IPCC calls for ‘stronger steering’ by financial regulators

April 5, 2022|Written by Graham Caswell

Climate-related financial risks remain “greatly underestimated” by financial institutions and markets, and require “stronger steering” by regulators and policy makers, the Intergovernmental Panel on Climate Change (IPCC) has found in its most recent mitigation report. Fossil fuel investors are on track to lose trillions of dollars if governments act as they must, the assessment warns, while financial flows towards mitigation measures are still far out of line with emissions targets and a stable future.

There is already enough high-carbon infrastructure to exceed 2C and meeting the Paris Agreement target will mean early retirements of existing infrastructure, the IPCC warns, pointing to the immediate cancellation of new coal projects as both the cheapest and the most effective way to help limit global heating.

Global greenhouse gas (GHG) emissions are at record levels and are continuing to grow, the report finds, with the sources extremely unequal. It shows that the top 10% of households are responsible for 34-45% of these emissions, while the bottom half of humanity contributes only 13-15%. Current climate policies and pledges are far from sufficient to avoid dangerous heating, it makes clear, and “immediate and deep” cuts in emissions everywhere are needed.

Published yesterday, the 2913-page report is the third in the most recent assessment exercise of the global scientific body. The first two found that humanity was “unequivocally” putting a “liveable future” in grave danger as a result of emissions, and that the window to avoiding this fate is closing rapidly. The latest report outlines what can be done to mitigate this systemic and potentially existential risk. It includes a chapter focusing specifically on investment and finance.

“The relatively slow implementation of commitments by countries and stakeholders in the financial system to scale up climate finance reflects neither the urgent need for ambitious climate action, nor the economic rationale for ambitious climate action,” the authors say, pointing to models showing that the costs of climate change are far higher than the costs of mitigation. Progress on the alignment of financial flows with low GHG emissions pathways remains slow, they warn, resulting in a “climate financing gap” which reflects a persistent misallocation of global capital.

To address these urgent problems the IPCC calls for ambitious global climate policy coordination, stepped-up climate financing and the redirection of capital markets. Innovative financing approaches can help reduce the systemic underpricing of climate risk, it says, calling for robust “green” labeling, disclosure schemes and the “de-risking” of cross-border investments in low-carbon infrastructure. Policy options with “important long-term catalytic benefits” include the alignment of climate and non-climate policies, accelerated finance for nature-based solutions and carbon pricing, and an end to fossil fuel subsidies “in a way that addresses equity and access.”

The report also introduces a new approach to categorising mitigation scenarios, ranging from C1 (1.5C with no or limited overshoot) up to C8 (4C). For the first time, the assessment also includes a chapter on demand reduction, showing how reducing and changing consumption could cut end-use emissions 40-70% by 2050, while at the same time improving human well-being.

The high-level summary of the report was approved line by line, by all 195 government members of the IPCC, following attempts to weaken the document by representatives of fossil fuel-producing countries.

IPCC assessments contain the conclusions of hundreds of specialised scientists and experts from around the world working over many years. They contribute heavily to the risk assessments, stress tests and scenario analysis carried out by central banks, financial supervisors and financial institutions. Because of the long timescales involved in producing these assessments, this is likely to be the last such exercise while the opportunity to stay within the Paris Agreement’s 1.5ºC target still exists.

This page was last updated April 8, 2022

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