Just in Time
Climate change is the greatest structural challenge facing the world today and addressing it will require humanity’s greatest ever collective effort.
Just in Time
Financing a just transition to net zero
Bill Winters
Group Chief Executive,
Standard Chartered
Climate change is the greatest structural challenge facing the world today and addressing it will require humanity’s greatest ever collective effort.
COP26 rightly signalled greater focus on financing the net zero transition, especially in the markets we call home – in Africa, Asia and the Middle East. It’s here where low carbon technologies can have the greatest impact but there are also profound climate risks and a huge transition challenge ahead of us.
Our latest report, Just in Time, issues a call to action by demonstrating the potential impact, on emerging market communities, of private investors failing to deliver on their COP26 pledges and plugging the USD94.8 trillion financing gap.
Our report shows that without help, emerging market populations could be USD2 trillion poorer per year (USD79.2 trillion poorer cumulatively between now and 2060 – the date by which some key markets seek to achieve net zero).
There is an opportunity for private investors to help drive a just transition, moving assets from developed to emerging markets with the help of the right policies and regulation.
Private capital from developed markets could help boost household consumption in emerging markets by 4.5 per cent on average each year between 2021 and 2060 and emerging market GDP would be 3.1 per cent higher on average each year between 2021 and 2060.
Just in Time also confirms that, if emerging markets continue with their existing climate policy and transition investments, we are likely to see catastrophic global temperature increases of at least 3°C by 2100 (perhaps even as high as 3.5 or 3.6°C).1
1 The baseline scenario is modelled on current trends including existing climate policy. See the methodology (About Just in Time) for further details.
Attracting the necessary capital from developed markets to aid emerging market transition will be a challenge. As shown in our previous report, The USD50 Trillion Question, the world’s top 300 investment firms with total assets under management of more than USD50 trillion, have just 2 per cent, 3 per cent and 5 per cent of their assets invested in the Middle East, Africa and South America, respectively.
In addition to attracting investment, we need a fairer transition financing model, with the public and the private sector working together and the developed world partnering with emerging markets to plug the financing gap. Governments and private sector investors will need to take a market-by-market approach, recognising that each market has its own emissions reduction pathway and challenges to transition at pace.
Banks and other financial institutions have a key role to play in developing and scaling the structures that will channel the trillions required for the net-zero transition in emerging markets. To this end, Standard Chartered pledged to mobilise USD300 billion in green and transition financing, guided by our Transition Finance Framework. Our progress so far is encouraging, and the pace is picking up.
Overall, I remain confident in our collective ability to deliver a Just Transition to net-zero.
I know that it will be difficult; we will all need to act with much greater urgency and relentlessly work through the difficult issues together. But then again, given the stakes involved, why wouldn’t we?
How much investment do emerging markets need to transition? And how can this be financed in a way that allows these markets to continue to grow and prosper? Just in Time: Financing a just transition to net zero sets out to answer these questions.
For the purposes of this study, we have assumed that emerging markets transition to net zero by 20602, while the developed world reaches net zero by 2050 and is net negative thereafter. Our model is consistent with limiting long-term global temperature rises to 1.5⁰C above pre-industrial levels.
Key findings
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Emerging markets need to invest an additional USD94.8 trillion3 – a sum higher than annual global GDP4 – to transition to net zero in time to meet long-term global warming targets.
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This is on top of the capital already allocated by emerging-market governments under their current climate policies.
- If emerging markets were to raise the additional finance exclusively through higher taxes and borrowing, household consumption would be, on average, 5 per cent lower per year, making emerging-market households around USD2 trillion poorer annually between 2021 and 2060. This could discourage climate action and make transition more likely to fail.
- If developed markets were to finance the emerging-market transition, household consumption in emerging markets would be 4.5 per cent higher on average each year between 2021 and 2060, and GDP 3.1 per cent higher on average each year between 2021 and 2060, compared to self-financing. Global GDP would be USD108.3 trillion higher cumulatively in the period.
- The additional USD94.8 trillion could be provided through a combination of developed-market grants and access to finance, including an USD83 trillion contribution from the private sector.
2 The 2060 net zero timeline selected by our economists specifically for this study, reflects the current status of commitments to net zero across many of our markets and specifically the slower pathway for emerging markets as foreseen under the Paris Agreement. This differs from the 2050 timeline for all markets we use for our own approach to net-zero highlighted in our recent whitepaper and which we encourage all stakeholders to adopt
3 All absolute monetary values given in the report are in 2021 prices. 4 “The world GDP, comprising 194 economies, in 2021 is projected around US$93.86 trillion in nominal terms, according to the IMF”
- To encourage and support a sufficient flow of investment, global decision-makers will need to show progressive leadership, and local markets need to develop their net-zero strategies and roadmaps. Global consensus must be achieved on climate risk management and modelling; standards, frameworks and incentives; carbon pricing and taxation; and policy tools
- The private sector needs to step up and take the lead with innovative financing products and a broader view of impact versus risk when it comes to emerging-market investments.
