Tensions between ambition and caution in climate change policy — and between aspiration and reality in how much finance ministers can influence this issue — were apparent as the Coalition of Finance Ministers for Climate Action held a virtual meeting in Washington on October 1`2, in the run-up to the Cop 26 climate summit in Glasgow in November.
The ministers met as premier Li Keqiang raised concern around the world by appearing to indicate that China would moderate its pace of cutting emissions, continue building coal-fired power stations and “intensify” oil and gas exploration.
António Guterres, secretary-general of the United Nations, one of the Coalition’s 20 partner organisations, gave a video statement at the meeting, in which he issued several challenges to finance ministers. “The political package that must be delivered in Glasgow needs to contain at least three key elements,” he said.
The first was to “swiftly close the emissions gap,” meaning countries’ national pledges should collectively put the world on track to cut emissions 45% by 2030 from 2010 levels, and ultimately the goal of limiting warming to 1.5°C.
Second, Guterres said, “developed countries must close the finance gap” by providing or exceeding the $100bn a year they promised in 2009 to channel to developing countries for climate action by 2020. The target has still not been met, and will be a major point of debate in Glasgow.
Under that heading, too, Guterres called on governments to emulate private sector initiatives such as the Net Zero Asset Owners’ Alliance by making mandatory the recommendations of the Taskforce on Climate-Related Financial Disclosures.
His third charge was that “Glasgow must deliver a breakthrough on adaptation”. He asked finance ministers, including as shareholders of development banks, “to consider allocating half of all climate finance in support of developing countries for adaptation”.
Can finance lead?
Guterres’s appeal rested on confidence that finance ministers could shape the climate agenda. “As finance ministers you hold the keys to success for Cop 26 and beyond,” he said. “Your decisions and actions in the coming weeks will determine whether the global economic recovery will be low carbon, resilient and inclusive or whether it will lock in fossil fuel investments with high risks of stranded assets.”
Pekka Morén, special representative of Finland’s finance minister, who has been centrally involved since Finland was one of the founding co-chairs when the Coalition was formed, said: “When the Coalition started, one of the key reasons was that finance ministers are not part of the Cop negotiations, and they should be.”
But this has not come about. One of the clearest calls in the ministerial statement published after Tuesday’s meeting was: “We underscore that finance ministries wish to deepen their involvement in the development, revision, and implementation of impactful and ambitious Nationally Determined Contributions, as well as long term strategies.”
NDCs are the pledges countries make under the Paris Agreement to cut emissions. One of the Coalition’s six founding Helsinki Principles is that finance ministers should engage actively in preparing and implementing them.
In most countries, climate policy and commitments are still being made and negotiated by heads of government and environment ministries — even though the Paris Agreement lays heavy emphasis on “making financial flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”.
“Finance ministers should be at the centre, and it hasn’t happened,” said Morén.
He said that when countries were setting NDCs, “involvement [of finance ministries] is probably there quite often — but it could be something extremely light.”
But he argues that this is partly inevitable. “It couldn’t happen, either, because finance ministries need to get their act together, the expertise, the tools.”
The how not the what
Finance ministers may not, therefore, have it in their power to deliver what Guterres called for. Few finance ministers will attend Cop 26.
Morén argues that at this stage, finance ministers can contribute most valuably by supporting climate policy by translating it into effective economic policy.
“We are not inviting ourselves to replace environment ministers and lead this,” he said. “We are ready to contribute and be more involved when we have important things to deliver to the table.”
These considerations mean the Coalition focuses more on implementation and capacity building than the headline policy decisions of how fast countries will decarbonise.
Morén gave the example of subsidies for fossil fuel use. “You can’t just take them off,” he said, partly because of the effect on employment and competitiveness. “It needs a lot of impact analysis, and a plan on how to make the economy greener.”
The international organisations such as the World Bank, OECD and IMF that partner the Coalition could help here. “Ministers don’t need to be told to take off subsidies,” Morén said. “We need advice on how to do it.”
The Coalition has also started this year to collaborate with the G20, particularly the G20’s Sustainable Finance Working Group, led by the US and China.
“Our agenda is broader and more comprehensive, and membership much wider,” said Morén. “The Coalition is easygoing because we don’t negotiate political agreements.”
This also means it is refreshingly free of disagreements. “We don’t have long drafting processes and want members to feel comfortable about the work,” said Morén. “If somebody says they don’t like something, we take it out of the statement.”
Contentious question
This collaborative approach is apparent in how the Coalition is dealing with the new and controversial issue of the Carbon Border Adjustment Mechanism, proposed by the EU in July. It is effectively a carbon tax on imported goods that have not been subject to carbon taxes where they were produced.
The US, Japan and Canada are also considering ideas of this kind, but the EU’s is farthest advanced, and was soon attacked by China as a violation of WTO trade principles.
The Coalition’s statement merely said “We will further consider policy perspectives of border carbon adjustment mechanisms and other international proposals, and share best practices.”
“We have this really big political debate coming up in Europe and ministers would like to have the Coalition look into it, because they would like to know what other countries are doing and understand how international solutions might affect the design of national carbon pricing reforms,” Morén said. “We want to make sure we have the facts on the table and that experts have been heard, including those who know about the WTO. We are not pushing any solution, we just want to be sure ministers have the best possible knowledge.”
The Coalition is likely to publish a report on CBAM later this year and has established a workstream on it — the fourth under its carbon pricing work.
