• The US vies for climate leadership once more: world leaders are looking for continuity of US support following a brief interlude.
  
• The 4th industrial revolution on the horizon: new low-carbon technologies are expected to drive the next wave of economic development.
• Improving climate equity between developed & developing nations: many developing nations feel more aggressive climate targets will require greater support from industrialised countries.
• Plugging the climate financing gap for pandemic-hit lower-income countries: innovative new solutions, including debt relief in exchange for achieving climate targets, could help address climate change and debt sustainability at once.
• Putting environmental risk & climate change at the centre of economic growth: the development of the carbon market and green taxonomies will help link economic & environmental outcomes.

Close to 40 world leaders descended upon Webex for the recent US-hosted (virtual) Leaders Summit on Climate, which many used as an opportunity to reveal new climate pledges and tout their progress to date.

Though not perfectly aligned – there are differences of opinion about how climate change & biodiversity loss should be addressed – there is clearly strong consensus among world leaders on the threat present, the need for a global response, and the realization of the incredible economic opportunity at hand as funding targets are raised, transition timelines accelerated, and new technologies developed.

Though much was discussed – and many press releases published, we think five major themes dominated the agenda and could set the pace for the next major policy push in the run-up to COP26 in November.

Nearly every world leader and dignitary expressed their excitement for the return of US leadership on climate policy. Clearly, it is not just about US leadership – but its unique ability to raise, commit, and coordinate capital.

Continuity of US support on the issue (beyond a Biden administration) will be central to the success of goals being met. Climate change wasn’t particularly high on the former US President’s agenda (to say the least), so it feels as if the world is giving the US a second chance – but damage has already been done, and there are skeptics (China, for instance) waiting for signals of US policy continuity before themselves making more aggressive emission reduction commitments.

Division between developed and developing countries is not new to the environmental policy arena, with the latter often arguing they should have a more flexible timeline for reducing their carbon footprint given the former’s historically heavy reliance on carbon-intensive technologies and suppliers based in the developing world. This thinking was perhaps best articulated by the President of Turkey, Recep Tayyip Erdogan, who said the country should be "evaluated on an equal footing” in tackling climate change.

That said, many frontier and emerging market leaders said they are willing to meet more aggressive emission reduction timelines – provided they receive more financial support from the developed world. For example, Vietnam committed to reducing emissions by 9% from present levels by 2030, but this target could be increased to 27% if provided with financial support from the international community. 

Climate equity was a major theme at COP21 in 2015, when developed countries committed to mobilizing $100 billion per year in climate financing for developing countries to help compensate for the fact that they face more acute physical and economic stresses from climate change – with less financial firepower to combat it. We think this will likely be a major policy theme at COP26 in Glasgow later this year.

The strong policy response to the coronavirus pandemic has added strain to government budgets, especially in smaller developing countries (where fiscal headroom was often cramped before the crisis). There were several discussions around how lower income economies could finance their response to climate change and mitigate future climate change-induced crises while taking acute fiscal pressures into account. To that end, Jamaica's Prime Minister Andrew Holness summarized well the desires & needs smaller nations in proposing four potential solutions:

1.     A global disaster fund: establishing a global disaster fund to help states recover and manage natural disasters.

2.     Risk-informed financing: expanding risk-informed financing in anticipation of natural disasters and climate events.

3.     Factoring climate vulnerability into the equation: including vulnerability measures as a prime consideration in determining access to development financing, rather than only income criteria.

4.     Debt relief for climate action: scaling up of debt-for-climate-adaptation swaps, to simultaneously address climate crisis and systemic debt issues by enabling debt relief in exchange for action on specific climate goals.

We see debt-for-climate-adaption becoming more widely discussed in emerging markets going forward, particularly as governments look to alleviate pandemic-induced financial stresses while maintaining or expanding their commitment to tackling climate change.

Pervading most discussions was the acknowledgement that environmental risk and climate change should be embedded at the core of how we think about economic growth & risk. The sentiment was well illustrated by IMF Managing Director Kristalina Georgieva in her remarks on climate finance, saying that environmental risk must be at the center of all macroeconomic analysis and growth forecasting – and offering two crucial steps to get us there:

1.     Establish credible carbon pricing and remove subsidies: a robust price on carbon, in addition to phasing out carbon subsidies, provides a critical market signal to producers and consumers in all sectors of the economy. Carbon revenues can help ensure a net-zero transition, compensating households for increased prices and helping businesses move from high to low carbon intensity activities. A mix of steadily rising carbon prices with forward guidance and green infrastructure investments could increase global economic growth by more than 0.7% per year for the next 15 years. Yet the average global carbon price is $2/ton – and this needs to rise to $75/ton by 2030 to curb emissions in line with the Paris Agreement targets.

She also argued that, for carbon prices to work, there needs to be an international carbon price floor for large emitters. One approach could be to focus on a minimum price among a small group of large emitters, while creating differentiated pricing structures outside of this core group based on a country's level of development.

2.     Get non-financial reporting and the taxonomy right: for climate finance to work, there needs to be a green taxonomy and standardized reporting of financial risks. While some taxonomies exist and much progress has been made on their development (particularly in Europe), they are rarely standardized across regions, and need refinement, wider adoption, and better enforcement.

While differences on how best to tackle climate change continue to narrow, the larger story here is the impressive momentum moving into COP26 – I can't think of any other moment in history where global leaders have been so aligned on an issue. If climate change is a prime example of the "tragedy of the commons", the velocity and magnitude of action laid out at the Summit hints at a possible "triumph of the commons" to come – but crucially, only if commitments are kept.

Check out our Road to COP26 series for actionable insights & a range of perspectives on how manage the transition to a net-zero economy, or access our ESG Insights Hub for the latest analysis on sustainable finance.

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