Global Panel of Climate Change Experts5
Standard Chartered would like to thank Just in Time’s global panel of climate change experts:
- Valerie Kwan, Director of Engagement, Asia Investor Group on Climate Change
- Mark Campanale, Founder, Carbon Tracker Initiative
- Sanna Markkanen, Research Programme Lead and Senior Analyst, Cambridge Institute for Sustainability Leadership
- Jean-Francois Mercure, Senior Lecturer in Global Systems, Exeter University
- Dr Ajay Gambhir, Senior Research Fellow, Grantham Institute for Climate Change and the Environment, Imperial College London
- Bridget Jackson, Chief Sustainability Officer, PwC
- John Tress, Director, Sustainable Finance, PwC
- Lullu Krugel, Chief Economist for South Africa, PwC
- Jules Kortenhorst, Chief Executive Officer, Rocky Mountain Institute
- Maria Ramos, Independent Non-Executive Director, Standard Chartered
5 Our Global Panel of Climate Change Experts were interviewed for their thoughts on net zero transition emerging markets. Comments from the panel can be found throughout the report.
Part One: The transition finance gap
To transition to net zero, emerging markets need significantly more investment
Developed markets emit the most and have the biggest job to do to transition their economies away from carbon by 2050. However, if developed markets fail to channel net-zero investment into emerging markets while working on their own transition, there will be devastating implications for the planet.
If all markets were to continue on their current paths – with the existing levels and patterns of investment – developed-world emissions would plateau, but emerging market emissions would continue to rise, resulting in global warming of 2°C by 2050, 2.2°C by 2060, and over 3°C by 21006. To achieve the central goal of the Paris Agreement, to limit global warming to well below 2°C – preferably 1.5°C – and avoid a climate emergency, it is estimated that global greenhouse gas emissions need to be reduced to net zero by mid-century.
6 ‘Current paths’ does not include announced policies or targets; it is based on ‘business as usual’ behaviour.
Emerging markets have a great opportunity to adopt low-carbon technology, yet also face tough transition-financing and climate challenges. Many of these markets are reliant on carbon-intensive industries, and many developed economies are also reliant on the products that these industries create. Emissions continue to rise in many emerging markets due to growing populations and strengthening economies.
But climate change does not respect borders: in the race to net zero everyone wins, or everyone loses. A climate emergency will only be prevented if the world reaches net-zero as soon as possible. Although some economies will move slower than others, all will need to transition eventually.
Without action, emerging market emissions will keep rising
What’s needed is a just transition – one where climate objectives are met without depriving emerging markets of their opportunity to grow and prosper. This will require the support of developed economies. If richer nations do not help finance emerging market transition, either they will not transition at all – meaning that the Paris Agreement goals are missed – or the economic effects of transition will be so harsh that emerging economies will not enjoy the same development richer nations have enjoyed over two centuries, fuelled by carbon. This would be unjust and could cause deepening global inequality and social unrest.
The scale of transformation required to get to net zero is unprecedented, and it needs to be achieved at a phenomenal pace. Without careful planning and a collaborative approach there is a real risk of leaving some of the world’s poorest communities behind, resulting in stranded markets as well as stranded assets.
This would ultimately make a successful, global transition impossible, and would also cause social unrest and deepening inequality. We must work together to ensure emerging markets are not left behind.
Simon Connell,
Global Head, Sustainability Strategy, Standard Chartered
The emerging market transition finance gap
Emerging markets need to find an additional USD94.8 trillion of transition finance – a sum higher than annual global GDP (projected at around USD93.86 trillion in nominal terms for 2021) to transition to net zero by 2060.
Our 2060 deadline for emerging markets for this study is in line with limiting global warming to 1.5⁰C above pre-industrial levels. However, it does require all markets to make considerable reductions in the short term, and for the developed world to reach net zero by 2050 and to be net negative – removing more carbon than is emitted – thereafter. The 2060 deadline produces a more conservative financing estimate, and accounts for the fact that many emerging markets currently lack transition plans that will take time to be created and executed.
The USD94.8 trillion needed is on top of the capital already committed in each market and is in addition to the estimated USD44.4 trillion raised from emerging market carbon taxes. The USD94.8 trillion includes the investment needed to transition the power sector, to make industry, transport and buildings more energy efficient, and other public expenditure including early scrappage7 schemes and environmental subsidies.
