Editing IPCC:AR6/WGIII/Chapter-15 (section)

=== 15.2.4 Climate Finance and Just Transition ===

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Climate financein support of a Just Transition is likely to be a key to a successful low-carbon transition globally ( ''high confidence'' ). Ambitious global climate agreements are likely to work far better by maximising cooperative arrangements ( [[#IPCC--2018|IPCC 2018]] ; [[#Gazzotti--2021|Gazzotti et al. 2021]] ) with greater financing support from developed to developing regions in recognition of ‘common but differentiated responsibilities and respective capabilities’ and a greater ethical sense of climate justice ( [[#Khan--2020|Khan et al. 2020]] ; [[#Sardo--2020|Sardo 2020]] ; [[#Warner--2020|Warner 2020]] ; [[#Pearson--2021|Pearson et al. 2021]] ). While Just Transition issues apply within developed countries as well (see later discussion), these are of relatively second-order significance to addressing climate justice issues between richer and poorer countries – given the scale of financing and existing social safety nets in the former and their absence in the latter. For example, over the past three decades drought in Africa has caused more climate-related mortality than all climate-related events combined from the rest of the world ( [[#Warner--2020|Warner 2020]] ). These issues can however serve both as a bridge and a barrier to greater cooperation on climate change. The key is to build greater mutual trust with clearer commitments and well-structured key decisions and instruments ( [[#Sardo--2020|Sardo 2020]] ; [[#Pearson--2021|Pearson et al. 2021]] ).

The Just Transition discussion has picked up steam. It was explicitly recognised in the Paris Agreement and the 2018 Just Transition Declaration signed by 53 countries at COP24, which ‘recognised the need to factor in the needs of workers and communities to build public support for a rapid shift to a zero-carbon economy.’ Originally proposed by global trade unions in the 1980s, the recent discourse has become broader. It has coalesced into a more inclusive process to reduce inequality across all three areas of energy, environment and climate ( [[#McCauley--2018|McCauley and Heffron 2018]] ; [[#Bainton--2021|Bainton et al. 2021]] ). It seeks accelerated public policy support to ensure environmental sustainability, decent work, social inclusion and poverty eradiation ( [[#Burrow--2017|Burrow 2017]] ), widely shared benefits, and protection of indigenous rights, and livelihoods of communities and workers who stand to lose (including workers in fossil fuel sectors such as coal and oil and gas) ( [[#UNFCCC--2018b|UNFCCC 2018b]] ; [[#EBRD--2020|EBRD 2020]] ; [[#Jenkins--2020|Jenkins et al. 2020]] ). Because the process involves ‘climate justice’ and equity within and across generations, it involves difficult political trade-offs ( [[#Newell--2013|Newell and Mulvaney 2013]] ). The implications for a Just Transition in climate finance are clear: expanding equitable and greater access to climate finance for vulnerable countries, communities and sectors, not just for the most profitable private investment opportunities, and a larger role for public finance in fulfilling existing finance commitments ( [[#Bracking--2021|Bracking and Leffel 2021]] ; [[#Kuhl--2021|Kuhl 2021]] ; [[#Long--2021|Long 2021]] ; [[#Roberts--2021|Roberts et al. 2021]] ).

Large shocks such as pandemics, and slow-growing ones such as climate, are typically known to worsen inequality ( [[#IMF%20and%20World%20Bank--2020|IMF and]] [[#World%20Bank--2020|World Bank 2020]] ). Evidence from 133 countries between 2001–2018 suggests that such shocks can cause social unrest, and migration pressures, especially when starting inequality is high and social transfers are low ( [[#Saadi%20Sedik--2020|Saadi Sedik and Xu 2020]] ). Additionally, climate policies are more politically difficult to implement when the setting is one of high inequality but much less politically costly where incomes are more evenly distributed with stronger social safety nets ( [[#Furceri--2021|Furceri et al. 2021]] ). A redrawn social compact incorporating climate ( [[#Beck--2021|Beck et al. 2021]] ) that would adopt redistributive taxes and lower carbon consumption, and strengthen state capacity to deliver safety nets, health and education with accelerated climate and environmental sustainability within and across countries, is increasingly recognised as important. Countries, regions and coordination bodies of the larger countries (G7, G20) have already begun such a shift to financing of a Just Transition, but primarily focused on the developed countries, although gaps remain ( [[#Krawchenko--2021|Krawchenko and Gordon 2021]] ).

