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

=== 15.6.3 Considerations on Availability and Effectiveness of Public Sector Funding ===

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The gap analysis as well as other considerations presented in this chapter illustrate the critical role of increased volumes and efficient allocation of public finance to reach the long-term global goals, both nationally and internationally.

'''Higher public spending levels driven by the impacts of COVID-19 and related recovery packages.''' Higher levels of public funding represent a massive chance but also a substantial risk. A missing alignment of public funding and investment activity with the Paris Agreement (and Sustainable Development Goals) would result in significant carbon lock-ins, stranded assets and thus increase transition risks and ultimately economic costs of the transition ( ''high confidence'' ). Using IMF data for stimulus packages, [[#Andrijevic--2020|Andrijevic et al. (2020)]] estimated that COVID-19-related fiscal expenditure had surpassed USD12 trillion by October 2020 (80% in OECD countries), a third of which being spent in liquidity support and health care. Total stimulus pledged to date is ten times higher than low-Paris-consistent carbon investment needs from 2020–2024 ( [[#Andrijevic--2020|Andrijevic et al. 2020]] ; [[#Vivid%20Economics--2020|Vivid Economics 2020]] ). Overall, stimulus packages launched include USD3.5 trillion to sectors directly affecting future emissions, with overall fossil fuel investment flows outweighing low-carbon technology investment ( [[#Vivid%20Economics--2020|Vivid Economics 2020]] ).

Lessons from the global financial crises show that although deep economic crises create a sharp short-term emission drop, and green stimulus is argued to be the ideal response to tackle both the economic and the climate crises at once, disparities between regional strategies hinder the low-carbon transition ( ''high confidence'' ). Indeed, inconsistent policies within countries can also counterbalance emission reductions from green stimulus, as well as a lack of transparency and green spending pledged not materialising ( [[#Jaeger--2020|Jaeger et al. 2020]] ). Also, aggressive monetary policy as a response to the global financial crisis, including quantitative easing that did not target low-carbon sectors, has been heavily criticised ( [[#Jaeger--2020|Jaeger et al. 2020]] ). The COVID-19 crisis recovery, in contrast, benefits from developments which have taken place since, such as an emerging climate-risk awareness from the financial sector, reflected in the call from the Coalition of Finance Ministers for Climate Action ( [[#Coalition%20of%20Finance%20Ministers%20for%20Climate%20Action--2020|Coalition of Finance Ministers for Climate Action 2020]] ), which unites 50 countries’ finance ministers, for a climate-resilient recovery.

The steep decrease in renewable electricity costs since 2010 also represents a relevant driver for a low-carbon recovery ( [[#Jaeger--2020|Jaeger et al. 2020]] ). Many more sectors are starting to show similar opportunities for rapid growth with supportive public spending such as low-carbon transport and buildings ( [[#IEA--2020d|IEA 2020d]] ). Expectations that the package will increase economic activity rely on the assumption that increased credit will have a positive effect on demand, the so-called demand-led policy ( [[#Mercure--2019|Mercure et al. 2019]] ). Boosting investment should propel job creation, increasing household income and therefore demand across economic sectors ( ''high confidence'' ). A similar plan has also been proposed by the US administration and the European Union through the Next Generation EU ( [[#European%20Council--2020|European Council 2020]] ).

Nevertheless, three uncertainties remain. First, only those countries and regions with highest credit-ratings (AAA or AA) with access to deep financial markets and excess savings will be able to mount such counter-cyclical climate investment paths, typically high-income developed economies ( ''high confidence'' ). In more debt constrained developing countries lower access to global savings pools because of higher risk perceptions and lower credit ratings (BBB or less), exacerbated by COVID-19, are already leading to credit downgrades and defaults (Koseet al. 2020) and have long tended to be fiscally pro-cyclical ( [[#McManus--2015|McManus and Ozkan 2015]] ). These include the general class of virtually all major emerging and especially low-income developing countries, to which such demand-stimulating counter-cyclical climate-consistent borrowing path is likely . To access such funds, these countries would need globally coordinated fiscal policy and explicit supporting cross-border instruments, such as sovereign guarantees, strengthening local capital markets and boosting the USD100 billion annual climate finance commitment ( [[#Dasgupta--2019|Dasgupta et al. 2019]] ).

Second, a strong assumption is that voters will be politically supportive of extended and increased fiscal deficit spending on climate on top of COVID-19-related emergency spending and governments will overcome treasury biases towards fiscal conservatism (to preserve credit ratings). However, evidence strongly suggests that voters (and credit rating agencies) tend to be fiscally conservative ( [[#Peltzman--1992|Peltzman 1992]] ; [[#Lowry--1998|Lowry et al. 1998]] ; [[#Alesina--2011|Alesina et al. 2011]] ; [[#Borge--2020|Borge and Hopland 2020]] ) ''',''' especially where expenditures involve higher taxes in the future and do not identifiably flow back to their local bases (the ‘public good’ problem) ( ''high confidence'' ). Such mistrust has been a reason for abortive return to fiscal austerity often in the past (most recently during global financial crisis) and may benefit for political support by consistently reframing the climate expenditures in terms of job creation benefits ( [[#Bougrine--2012|Bougrine 2012]] ), effectiveness of least-cost fiscal spending on climate for reviving private activity, and the avoidance of catastrophic losses (Huebscher et, al. 2020) from higher carbon emissions. A new understanding of debt sustainability including negative implications of deferred climate investments on future GDP has not yet been mainstreamed (see more on the debt sustainability discussion below (e.g., [[#Buhr--2018|Buhr et al. 2018]] ; [[#Fresnillo--2020a|Fresnillo 2020a]] ). In addition, implications on the availability of international public finance flows are not yet clear since current additional funding prioritises urgent health care support rather than an increase in predictable mid-/long-term financial support. Heavy investment needs for recovery packages in developed countries on the one hand and their international climate finance commitments on the other might be perceived to compete for available ‘perceived as appropriate’ budgets.

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