7 These are government schemes to encourage the replacement of older, more polluting vehicles with newer, more environmentally ones, where the government provides a financial incentive or subsidy.
Carbon taxes
A carbon tax is a type of carbon pricing levied on the carbon emitted in the production goods or services. The taxes are designed to reduce emissions by increasing prices, which reduces the demand for products with a high footprint and incentivises companies to make processes less carbon intensive. Currently, 27 markets have introduced a carbon tax. Among them are several emerging markets including Argentina, Chile, Colombia, Kazakhstan, Mexico and South Africa. It is almost impossible for any market to reach net-zero emissions without carbon pricing. At a cost to households and businesses, carbon pricing could raise substantial revenues, and this has been incorporated into our net-zero transition finance calculation (see figure 3). However, it would not raise nearly enough to fund the entire transition.
There are going to be a number of developing countries that will find transition difficult because of the political economy – for example, regions heavily dependent on fossil fuels.
We have to make sure insurance policies are in place in case these countries can’t transition fast enough – as the climate is not going to respect our inability to transition
in time.
Dr Ajay Gambhir,
Senior Research Fellow, Imperial College London Grantham Institute for Climate Change and the Environment
Part Two: Closing the Transition Finance Gap
Failure to reach net zero is not an option. How can the transition finance gap be closed?
The stakes are high, and failure is not an option. Emerging markets need to transition to net zero as soon as possible, and that means raising additional finance.
Our study explores two routes to raising the USD94.8 trillion required for emerging markets to reach net zero by 2060:8
- Self-financing: emerging markets raise the capital themselves through higher taxes and domestic borrowing.
- Developed market financing: the developed world helps provide the capital through a combination of grants and access to finance.
These two contrasting scenarios emphasise the importance of developed market support for emerging market transition. In reality, a route between these two paths is probably the most likely.
A self-financed transition
If emerging markets raised the capital themselves, the study assumes that 75 per cent would come from households via higher taxes, and 25 per cent would be borrowed. This split reflects the relative share of consumption and investment spending in these economies.9
Self-financing a net-zero transition would take a significant sum away from emerging market households: USD2 trillion annually; close to the amount currently spent on food and drink each year.10 Emerging markets’ household consumption – the money available to spend on everyday needs – could fall by around 5 per cent on average between 2021 and 2060. In total, between now and 2060, emerging market household consumption could be reduced by USD79.2 trillion.11
8 Please see the executive summary for an explanation of why this study assumes emerging markets will reach net zero in 2060. 9 Currently in the developing world consumption is approximately twice the size of investment - 67/33% - however investment rates fall as countries develop so 75/25% is a more accurate split for 2021-2060. 10 Source: The Global Consumption Database published by the World Bank. 11This is a figure for all emerging markets. For the purposes of this study, we have used the UNFCCC’s division of emerging markets and developed markets (referred to as ‘annex 1’ and ‘non-annex 1’ countries).
This means these households would have less money to spend on essentials such as food, clothing, housing, energy, health and education. Health and education, key to building better futures, are likely to be hit first. Many people in emerging markets are already living in extreme poverty, defined by the World Bank as surviving on less than Int$ 1.9012 per day. In some parts of Africa, 70 to 80 per cent of the population live below this poverty line.
Emerging markets are bearing the brunt of climate change that has largely been caused by developed countries. They cannot be expected to carry the weight of transition.
The impact associated with inaction is becoming clearer every day, and the industrialised economies must now step up. This is not about them ‘saving the day’. Rather, it is about embracing global opportunities and mitigating global risks that impact everyone everywhere.
Bridget Jackson, Chief Sustainability Officer, PwC
This financing pathway could make a successful transition impossible, as emerging markets would be unlikely to be able to raise this huge amount of capital – USD94.8 trillion – alone.
Emerging markets do not have the same access to finance as their developed counterparts, partly because many have a lower degree of monetary sovereignty – the exclusive right of a state to control its own currency.13 Governments are also grappling with the cost of COVID-19 and looking to rebuild their economies, many of which are based on carbon-intensive industries, as quickly as possible. Taking the self-financing route almost certainly means a failed net-zero transition and a resulting climate emergency.
12 The international dollar (Int$) is a currency unit used by economists and international organisations to compare the values of different currencies. International dollar comparisons between countries have been adjusted to reflect currency exchange rates, but also adjusted to reflect purchasing power parity (PPP) and average commodity prices within each country. An international dollar would buy – in the relevant country - a comparable amount of goods and services that a US dollar would buy in the US.
