18 Nov 2021
The 26th United Nations Climate Change Conference – known as COP26 - has closed, further progress has been made, and the implications are material. Businesses now have more certainty. But investment, fiscal policy and price signals are going to be needed.
As with any change, climate and its mitigation will hit the most vulnerable the hardest.
"Businesses and governments may have formed a plan for a sustainable future at the recent COP26 conference. Now they need to deliver on the plan."
Multilateralism still has some life in it, even if bilateralism has become the norm in many other spheres. The challenges will require sustaining this shared responsibility.
At least 30 countries have both grown gross domestic product (GDP) and reduced carbon commitments. Technology might improve that trade-off in the future. But countries acting together with more ambitious targets raises the demand on resources and the coordination challenges.
The transition is sure to spring surprises. Economists’ estimates of the impact of climate change are often a fraction of those of scientists, at least partly because economists presume smooth adjustment paths. Our lived experience suggests the adjustment paths will be very uneven.
Any change brings opportunity and the larger the change the larger the opportunity. The International Energy Agency (IEA) has suggested clean energy investment must more than triple from current levels to around $US4 trillion per year.
It doesn’t stop there. Some cities are rethinking transit to reduce demand for infrastructure and energy. Healthcare, so central to dealing with the human costs of the pandemic, faces its own climate pressures. If the global healthcare sector were a country, it would be the fifth-largest emitter of greenhouse gases. Many healthcare systems rely on single-use items to reduce infection but only about 15 per cent of healthcare waste is considered hazardous. The opportunities are substantial and widespread.
This investment will require resources. Not just funding but capital equipment, staff, technology and know-how. Some of this may come from a redirection of existing investment which doesn’t meet climate requirements. But global investment has already been soft and commodity investment in the last five years is the weakest in at least two decades. The ability to redirect is low.
Consequently, the bulk will need to come from delayed consumption which will also need to embody a shift in the mix of consumption away from carbon-intensive products. Rising funding costs and inflation are already suggesting the world’s call on resources eclipses supply.
To deliver this, the price or availability of carbon-intensive consumption must rise relative to low-carbon consumption. This could be through a price signal such as interest rates, product prices or an exclusionary policy which overtly limits some types of consumption.
Fiscal policy absolutely has a role to play but we’re jumping from a low bar. The Organisation for Economic Co-operation and Development (OECD) suggests only 2 per cent of COVID-related spending has been allocated to green measures. Funding a stable climate erodes traditional concerns government debt is a legacy for the next generation. Economic downturns – when competition for resources eases and the economy needs stronger demand – are valuable opportunities to advance the green agenda.
Most to gain
As with many opportunities, those who have the most also have the most to gain. Some communities will find this adjustment extremely challenging. The supply and price of many of life’s necessities – including food, shelter and insurance – will be affected. Power prices in parts of Asia, Europe and the UK have recently been highly volatile and estimates of the costs of climate-related events are proving to be much higher than forecast.
The pandemic has already exacerbated existing inequalities and created new ones. Inequality itself lowers GDP growth. The economic cost of the pandemic for the US may be 75 per cent of GDP compared with early-stage estimates of a global cost of around 2 per cent of world GDP. Even the cost of single-country events is large. Hurricane Katrina is estimated to have cost 1 per cent of US GDP and the 2019 Australian bushfires 5 per cent of Australian GDP.
Trade liberalisation provides some sobering lessons. Those disadvantaged were often viewed as simply failing to adjust. Reflecting, as Michael J Sandel has put it, “the tendency of winners...to forget the luck and good fortune that helped them on their way”. But longer-term studies suggest labour markets more exposed to import competition from China experienced larger declines in employment and earnings and increases in poverty, single-parenthood and mortality related to drug and alcohol use.
The world’s experience with trade liberalisation suggests support for the agenda can best be sustained when the losses do not fall disproportionately. The climate response must heed this message.
While progress can be hard to observe, more than 80 per cent of global GDP has a net-zero target. We have the plans and tools; now it’s about the opportunity and not leaving anyone behind.
Richard Yetsenga is Chief Economist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
18 Nov 2021
28 Oct 2021