Carbon pricing is an issue where international cooperation is not just about mutual learning — harmonisation is valuable in itself. This could also be true of green budgeting, where countries may want to adopt common standards on what counts as green expenditure.
Climate through and through
Morén said the thrust of this ministerial meeting was “a broad picture of systemic change. More and more ministers are mainstreaming climate issues and allocating resources. We know it’s a long term effort — we were discussing the challenges of reform. The biggest one is how you assess the impact of policies and develop a long term plan. That’s where you need good, solid analysis.”
Morén said one key issue for finance ministries trying to mainstream climate was “we need to change the way we network with our partners — external stakeholders that are affected”.
This included other ministries, the private sector and civil society. Morén added: “In order to achieve green transition and successful adaptation to climate change, we need solutions that are widely acceptable and fair.”
He pointed to the video speeches by Paschal Donohoe and Nikolai Wammen, the Irish and Danish finance ministers, as good examples of mainstreaming.
“It is vital that we move to introduce climate action as a core consideration in finance ministers’ strategies,” Donohoe said. This would involve, he said, “integrat[ing] and mainstream[ing] evidence-based research in supporting economic policy design.”
Ireland has committed by law to reducing emissions by an average of 7% a year between 2021 and 2030 and achieving net zero by 2050. Carbon pricing and green budgeting will be key policies to achieve that.
The carbon price will rise gradually to €100/tonne by 2030. “This provides certainty to society that the government is committed to decarbonising and it gives… businesses sufficient time to decarbonise in a planned way,” Donohoe said.
Ireland has been tagging green public spending for a few years, but this year also began analysing tax measures for their climate impact.
Radical proposals
Guterres had more to say to the Coalition, beyond his three key points about Cop 26 — including some quite radical ideas.
He called on ministers to make the recommendations of the Taskforce on Climate-Related Financial Disclosures mandatory.
Morén praised Guterres’ speech and said “he speaks the language of finance ministers”.
He said members had been discussing the TCFD issue, and some countries like the UK were making it mandatory, but the Coalition was not going to push members to do this.
Guterres also suggested ministers request the multilateral development banks to “present a set of concrete measures, implementable by the end of next year at the latest, to address red tape issues and improve the speed and efficiency of … all development finance institutions”.
Morén said “The MDBs’ role is important and on the agenda.”
Ministers are increasingly aware of the MDBs’ expertise in green investments and that they understand the local challenges in member countries. Ministers want to use their influence at the MDBs properly. “Now they are more into what is the value added,” Morén said.
Ministers have raised with the MDBs the idea of how they take into account the Helsinki Principles when advising countries.
The Coalition does not have a workstream on MDBs, but it has held regional workshops with both the Nordic Investment Bank and the European Bank for Reconstruction and Development. One is planned with the African Development Bank.
Rethinking GDP
Guterres said: “I ask that you reconsider how you calculate GDP. Nature’s resources still do not figure in countries’ calculations of wealth. We need nature-based solutions for adaptation and mitigation. The current system is weighted towards destruction, not preservation. Governments must reflect nature’s true value in all policies, plans and economic systems.”
He also asked ministers to instruct their representatives at the OECD to initiate a review of “eligibility thresholds for official development assistance”, to help middle income countries, and to support the development of a multidimensional vulnerability index to ease small island states’ access to finance.
On recalculating GDP and the ODA eligibility, Morén said: “To me this is clearly work that needs to be initiated by international organisations like the OECD and the EU. These institutions should do the basic work on that.” However, the Coalition is considering biodiversity issues and will be producing a report on them.
It is also working with the V20 group of states vulnerable to climate change, and the Maldives’ finance minister was the second speaker at the latest meeting, after Janet Yellen of the US.
Broadening engagement
The US, Japan, Malaysia and South Korea joined the Coalition in April. Estonia, Hungary, Peru, Slovakia, and Ukraine have joined since, bringing the total to 65 countries.
China and India are still not members, though the Chinese finance minister Liu Kun spoke as a guest at the April meeting.
On the agenda for the coming year, the Coalition wants to start a training programme on climate issues for finance ministry officials. Morén also foresees ministries broadening their engagement with the Coalition as they invest more in climate policies. “We have tried to encourage all countries to bring at least one person to each workstream,” he said. “In two years’ time, he or she will be the best expert in that area, and will benefit from access to the network of experts in the Coalition.”
Ministries could, for example, hire a climate specialist for each of their departments, who would become an expert in how climate interacted with financial markets, taxation or budgeting, and all those people could immediately join one of the Coalition’s workstreams, so that they could learn from their opposite numbers in other countries.
Finland’s co-chairmanship is likely to end next year, and at the latest by April 2023. More countries now appear willing to take on the role, alongside Indonesia, which succeeded Chile in April.
The Coalition now has a permanent secretariat, housed by the World Bank in Washington, with nine staff supplied by the Bank and the IMF. It is led by Christian Eigen-Zucchi, a senior economist from the Bank, and James Roaf, co-ordinator of climate change policy in the IMF’s fiscal affairs department.
Under its agreement with the World Bank and IMF on the secretariat function, they bring in the resources and expertise to support its work.
“Coalition members are their shareholders so it makes good sense,” said Morén. “But we are also adding value to them, because with experts from member countries, also the institutions have started to cooperate more through Coalition workstreams.”