13 Monetary sovereignty includes essentially three exclusive rights for a given state: the right to issue currency, that is, coins and banknotes that are legal tender within its territory; the right to determine and change the value of that currency; and the right to regulate the use of that currency, or any other currency, within its territory.
A transition financed by the developed world
Emerging markets cannot be left behind in the race to net zero or be expected to sacrifice their economic development and prosperity.
The fairest and most achievable route is developed market financing: wealthier countries providing the USD94.8 trillion needed – the equivalent of 2.7 per cent of annual GDP for the developed world – through a combination of public and private sector financing. Developed market governments have the means to make the necessary grants as most emerging markets do not have enough domestic finance available. Our study also reveals that providing this financing would benefit developed economies.
This financing model would see the public sector provide grants of just under USD300 billion annually – a total of USD11.8 trillion between 2021 and 2060 – mainly for investment into energy efficiency in transport and buildings. The split among developed countries’ contributions would be in line with GDP but, realistically, these grants will only cover a minor portion of the finance needed.
The private sector will need to bridge the remaining gap, supplying loans of just over USD2 trillion annually – a total of USD83 trillion between now and 2060 – for power sector investment and energy efficiency investment across industry, transport, and buildings. This finance would not be spread evenly over the period: a greater proportion will be needed earlier on in the transition.
The assumed split between public and private sector financing is based on the private sector providing the investment required by the power sector (on the basis that it is easier to make tangible returns on electricity infrastructure) and a percentage of the investment required for energy efficiency across industry (100 per cent), transport (80 per cent) and buildings (20 per cent) – a total of USD83 trillion.
The public sector would then provide the remaining percentage of the investment required for energy efficiency across transport (20 per cent) and buildings (80 per cent) and other public expenditure required (early scrappage costs and environmental subsidies) – a total of USD11.8 trillion, following the USD44.4 trillion offset of carbon tax revenues and household environmental tax.14
This approach would delay the pain of paying for net zero, making it more likely that emerging markets will move at the speed required. Moving quickly also has other benefits: spending now will help to boost the post-COVID economy, and governments can take advantage of current low interest rates. It is likely that some public support would be required to incentivise the private sector to make the necessary loans without charging high interest rates.15
14 Figures derived from the IEA data on energy efficiency have been used for these calculations. 15 This idea – that public support would be needed to incentivise the private sector to make the necessary loans without charging high interest rates – is assumed implicitly in the economic modelling.
If emerging markets are to transition to net zero in time to meet global climate change goals we need action and we need it now. As it stands, there is simply not enough money flowing towards net-zero transition in the developing world.
We must leverage the private sector and take the capital sitting in the north and put it to work in the global south. This is not about aid; it is a commercial matter. The finance community must support existing renewable energy infrastructure platforms in the global south as well as developing new structures required to enable private sector capital to flow at a market-by-market level. And solutions need to be creative. Investors prefer big projects, but emerging markets require financing to support decentralised energy systems – so we need to find a way of mobilising private sector capital into smaller investments.
Mark Campanale, Founder, Carbon Tracker Initiative
Developed market financing could mean household consumption in emerging markets would be 4.5 per cent higher on average each year between 2021 and 2060 (compared to self-financing) and emerging market GDP would be 3.1 per cent higher on average each year between 2021 and 2060.
This could mean emerging market consumption is USD1.7 trillion higher on average annually, and USD68.6 trillion higher cumulatively between 2021 and 2060.
However, it’s not just emerging markets that would benefit economically. If developed markets provided finance for emerging market transition, it would boost the global economy. Our study shows that global GDP would be USD108.3 trillion higher cumulatively between now and 2060 compared to emerging markets’ self-financing.16
16 The costs of climate risks are not factored into the model, so in fact under a failed transition (baseline scenario) GDP would be a lot lower, and the benefits of transition compared to baseline would actually be much greater.
Arranging transition finance
Arranging the additional financing is a critical issue. This study assumes that commercial banks create new money when they advance loans, and so additional lending to emerging markets will not affect rates of lending or interest charged to companies in developed markets. The small share of funding that comes from public sources would need to be provided by central banks if governments were to avoid interest charges; however, the response to COVID-19 showed that this is possible, if the low-carbon transition is viewed as a crisis that requires an urgent response. It is noted that increased rates of money creation could fuel inflation in emerging markets where product demand in the real economy rises, but the modelling results showed only limited impacts that are outweighed by changes in energy prices. Exchange rate movements remain uncertain, but an appreciation of emerging markets’ currencies is another possible outcome in the developed market financing pathway.
The developed market financing approach is an opportunity for private investors to help drive a just transition, moving assets from developed to emerging markets with the help of the right policies and regulation to support sustainable industry, infrastructure, transport and energy systems.
