While carbon pricing and sustainable financing are important tools to combatting climate change, investing in clean energy technologies are the best way to achieving net-zero carbon emissions.
The move to achieving net-zero carbon emissions must happen as quickly as possible and at scale to combat climate change. To achieve real, quantifiable impacts, we must explore and invest in all possible policy solutions, among them carbon pricing, sustainable finance and the promotion of clean energy technology.
All of these will be crucial over the coming decade. However, we should start with the greater promotion of clean energy technologies in order to really hit the bullseye on the net-zero target, as it will serve as the basis for the other policy tools to work successfully.
Carbon pricing and sustainable financing tools
Carbon pricing will remain the backbone of climate policy, but public apprehension and political constraints are hindering widespread adoption. For a long time, policymakers and economists have been “enchanted” with putting a price on carbon as the most effective and efficient tool to curb climate change. The concept is sensible and straightforward: price and tax the pollutants and mighty market forces will work for the planet by pushing the dirtiest fuels out of the system. Unfortunately, this compelling story alone does not guarantee public support. Until we have competitive, low-carbon technologies to provide the same services – energy and transport – at a lower price, having voters and politicians accept higher carbon prices is simply wishful thinking.
Sustainable finance also has a pivotal role to play, but requires clear policy signals for stronger impact. For years, there have been hopes that the financial sector, driven by political support, will somehow bring about the change we need.
The most successful green assets right now are green bonds that reached a market volume of $250 billion in 2019. But green bonds are basically priced the same as equivalent bonds with the same risk level, are mostly used for refinancing rather than new investments, and have been issued by some of the dirtiest polluters. So, how to do you expect them to bring major positive change?
While governments can use financial regulations to encourage markets to drive change, there is strong pushback from the financial industry and central banks. I can recall one instance where we consulted a government on the stronger inclusion of climate risks in financial regulations. Following the consultancy, the government was actually willing to take further steps. Unfortunately, political pressure from the financial industry not only blocked this, but actually led to the removal of very basic environmental reporting requirements from these same regulations. Without a strong price on carbon or widespread availability of affordable clean technologies, I’m afraid the impact of the financial sector will remain limited.
Support for clean energy technologies
Unlike the first two policy tools – carbon pricing and sustainable finance – clean energy technologies have broad public support and measurable success in driving down emissions.
Much of my personal optimism regarding us meeting the goals of the Paris Agreement stems from the increasing accessibility, reliability and affordability of clean technologies. Within just a few years, the installed and levelized costs of renewable energy systems – notably solar PV – have decoupled from fossil fuel prices. In simple terms, coal is not going to get cheaper, but solar will. And there is growing public support backing such burgeoning clean technologies.
Fifteen to twenty years ago, most experts had doubts about the future of solar PV, especially as the cost to reduce just 1 tonne of CO2 was far too high. Today, renewable energy sources, including solar, are producing electricity at a more competitive price than coal, gas and oil, and production costs continue to fall. The benchmark price for solar has dropped 84% since 2010, offshore wind by more than half and onshore wind by 49%. Similar stories exist for energy storage: the price of lithium-ion batteries has already dropped by more than three quarters since 2012.
Apart from subsidies for specific technology – both for research and deployment – policymakers have used standards for advancing technologies. Take energy efficiency, for example. With simple mandatory standards for light bulbs, millions of tonnes of CO2 emissions have been reduced.
In 2019, one-third of the world’s energy consumption is covered by mandatory standards and regulations compared with just 11% in at the turn of the century. A stronger focus on technology would create three massive advantages for climate policy:
- Improved livelihoods – clean technology is highly tangible and can improve people’s lives directly, so there is generally broad support.
- Innovation and jobs – clean technology provides a positive narrative that policymakers can get behind: innovation, development and job opportunities.
- Private sector support – business has a strong interest in new technology. Over the last decade, the private sector has consistently attracted more than 75% of EU investment in clean energy research and innovation and increased annual spending from around €10 billion to over €16 billion.
We cannot afford to delay action, especially when we have powerful tools available, today, to create the change we need. While carbon pricing is still the backbone of any climate policy, there is not enough public support to get it off the ground across the globe quickly enough. Sustainable finance can support the transition to net zero, but without stronger policy signals, its impact remains limited.
History shows that clean technology has always had broad political support and the most significant impact on CO2 reductions, largely thanks to R&D, clear standards and deployment incentives. By focusing more on the development and deployment of clean technology, policymakers can speed up progress towards solving the climate crisis.
Let's not delay any longer – let's take the next step on our ambitious climate action journey, today.
Martin Stadelman is Director Funds & Platforms at South Pole