 61.6 billion globally for the same period. Capital markets, insurance providers and asset managers need to spot the longer term risks to traditional assets from low-carbon policies – such as the national emissions trading scheme due next year – and gear up for unprecedented growth in the less familiar green finance arena.
“Co’s that don’t prepare are likely to find themselves desperately playing catch up”
China’s actions, by way of scale and political influence, are destined to have a far greater impact than President Trump’s backward climate stance. So it is high time for green finance and to investigate physical and political climate risks in China. Companies that don’t prepare are likely to find themselves desperately playing catch up.
1 Set out in the G20 Green Finance Synthesis Report
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