As well as examining the cost of transition for all emerging markets our research examines the individual cost and impact for eight focus markets: China, India, Indonesia, Nigeria, South Africa, Malaysia, Kenya and the UAE.17
These markets will have very different journeys to net zero, but they all face a significant transition finance shortfall ranging from USD35.1 trillion for China to a USD300 billion for Nigeria.
17 For the purposes of this study, we have used the UNFCCC’s division of emerging markets and developed markets (referred to as ‘annex 1’ and ‘non-annex 1’ countries).
China
When it comes to climate policy and a net-zero transition, China occupies a unique space. It is the world’s highest emitter, but it is also a leader in renewable energy. China will aim to hit peak emissions before 2030 and for carbon neutrality by 2060, and the government has published detailed plans for curbing emissions. The US-China Joint Glasgow Declaration on Enhancing Climate Action in the 2020s restated both countries’ commitment to the aims of the Paris Agreement and stressed the importance of developed markets meeting their promise to provide USD100 billion climate finance per year to emerging markets. China is also making sizable green energy investments in other markets as part of the Belt and Road Initiative.
Our study estimates that China needs an additional USD35.1 trillion in transition finance to reach net zero by 2060. This accounts for over a third of the total transition finance gap for all emerging markets.
But should China be counted as an emerging market? The United Nations Framework Convention on Climate Change (UNFCCC) puts China in this category, so we have considered China a recipient rather than a provider of finance for the purposes of our study. But the reality is more complicated.
With healthy economic growth and a sophisticated financial market, China is arguably in a strong position to finance its own transition.
Unlike other emerging markets, China could find much of its net-zero investment domestically, supplemented by foreign direct investment on commercial terms. This could reduce the total amount of finance that the developed world needs to provide for emerging market transition from USD94.8 trillion to USD59.7 trillion, reducing the proportion of developed market GDP needed to fill the gap from 2.7 to 1.7 per cent.
But this could also be taken a step further, with China put on the other side of the equation. If China is considered a provider of finance, markets financing the transition would need to spend 1.4 per cent of their GDP on financing emerging market transition.
The role of China, therefore, has a huge impact on the journey to net zero. Reconsidering China’s position could substantially reduce the cost for the developed world and make net-zero goals feel much more achievable.
COP26
COP26 – short-hand for the 26th Conference of the Parties – was held in Glasgow between the 31st of October and the 12th of November 2021. COP meetings are attended by countries that signed the United Nations Framework Convention on Climate Change (UNFCCC) – a treaty agreed in 1994. Before the conference, 200 markets were asked for their plans to cut emissions by 2030. Under climate plans presented ahead of Glasgow, analysis showed that emissions in 2030 could put the world on track for 2.4⁰C of warming.
During the meeting, leaders revisited climate pledges made under the 2015 Paris Agreement, the global agreement to tackle climate change, which aimed to limit the global temperature increase in this century to 2⁰C while pursuing efforts to limit the increase even further to 1.5⁰C.
The key outcome of COP26 – the Glasgow Climate Pact – sets a challenge for nations to return in 2022 with improved 2030 targets in line with the Paris Agreement’s central goal to limit global warming. However, it also notes with ‘deep regret’ the failure of developed markets to so far meet the target to mobilise USD100 billion a year in climate finance and commits nations to deliver on their promises every year through to 2025.
The transition finance gap by market
Each of our focus markets have different emissions reductions pathways and different paces of transition. Yet for each market, a self-financing model would have a negative impact on household consumption.
The UAE is heavily reliant on fossil-fuel exports but has set a target of 2050 for carbon neutrality, becoming the first Middle Eastern and Gulf state to do so. During the UAE’s national address at COP26 in Glasgow, Dr Sultan Al Jaber, Minister of Industry and Advanced Technology and Special Envoy for Climate Change, called for “partnership and cooperation to find sustainable solutions, while creating incentives for economic growth.”
Nigeria – Africa’s largest oil producer – has committed to achieving net-zero carbon emissions by 2060. However, President Muhammadu Buhari has underlined the importance of gas as a transition fuel and called for financial assistance for Nigeria to achieve the target. Like the UAE, Nigeria needs to quickly transition to avoid becoming stranded as the world moves away from oil. At COP26, the president urged international leaders to help fund renewable energy and gas projects in Africa.
Kenya has been ahead of other countries in Africa with green finance initiatives and renewable technology. Renewable energy currently accounts for almost three-quarters of Kenya’s installed power generation capacity, and President Uhuru Kenyatta told the international community at COP26 that Kenya is on-course to achieve full transition to clean energy by 2030. But the Kenyan leader also called on the international community to invest more in research, innovation and technology transfer, and the use of public private partnerships in financing clean energy solutions.