Such a redrawing of a social compact has happened significantly in the past, for example, after the 1860s ‘gilded age of capital’ with the enlargement of the franchise in democratisation waves in Europe and the Americas ( [[#Dasgupta--2015|Dasgupta and Ziblatt 2015]] , 2016). Not only was social conflict avoided but growth outcomes became more equitable and faster. Similarly, comprehensive modern social safety nets and progressive taxation, which started in the Great Depression and was extended in the post-war period, had both a positive pro-growth and lower inequality effects ( [[#Brida--2020|Brida et al. 2020]] ).

There are three levels at which policy attention on climate financing now may need to be focused. The first is the need to address the global equity issues in climate finance in a more carefully constructed globally cooperative public policy approach. The second is to address issues appropriately with enhanced support, at the national level. The third is to work it down further, to addressing needs at local community levels. Because private investors and financing mostly deal with allocation to climate finance at a global portfolio level, then to allocation by countries, and finally to individual projects, the challenge for them is to refocus attention to Just Transition issues at the country level, but also globally as well as locally (in other words, at all three levels).

Climate finance will likely face greater challenges in the post-pandemic context ( [[#Hanna--2020|Hanna et al. 2020]] ; [[#Henry--2020|Henry et al. 2020]] ). Evidence from the COVID-19 pandemic suggests that those in greatest vulnerability often had the least access to human, physical, and financial resources ( [[#Ruger--2020|Ruger and Horton 2020]] ). It has also left in in its wake divergent prospects for economic recovery, with rising constraints on credit ratings and costly debt burden in many developing countries contrasted with the exceptionally low interest rate settings in developed economies driving the limited fiscal space in the former groups ( [[#Benmelech--2020|Benmelech and Tzur-Ilan 2020]] ). Similarly, monetary policies are likely to be much tighter in developing countries in part structurally because of the absence of ‘exceptional privilege’ of global reserve currencies in developed economies.

The result is a divergence in recovery prospects in the aftermath of the pandemic, with output losses (compared to potential) set to worsen in developing economies (excluding China) as compared to developed countries ( [[#IMF--2020b|IMF 2020b]] ). In these circumstances, a coordinated and cooperative approach, instead of unilateralism, might work better ( [[#McKibbin--2020|McKibbin and Vines 2020]] ). In the case of climate, simulations clearly suggest the need and advantages of better coordinated climate action with stepped-up Paris Agreement envisaged transfers ( [[#IMF--2020b|IMF 2020b]] ). Several options in international climate finance arrangements to support a Just Transition are both available and urgent.

As a first priority, measures might need to accelerate a mix of equitable financial grants, low-interest loans, guarantees and workable business models access across countries and borders, from developed countries to low-income countries. A big push on low-carbon energy access globally, especially in large low-income regions such as Africa, with accelerated financial transfers, makes sense ( [[#Boamah--2020|Boamah 2020]] ). For about one billion people globally at the base of the pyramid without access to modern low-carbon energy access, such an action, with enormous immediate leap-frogging potential, would be a key pathway to achieve the SDGs, ensure that high-carbon energy use is avoided, such as the burning of biomass and forests for charcoal, and improve air quality and public health, especially women’s health ( [[#van%20der%20Zwaan--2018|van der Zwaan et al. 2018]] ; [[#Nathwani--2019|Nathwani and Kammen 2019]] ; [[#Dalla%20Longa--2021|Dalla Longa and van der Zwaan 2021]] ; [[#Michaelowa--2021|Michaelowa et al. 2021]] ; [[#Osabuohien--2021|Osabuohien et al. 2021]] ).

