The launch of the Santiago Action Plan at the COP25 meeting in Madrid by finance ministers is an important step to ensure finance ministries play their role in accelerating the zero carbon transition.
Without a comprehensive assessment of the scale and type of funding needed, climate mitigation policies risk being bound to what is deemed politically possible rather than what is required by science.
At COP25 in Madrid yesterday (December 9, 2019), the Coalition of Finance Ministers for Climate Action launched the Santiago Action Plan setting out how the 51-country coalition will align its activities with the Paris Agreement. The action plan also outlines how coalition members will take a proactive role in decarbonising their economies and managing climate risks. The Coalition, established in April 2019 and co-led by Finland and Chile, offers a powerful opportunity to drive real change and accelerate a zero carbon transition.
Ministries of finance are in the driving seat of systematic economic change. While other ministries are important for implementing plans at the national level, ministries of finance wield ultimate power over budgets and capital expenditure meaning they set the direction of travel for entire economies. Until now, however, they have been largely absent from the political debate on the transition towards net zero carbon and resilient economies. Climate has been seen mostly as a separate environmental issue, rather than a cross-cutting macroeconomic one.
The new action plan puts this idea to rest. The Coalition’s plan builds on the Helsinki Principles, which demonstrate the scale of the opportunity for finance ministers to guide efforts to accelerate the zero carbon transition and deliver the finance needed to limit climate impacts. One of the key tools for speeding up the global transition is the publication of national finance strategies for climate change as Chile has just done.
Creating a finance strategy at national level requires an assessment and quantification of national needs for decarbonisation and resilience. By creating a plan, a clear pathway is established to raise finance at the scale and response required. Without such a comprehensive assessment of the scale and type of funding needed, climate mitigation policies risk being bound to what is deemed politically possible rather than what is required by science.
Reframing economic analysis and planning to achieve a zero carbon economy requires a number of analytical steps to answer key questions:
- What is the country’s long-term decarbonisation strategy? What needs to be financed and how much investment is required to deliver this strategy?
- Who will finance it? The roles of public and private, national and international actors.
- How will it be financed? What systematic changes are needed to ensure finance is delivered where it is needed at the scale and pace required.
Although these may seem simple and obvious questions, they represent a different approach to how economic planning has typically been done previously. Long-term goals need to be identified and synergies between different elements of the economy understood. Ministers of finance are entering a new era where collaboration and cooperation within governments is essential, as their ministerial counterparts, such as ministers of environment, are set to become crucial supporters of the zero carbon economy. An increasing number of countries are setting up some kind of cross-departmental forum to discuss the national response to climate change.
As ministers of finance approach this new challenge they should bear three important considerations in mind:
First, developing countries have historically looked to finance from abroad to support the delivery of net zero carbon and resilient projects. Creating an integrated national strategy will enable developing countries to be more effective in accessing and leveraging international finance, and make it easier to ensure that national financial sources (public and private) are brought into play where appropriate.
Secondly, by setting out a finance strategy for the climate transition, national governments send a clear signal as to the direction of travel within the economy. This allows all economic actors to feel confident the government is committed to the economic transformation required. Creating a strategy also clarifies the role of each industry sector within the transition.
Lastly, the opportunities offered by national financial development tools are sometimes underestimated. In many countries National Development Banks (NDBs) have had a crucial role in the development of the local economy. As governments start setting national climate targets, NDBs will have the potential to play a key role in delivering the climate transition. Other key instruments such as national investment systems will also be important for delivering investments aligned to national climate goals and helping to signal government priorities.
Ministers of finance have always had the power to shape the economy. In many cases however, they have been reticent to use and even recognise this power. Often, they have been more concerned in dealing with the imperatives of today rather than planning for tomorrow, but ultimately, they are the one’s designing how national economies operate and run. The scale of the climate challenge is now proving that finance ministers must step up to deliver the zero carbon and resilient transition. In the actions announced at COP25 we see the first signs of what this could look like.