South Africa is heavily reliant on coal for power generation and also exports coal. It is aiming to shift its economy away from heavy industry to the service industry as part of its net-zero transition journey. But South Africa has been hit hard by COVID-19, with economic hardship triggering social unrest and increased distrust of globalisation. Under a deal announced at COP26, South Africa is set to receive USD8.5 billion from wealthier nations to help end its reliance on coal.
India is the world’s third-largest CO2 emitter in absolute terms, but its huge population means its emissions per capita are much lower than other major world economies. India has pledged to achieve net-zero carbon emissions by 2070, the most distant net-zero
Self-financing: The impact on household consumption (by market*)
*Please refer to the section on China for more information and additional data.
Developed market financing: the impact on household consumption
(by market*)
*Please refer to the section on China for more information and additional data.
target of any G20 nation. It is still heavily dependent on coal and will need significant investment to increase renewable energy capacity and improve efficiency. India has underlined the importance of climate finance from the developed world for achieving its goals.
Indonesia and Malaysia will also need assistance from the developed world. Malaysia's prime minister Ismail Sabri Yaakob has announced a goal for the country to become carbon neutral "as early as 2050." The Indonesian government has set an ambitious target of reducing emissions by 41 per cent by 2030 if international funding is provided (conditional, against the 2030 business as usual), compared to 29 per cent without. Indonesia plans to reach net-zero emissions by 2060 at the latest but has struggled to prioritise net-zero transition in its quest for economic development. Indonesia has also criticised the terms of a recent global deal to end deforestation by 2030, suggesting that it is unfair.
Developed market financing: the impact on GDP (by market)
When I think about climate change, I think first of the opportunity for emerging markets. Transition to net zero involves investment in people, infrastructure, digitalisation, economies and countries. It is inclusive, creating a world that involves smaller, emerging economies and SMEs.
There are of course challenges, and if we aren’t careful people in emerging markets will be left behind. We all own climate change and must recognise that the transition to net zero is a global issue – and we will only succeed if we all work together. If we don’t, parts of the world will be left further behind and this would be a tragedy.
Maria Ramos, Independent Non-Executive Director, Standard Chartered
Part Three: Making Developed Market Financing a Reality
Innovative policies and strategies are needed to mobilise the finance required for a fairer transition
To make developed market financing a reality – preventing a climate emergency and supporting economic growth – will require strategy, policy and finance. It provides opportunities for private sector investors to be involved in growing flows of capital to emerging markets.
We are facing a planetary emergency. Everyone in every sector needs to take their responsibility and lead. The private sector cannot wait for the public sector, we need to work together – nobody can hide behind anybody else. It is both the size and urgency that is so stunning: we have just ten years to reduce carbon emissions by fifty per cent.
Jules Kortenhorst, CEO, RMI
Strategy
When it comes to strategy, both the global community and local markets must play their part. Global decision-makers will need to show progressive leadership, and local markets need to develop their net-zero strategies and roadmaps to encourage and support the flow of finance.
Effective strategy will need to include collaboration across sectors and value chains. For example, shipping cannot decarbonise without on-land infrastructure, aviation cannot decarbonise without a supply of biofuels, and greener steel production is reliant on the use of low-carbon hydrogen.
At a local level, a market-by-market approach is essential. Emerging markets face different challenges so governments must develop bespoke strategies, incorporating different emissions reduction pathways and paces of transition where necessary. Markets reliant on the industries and technologies that will decline in the transition will need different pathways and a robust industrial policy to reduce the chances of a disruptive transition.
A blanket approach to net-zero transition for emerging markets will not work. The level of diversity across Asia and other emerging economies is huge; these are widely varied regions and markets. We must take it down to a market-by-market level, and look at what each individual market requires to transition – and then support them in developing a net-zero strategy and pace of transition that is aligned with their needs.
Valerie Kwan, Director of Engagement, Asia Investor Group on Climate Change
Policy
Changes to developed market policies are needed: current rules create barriers to capital moving from developed to emerging markets. Very high liquidity requirements on long term assets – introduced after the financial crisis – have led to a drop-off in infrastructure financing, for example.
If capital is to flow more easily, global consensus must be achieved on climate risk management and modelling, agreed standards, frameworks and incentives (including disclosure frameworks on emissions reduction), carbon pricing and taxation, and policy tools and timelines.