A second priority is to accelerate the implementation of the USD100 billion a year (and likely more, given growing financing gaps) in climate finance commitments expressed in the Copenhagen Agreement Accord (and reiterated since) from developed to developing countries, and to build greater confidence by agreeing rapidly on key definitions. Shifting to a grant equivalent net flows definition of climate finance, which is now universally accepted for all other aid flows by all parties since 2014 and which took effect since 2019 on every other public international good finance provision (under the SDGs), with the sole exception of climate finance, would resolve many uncertainties: the disbursement of climate finance flows on a grant equivalent basis that is comparable across institutions, instruments and countries, and measurement with greater accuracy about the effective transfer of resources. The journey to get to a clear and precise definition of net official overseas development assistance (ODA) took time. The original proposal was first initiated in the 1960s ( [[#Pincus--1963|Pincus 1963]] ) but it was not till multilateral development banks (MDBs) and others laid out the compelling reasons why ( [[#Chang--1998|Chang et al. 1998]] ) that this was accomplished: especially to resolve decades of confusion and inconsistency between different types of financial flows and hence the perennial measurement problems and ‘the compromise between political expediency and statistical reality’ ( [[#Bulow--2005|Bulow and Rogoff 2005]] ; [[#Hynes--2013|Hynes and Scott 2013]] ; [[#Scott--2015|Scott 2015]] , 2017).

A third related and increasingly crucial priority is to expedite the operational definition of blended finance and promote the use of public guarantee instruments. Private flows to accelerate the low-carbon transition in developing countries would benefit enormously, by gaining clearer access to public international funds and support defined on a grant equivalent basis, provided development and climate finance operational definitions and procedures were improved on an urgent basis ( [[#Blended%20Finance%20Taskforce--2018a|Blended Finance Taskforce 2018a]] ; [[#OECD-DAC--2021|OECD-DAC 2021]] ). When blended and supported by public finance and policy, the grant equivalency measure can easily and more accurately measure the value and benefit of blended public and private finance by comparing the effective interest cost (and volume) gain with such financing, against the benchmark costs without such blending. Here again, a pressing challenge is to improve the operational definitions of what counts as ODA within blended finance. Blended finance remains very poorly defined and accounted ( [[#Pereira--2017|Pereira 2017]] ; [[#Andersen--2019|Andersen et al. 2019]] ; [[#Attridge--2019|Attridge and Engen 2019]] ; [[#Basile--2019|Basile and Dutra 2019]] ). Guarantees are expressly not included in the definition of ODA ( [[#Garbacz--2021|Garbacz et al. 2021]] ). As a result, bilateral and multilateral agencies have no incentive or limited authority and basis to use such instruments, while multilateral development banks continue to approach guarantees with great caution because of the limits of their original charters ( [[#World%20Bank--2009|World Bank 2009]] ) and require counter-indemnities by recipient countries, internal and historic agency inertia, perceived loss of control over the use of funds (compared to their preferred direct project-based lending) and employ restrictive accounting rules for capital provisioning of guarantees at 100% of their face value to maintain AAA ratings with credit rating agencies ( [[#Humphrey--2017|Humphrey 2017]] ; [[#Pereira%20dos%20Santos--2018|Pereira dos Santos and Kearney 2018]] ; [[#Bandura--2019|Bandura and Ramanujam 2019]] ; [[#Hourcade--2021a|Hourcade et al. 2021a]] ). Largely because of such official uncertainty the actual flows of blended finance and guarantees continue to remain a very small share (typically, less than 5%) of official and multilateral finance flows to lower project risks and costs, and hence the potential for large-scale accelerated low-carbon private investments in developing countries. Public guarantees can offer a fifteen times multiplier effect on the scale of low-carbon investments generated with such support, compared to a 1:1 ratio in direct financing ( [[#Hourcade--2021a|Hourcade et al. 2021a]] ).

It makes sense to expedite these operational procedures ( [[#Khan--2020|Khan et al. 2020]] ) which cannot be otherwise explained except in terms of avoiding responsibilities, even where the benefits would be high ( [[#Klöck--2018|Klöck et al. 2018]] ). It also causes (unnecessary) fragmentation and complexity and often ‘strategic’ ambiguity by many actors ( [[#Pickering--2017|Pickering et al. 2017]] ), which worsens the possibilities for international cooperation, a critical requirement to achieve the Paris goals ( [[#IPCC--2018|IPCC 2018]] ). The world would gain collectively if these issues were to be decided soon. The absence of such a collective decision continues to be exceptionally costly for the implementation of the Paris Agreement because of the fractious and seemingly insoluble negotiating climate and a breakdown of trust that this has created ( [[#Roberts--2017|Roberts and Weikmans 2017]] ).

