Editing IPCC:AR6/WGIII/Chapter-4 (section)

==== 4.4.1.4 Channelling Financial Resources ====

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Accelerated mitigation and shifting development pathways necessitate both redirecting existing financial flows from high- to low-emissions technologies and systems and providing additional resources ( ''robust evidence'' , ''high agreement'' ). An example is changes in investments from fossil fuels to renewable energy, with pressures to disinvest in the former while increasing levels of ‘green finance’ (Sections 6.7.4 and 15.5). While some lower-carbon technologies have become competitive (Sections 1.4.3 and 2.5), support remains needed for the low-emissions options have higher costs per unit of service provided than high-emission ones. Lack of financial resources is identified as a major barrier to the implementation of accelerated mitigation and of shifts in development pathways. Overcoming this obstacle has two major components. One relates to private capital. The other to public finance.

There is substantial amount of research on the redirection of private financial flows towards low-carbon investment and the role of financial regulators and central banks, as detailed in Chapter 15. Financial systems are an indispensable element of a systemic transition ( [[#Fankhauser--2016|Fankhauser et al. 2016]] ; [[#Naidoo--2020|Naidoo 2020]] ). Policy frameworks can redirect financial resources towards low-emission assets and services ( [[#UNEP--2015|UNEP 2015]] ), mainstreaming climate finance within financial and banking system regulation, and reducing transaction costs for bankable mitigation technology projects ( [[#Mundaca--2013|Mundaca et al. 2013]] ; [[#Brunner--2014|Brunner and Enting 2014]] ; [[#Yeo--2019|Yeo 2019]] ). Shifts in the financial system to finance climate mitigation and other SDGs can be achieved by aligning incentives and investments with multiple objectives ( [[#UNEP%20Inquiry--2016|UNEP Inquiry 2016]] ).

Different approaches have been explored to improve such alignment ( [[IPCC:Wg3:Chapter:Chapter-15#15.6|Section 15.6]] ), from national credit policies to directly green mainstream financial regulations (e.g., through modifications in the Basel rules for banks). For all approaches, an essential precondition is to assess and monitor the contribution of financial flows to climate and sustainability goals, with better metrics that clearly link with financial activity ( [[#Chenet--2019|Chenet et al. 2019]] ). Enabling the alignment of investment decision-making with achieving climate and broader sustainability goals includes acknowledgment and disclosure of climate-change related risk and of risks associated with mitigation in financial portfolios. Current disclosures remain far from the scale the markets need to channel investment to sustainable and resilient solutions ( [[#UNEP%20-%20Finance%20Initiative--2020|UNEP - Finance Initiative 2020]] ; [[#Clark--2018|Clark et al. 2018]] ; [[#Task%20Force%20on%20Climate-Related%20Financial%20Disclosures--2019|Task Force on Climate-Related Financial Disclosures 2019]] ; [[#IPCC--2018b|IPCC 2018b]] ). Disclosure, however, is not enough (Ameli et al. 2020). In addition, climate targets can be translated into investment roadmaps and financing needs for financial institutions, both at national and international level. Financing needs are usable for financial institutions, to inform portfolio allocation decisions and financing priorities ( [[#Chenet--2019|Chenet et al. 2019]] ). At the international level, for example, technology roadmaps for key sectors can be translated into investment roadmaps and financing needs, as shown by existing experiences in energy and industrial sectors ( [[#IEA--2015|IEA 2015]] ; [[#IEA%20and%20WBSCD--2018|IEA and WBSCD 2018]] ; [[#Chenet--2019|Chenet et al. 2019]] ).

The transition from traditional public climate finance interventions to the market-based support of climate mitigation ( [[#Bodnar--2018|Bodnar et al. 2018]] ) demands innovative forms of financial cooperation and innovative financing mechanisms to help de-risk low-emission investments and support new business models. These financial innovations may involve sub-national actors like cities and regional governments in raising finance to achieve their commitments ( [[#Cartwright--2015|Cartwright 2015]] ; [[#CCFLA--2017|CCFLA 2017]] ). Moreover, public-private partnerships have proved to be an important vehicle for financing investments to meet the SDGs, including economic instruments for financing conservation ( [[#Sovacool--2013|Sovacool 2013]] ; [[#Díaz--2019|Díaz et al. 2019]] ).

Overall, early action is needed to overcome barriers and to adjust the existing incentive system to align national development strategies with climate and sustainable development goals in the medium-term. [[#Steckel--2017|Steckel et al. (2017)]] conclude that climate finance could become a central pillar of sustainable development by reconciling the global goal of cost-efficient mitigation with national policy priorities. Without a more rapid, scaled redeployment of financing, in development trajectories that hinder the realisation of the global goals will be locked in ( [[#Zadek--2016|Zadek and Robins 2016]] ). Investment might be designed to avoid trading off the Paris goals against other SDGs, as well as those that simultaneously reduce poverty, inequality, and emissions ( [[#Fuso%20Nerini--2019|Fuso Nerini et al. 2019]] ).

At the national level, it is also essential to create public fiscal space for actions promoting the SDG agenda and thereby broadening the scope of mitigation ( ''medium evidence'' , ''medium agreement'' ). To do so, pricing carbon – either through tax payments based on the level of emissions or cap-and-trade systems that limit total allowable emissions – is an efficient means of discouraging carbon emissions throughout an economy (both in consumption and production) while simultaneously encouraging a switch to non-carbon energy sources and generating revenues for prioritised actions ( [[IPCC:Wg3:Chapter:Chapter-13#13.6.3|Section 13.6.3]] ). Regarding to levels, the High-Level Commission on Carbon Prices concluded that ‘carbon-price level consistent with achieving the Paris temperature target is at least USD40–80 tCO 2 –1 by 2020 and USD50–100 tCO 2 –1 by 2030, provided a supportive policy environment is in place’ ( [[#CPLC--2017|CPLC 2017]] ; [[#Wall%20Street%20Journal--2019|Wall Street Journal 2019]] ). National level models yield median carbon values of carbon values of USD733 tCO 2 –1 in 2050 along accelerated mitigation pathways ( [[#4.2.6|Section 4.2.6]] ), while global models find a median value of USD578 tCO 2 –1 for pathways that reach net zero CO 2 between 2045 and 2055 [interquartile range USD405–708] ( [[IPCC:Wg3:Chapter:Chapter-3#3.6.1|Section 3.6.1]] ).

Carbon pricing, however, is designed to reduce its fiscal base. Fiscal space may therefore also need to stem from other sources, although fiscal reforms are complex endeavours ( [[#4.4.1.8|Section 4.4.1.8]] ). For countries at lower income levels, foreign aid can make an important contribution to the same agenda ( [[#Kharas--2019|Kharas and McArthur 2019]] ). It may also be noted that, according to estimates at the global level, military spending amounted to USD1.748 trillion in 2012 (the last year with data), a figure that corresponded to 2.3% of GDP, 55% of government spending in education, and was 13 times the level of net ODA ( [[#World%20Bank--2020|World Bank 2020]] ; [[#SIPRI--2020|SIPRI 2020]] ). Given this, moderate reductions in military spending (which may involve conflict resolution and cross-country agreements on arms limitations) could free up considerable resources for the SDG agenda, both in the countries that reduce spending and in the form of ODA. The resolution of conflicts within and between countries before they become violent would also reduce the need for public and private spending repairing human and physical damage. The fact that civil wars are common in the countries that face the severest SDG challenges underscores the importance of this issue ( [[#Collier--2007|Collier 2007]] , pp.17–37).

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