Integrating carbon pricing – through carbon taxation or otherwise – is a transformative step to breaking down the current operating construct that economic growth and fighting climate change are separate issues, as it more closely aligns economic success with climate success. The net-zero transition could have many wider economic benefits, including creating new employment opportunities, far outweighing the number of jobs lost in the move away from fossil fuels. A recent study by the Inter-American Development Bank and the International Labour Organization found that the transition to a net-zero economy could create 15 million net new jobs in Latin America and the Caribbean alone by 2030.
Policy work that estimates the magnitude of the cost of inaction is also an important step in making the link between economic success and net-zero success.
Financing
Governments cannot be expected to provide all the finance, but the public sector will need to use its funds to encourage private investment. Public sector money has the potential to ‘crowd in’ private sector finance. Blended finance, for example, can encourage private sector investment by reducing the risk, as public money is used to subsidise the cost of capital or mitigate possible losses. Governments can also encourage investment by issuing more sovereign green bonds (financing products provided by governments to fund projects with environmental benefits). These initiatives indicate a country’s commitment to a low-carbon economy and can help bring down the cost of capital for green projects by attracting investment and mobilising private capital towards sustainable development.
European and American public sector bodies are currently among the most active investors in the sustainable finance space. Governments and development banks provide either direct finance or credit support mechanisms to support emerging markets with transition. For example, the World Bank helped the Republic of Seychelles to develop the world’s first sovereign blue bond – a financial instrument to support sustainable marine projects – and to raise USD15 million from international investors.
These public sector institutions can use their robust balance sheets to create products that mobilise private capital to support the net-zero transition.
Alongside this, banks, investors and other financial institutions are creating and scaling the structures needed for investment in emerging markets’ net-zero transition. Low-carbon projects in emerging markets offer great opportunities in terms of both impact and potential returns but they are not attracting the capital they need. Banks and other financial institutions can help leverage private sector investment with innovative green finance products, schemes and platforms.
Banks and other financial institutions will need to keep developing and growing offerings like sustainable deposits products, ESG derivatives, repurchase agreement transactions (repos) based on ESG principles, and sustainable trade products. Financial institutions can play a really significant role here, providing incentives for performance against sustainability targets and helping direct capital to where it is needed most.
Concerns about risk deter emerging market investment
Investors are concerned about the risk involved in investing in emerging markets, which is limiting capital flows from west to east and starving the transition of funds. Our 50 Trillion Dollar Question study – based on interviews with investors with a combined USD50 trillion in assets under management – found that more than two-thirds of investors believe emerging markets are high-risk, raising concerns over market volatility, bribery and corruption, government interference, and political risk.
These perceptions of risk persist despite evidence of strong returns: 88 per cent of investors say that investments in emerging markets have matched or outperformed developed markets over the past three years.
Lending to emerging markets can undoubtedly be risky, however, particularly for long-term projects. Practical measures provided by governments – such as technical help with projects or guarantees – will be important to give private sector investors reassurance and confidence.
While Asia, Africa and the Middle East are among the regions most impacted by climate change, investor concerns over risk, poor data and patchy reporting mean that not enough capital is reaching these markets.
Our Opportunity2030 study calculated the finance needed to achieve three of the UN’s Sustainable Development Goals (SDGs), focusing on high-growth markets in Asia and Africa.
It found that while investors, corporations and financial institutions say they are committed to achieving the SDGs, capital is not moving at the required speed to the countries where investment matters most, presenting an untapped investment opportunity of almost USD10 trillion for the private sector.
Without a shift in attitudes towards emerging market investments, the world stands little chance of meeting global goals like the SDGs or the Paris Agreement – the landmark global pact on climate change.
Crossing the net-zero finish line together
The amount of finance required to reach net zero is substantial, but the risks – and the costs – of failing to act are much greater. Transitioning all markets to net zero in time to reach global climate change goals without hampering the economic development of emerging markets is a big task. But this monumental challenge is possible if emerging markets and developed markets take meaningful and urgent steps together, starting now. There is future work to be done on the cost of inaction in emerging markets, how climate and growth are better integrated, and how climate finance can be meaningfully scaled.
Just in Time examines what emerging markets may require to transition to net zero in time to meet global climate change goals. The study combines economic modelling, which quantifies the capital needed and the impact of different transition financing models on socio and economic development variables in emerging markets collectively and across eight focus markets, with insights from a global panel of climate change experts.
Economic modelling
The economic modelling for this report was done using the E3ME model.
The E3ME macroeconomic model
E3ME is a computer-based model of the world’s economic and energy systems and the environment. It was originally developed through the European Commission’s research framework programmes and is now widely used in Europe and beyond for policy assessment, for forecasting and for research purposes. A technical model manual of E3ME is available online at www.e3me.com.