A fourth priority is expanding jobs and dealing with job losses in the global low-carbon transition ( [[#Carley--2020|Carley and Konisky 2020]] ; [[#Crowe--2020|Crowe and Li 2020]] ; [[#Pai--2020|Pai et al. 2020]] ; [[#Cunningham--2021|Cunningham and Schmillen 2021]] ; [[#Hanto--2021|Hanto et al. 2021]] ), especially in coal and other sectors, as well as land and other effects for indigenous communities ( [[#Zografos--2020|Zografos and Robbins 2020]] ). Many countries, especially low-income countries, remain dependent on fossil fuels for their energy and exports and jobs, and support for their transition to a low-carbon future will be essential. Global recovery from the pandemic will take longer than initially envisaged ( [[#IMF--2021c|IMF 2021c]] ; [[#OECD--2021b|OECD 2021b]] ) and an accelerated climate action for a Build Back Better global infrastructure plan with better and more resilient jobs might play a key role as part of the Just Transitions. Already, there is substantial evidence ( [[#Sulich--2020|Sulich et al. 2020]] ; [[#Dell’Anna--2021|Dell’Anna 2021]] ; [[#Dordmond--2021|Dordmond et al. 2021]] ) that a more sustainable climate path would generate many more net productive jobs (with much higher employment multipliers and mutual gains from given spending) than would any other large-scale alternative. But this would nevertheless require a carefully managed transition globally, including access to much larger volumes of climate financing in developing economies ( [[#Muttitt--2020|Muttitt and Kartha 2020]] ). The multilateral finance institutions have generally played a supportive role, expanding their financing to developing countries during the pandemic (even as bilateral aid flows have fallen sharply), but have been hampered by the constraints on their mandates and instruments (as noted earlier). Political leadership and direction will be again crucial to enhance their roles. The recent expansion of SDR quotas at the IMF similarly might help, but the current distributions of quota benefits flow primarily to the developed countries and do little to expand investment flows on a longer-term basis for a global expansion in growth and job opportunities in the low-carbon transition.

As a fifth priority, transformative climate financing options based on equityand global sustainability objectives may also need to consider a greater mix of public pricing and taxation options on the consumption side ( [[#Arrow--2004|Arrow et al. 2004]] ; [[#Folke--2021|Folke et al. 2021]] ). Two-thirds of global GHG emissions directly or indirectly are linked to household consumption, with average per capita carbon footprint of North America and Europe of 13.4 and 7.5 tCO 2 -eq per capita, respectively, compared to 1.7 in Africa and Middle East ( [[#Gough--2020|Gough 2020]] ) and as high as 200 tCO 2 -eq per capita among the top 1% in some high-income geographies versus 0.1 tCO 2 -eq at the other end of the income distribution in some least-developed countries ( [[#Chancel--2015|Chancel and Piketty 2015]] ). Globally, the highest-expenditure households account for eleven times the per capita emissions of lowest-expenditure households, with rising carbon income elasticities that suggest ‘redistribution of carbon shares from global elites to global poor’ as welfare efficient ( [[#Chancel--2015|Chancel and Piketty 2015]] ; [[#Hubacek--2017|Hubacek et al. 2017]] ). Within countries and regions,and within sectors, similar patterns hold. The top 10% of the population with the highest per capita footprints account for 27% of the EU carbon footprint, and the top 1% have a carbon footprint of 55 tCO 2 -eq per capita, with air transport the most elastic, unequal and carbon-intensive consumption ( [[#Ivanova--2020|Ivanova and Wood 2020]] ). Similarly, within sectors, there are large differences in carbon-intensity in the building sector in North America ( [[#Goldstein--2020|Goldstein et al. 2020]] ) and across cities where consumption-based GHG emissions vary widely across the world (ranging from 1.8 to 25.9 tCO 2 -eq per capita).