E3ME is often used to assess the impacts of climate mitigation policy on the economy and the labour market. The basic model structure links the economy to the energy system to ensure consistency across each area.
E3ME provides comprehensive analysis of policies, including:
- Direct impacts, for example reduction in energy demand and emissions, fuel switching and renewable energy
- Secondary effects, for example on fuel suppliers, energy price and competitiveness impacts
- Rebound effects of energy and materials consumption from lower price, spending on energy or higher economic activities
Overall macroeconomic impacts; on jobs and economy including income distribution at macro and sectoral level
E3ME is often compared to Computable General Equilibrium (CGE) models. In many ways the modelling approaches are similar; they are used to answer similar questions and use similar inputs and outputs. However, underlying this there are important theoretical differences between the modelling approaches.
In a typical CGE framework, optimal behaviour is assumed, output is determined by supply-side constraints and prices adjust fully so that all the available capacity is used. In E3ME the determination of output comes from a post-Keynesian framework and it is possible to have spare capacity. The model is more demand-driven and it is not assumed that prices always adjust to market clearing levels.
The differences have important practical implications, as they mean that in E3ME regulation and other policy may lead to increases in output if they are able to draw upon spare economic capacity. This is described in more detail in the model manual.
The econometric specification of E3ME gives the model a strong empirical grounding. E3ME uses a system of error correction, allowing short-term dynamic (or transition) outcomes, moving towards a long-term trend. The dynamic specification is important when considering short and medium-term analysis (e.g. up to 2020) and rebound effects, which are included as standard in the model’s results.
E3ME modelling for the Just in Time study
We used the E3ME model to integrate publicly available economic, environmental and social data to quantify the time and capital required for emerging markets to transition to meet global climate change goals (a long-term temperature target of no more than 1.5⁰C of warming above pre-industrial levels). In our transition scenarios, the point of net zero carbon emissions is reached by 206018 (rather than 2050 as in some other net zero scenarios), but cumulative total CO2 emissions (including those from AFOLU) from 2020 onwards are limited to 535 GT, very close to the 50th percentile remaining budget required to limit long term temperature rise to 1.5 degrees indicated by the IPCC’s Special Report on Global Warming of 1.5 degrees.
18 The 2060 net zero timeline selected by our economists specifically for this study, reflects the current status of commitments to net zero across many of our markets and specifically the slower pathway for emerging markets as foreseen under the Paris Agreement. This differs from the 2050 timeline we use for our own approach to net-zero highlighted in our recent whitepaper and which we encourage all stakeholders to adopt
We then developed three climate scenarios and applied different transition financing models to each and the impact of these where applicable on economic variables (GDP, household consumption, employment/unemployment, investment) across emerging markets collectively (UNFCCC’s definition of developed and developing countries referred to as ‘annex 1’ and ‘non-annex 1’ countries) and within our eight focus markets (China, India, Malaysia, Indonesia, UAE, Kenya, Nigeria, South Africa).
Baseline scenario: no additional financing provided
Modelled on current trends including existing climate policy. Includes a recovery from COVID-19 and a return to previous rates of growth, with interest rates rising gradually back to historical norms. Assumes no further climate policies are added but renewable electricity and electric vehicles continue to increase market share following current trends. No additional financing provided. Total warming expected to be over 3⁰C above pre-industrial levels by 2100.
Transition scenario: self-financing pathway
Contains a wide range of regulatory and market-based policies required to meet the long-term target to limit warming to a maximum of 1.5⁰C above pre-industrial levels. Additional financing provided domestically. Total financing gap is the sum of the finance gap in all emerging markets cumulated over the period 2021-2060; this is additional to investment already accounted for in the No Additional Financing scenario. Financing required and provided by emerging markets (75 per cent from domestic households and 25 per cent from domestic borrowing; this split reflects the relative share of consumption and investment spending in the economy). Supports decarbonisation in emerging markets only.
Just transition scenario: developed market financing pathway
Contains a wide range of regulatory and market-based policies required to meet the long-term target to limit warming to a maximum of 1.5⁰C above pre-industrial levels. Additional financing provided internationally. Total financing gap is the sum of the finance gap in all emerging markets cumulated over the period 2021-2060; this is additional to investment already accounted for in the No Additional Financing scenario. Financing required by emerging markets and provided by the developed world through a combination of public and private sector finance. Supports decarbonisation and socio-economic development in emerging markets.
The cost of climate risks is not incorporated into the model, so in reality the baseline scenario – which would result in a failed transition – would result in much greater negative economic impacts.
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Credits
Just in Time is based on in-depth research commissioned by Standard Chartered, designed by Standard Chartered and Man Bites Dog.
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