Numerous options exist ( [[#Broeks--2020|Broeks et al. 2020]] ; [[#Nyfors--2020|Nyfors et al. 2020]] ) for such carbon consumption reduction measures, while potentially improving societal well-being, for example: (i) inner-city zoning restrictions on private cars and promoting walking/bicycle use and improved shared low-carbon transport infrastructure; (ii) advertising regulation and carbon taxes and fees on high-carbon luxury status goods and services; (iii) subsidies and exemptions for low-carbon options, higher value-added taxes on specific high-carbon products and services, subsidies for public low-carbon options such as commuter transport, and other behavioural nudges ( [[#Reisch--2021|Reisch et al. 2021]] ); and (iv) framing options (emphasising total cost of car over lifetimes), mandatory smart metering, collective goods and services (leasing, renting, sharing options) and others. Finally, reducing subsidies on fossil fuels, raising the progressivity of taxes and raising overall wealth taxes on the richest households, which have been sharply falling ( [[#Scheuer--2021|Scheuer and Slemrod 2021]] ) even as global income and wealth have risen, with regressive and falling overall taxes ( [[#Alvaredo--2020|Alvaredo et al. 2020]] ; [[#Saez--2020|Saez and Zucman 2020]] ), could effectively generate significant revenues (over 1% of GDP yr –1 ), about the same size as the proposed global USD50 pertonne carbon price proposed and estimated by the IMF/OECD 2021 report to the G20 ( [[#IMF%20and%20OECD--2021|IMF and OECD 2021]] ) to cover expected net interest costs on overall decarbonisation initiatives and financing of green new deals ( [[#Schroeder--2021|Schroeder 2021]] ).

These five options identified above on near-term actions and priorities will however, require greater collective political leadership. A review of past crisis episodes suggests that collective actions to avoid large global or multi-country risks work well primarily when the problems are well defined, a small number of actors are involved, solutions are relatively well established scientifically, and public costs to address them are relatively small ( [[#Sandler--1998|Sandler 1998]] , 2015) (for example, dealing with early pandemic outbreaks such as Ebola, TB, and cholera; extending global vaccination programmes such as smallpox, measles and polio; early warning systems and actions for natural disasters such as tsunamis, hurricanes/cyclones and volcanic disasters; the Montreal Protocol for ozone-depleting refrigerants, and renewables wind and solar energy development). They do not appear to work as well for more complex global collective action problems which concern a number of economic actors, sectors, without inexpensive and mature technological options, and where political and institutional governance is fragmented. Greater political coordination is needed because the impacts are often not near term or imminent, but diffuse, slow moving and long term, and where preventive disaster avoidance is costly even when these costs are low compared to the longer-term damages – till tipping points are reached of the need for reduced ‘stressors’ and increasing ‘facilitators’ ( [[#Jagers--2020|Jagers et al. 2020]] ). But by then, it may be too late.

Private institutional investors equally might equally wish to pay greater attention to the Just Transition finance issues. It would be useful for investors to identify ways to support to such initiatives, and more clearly identify the benefits of such transition measures envisaged by both countries and investment financing proposals, including incorporating Just Transition consideration in their support to broader ESG and green financing initiatives.

The second level of attention needed on Just Transitions has to do with inequities within a large country setting, developed or developing. The Just Transition issue exists within developed countries as well. As the ongoing pandemic illustrates, the first climate burden hit is often felt most acutely at the level of states and cities, with many smaller ones without enough fiscal capacity or ability to mount an adequate discretionary counter policy. Only national governments have the ability to borrow more in their fiscal accounts to address large collective problems, whether pandemics or climate change. Therefore, it is important that national policies and funds be available for programmes to address the Just Transition issues for larger subnational states, cities and regions. This would be helped by countries including Just Transition initiatives in their NDCs for financing (as South Africa has recently done), and attention by external financing agencies and MDBs to large-scale adverse impacts in their climate policies and investments. For example, the EU Green Deal plans ( [[#Nae--2021|Nae and Panie 2021]] ) include several initiatives (focusing on industries, regions and workers adversely affected, with explicit programmes to address them).

The third level of argument is for a shift in focus from an exclusive attention to financing of mitigation and low-carbon new investments projects to also better understanding and addressing the local adverse impacts of climate change on communities and people, who are vulnerable and increasingly dispossessed due to losses and damages from climate change or even those who are impacted by decarbonisation measures in the fossil fuel sectors and transportation, as well as those who are harmed by polluting sectors: indigenous men and women, minorities and generally the poor. It is evident that very few resources are available to countries, investors, civil society, and smaller development institutions seeking to achieve a just transition ( [[#Robins--2020|Robins and Rydge 2020]] ).

Finally, greater support is warranted for smaller towns and cities, local networks, small and medium-sized enterprises (SMEs), communities, local authorities and universities for projects, research ideas and proposals ( [[#Lubell--2021|Lubell and Morrison 2021]] ; [[#Moftakhari--2021|Moftakhari et al. 2021]] ; [[#Stehle--2021|Stehle 2021]] ; [[#Vedeld--2021|Vedeld et al. 2021]] ).

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