15 November 2023

SSM's Elderson: Making finance fit for Paris: achieving “negative splits”

...we can deliver on our commitments to limit global heating ... provided that solid foundations have already been laid in the first half of the decade and on the – admittedly extremely challenging – condition that we run at a world record-breaking pace in the second half.

As a number, “two” seems to have a particular appeal in many fields beyond marathon running. At the ECB, for example, we consider that price stability is best maintained by aiming for 2% inflation over the medium term. Meanwhile, climate scientists consider two degrees Celsius above pre-industrial levels as the global heating threshold beyond which extreme weather events and the degradation of ecosystems would be disastrous for humankind. In the Paris Agreement, global leaders committed to staying well below those two degrees of global heating. And it is the figure the High-Level Expert Group on Sustainable Finance – which I took part in – had in mind when drawing up its recommendations on sustainable finance in 2018.

This conference marks the halfway point in what was envisaged to be a decade for sustainable finance, building on the high-level group’s recommendations. And at this half-time juncture, I am sorry to say that it is not at all certain that humankind will remain below that disastrous threshold of two degrees of global heating. But Kelvin Kiptum’s recent world record provides hope. It shows that, by pushing for a negative split, great achievements are possible. In other words, we can deliver on our commitments to limit global heating in line with the Paris Agreement, provided that solid foundations have already been laid in the first half of the decade and on the – admittedly extremely challenging – condition that we run at a world record-breaking pace in the second half.

Mapping the course

Such foundations start with a clear road map for achieving our objectives. In other words, a clear strategy setting out the milestones on the path to Paris.

Here, there is no doubt that the responsible EU authorities have delivered. The Paris Agreement has been transposed into the European Climate Law, which includes a commitment to the ultimate objective of climate neutrality by 2050 as well as interim objectives for reductions in emissions by 2030 and 2040. The commitment to reduce emissions by 55% by 2030 is further reinforced in the EU’s Fit for 55 strategy. And the EU has pledged to end its dependence on Russian fossil fuels well before 2030 under its REPowerEU plan.

The European Commission estimates that an average annual investment of €1.25 trillion during the period 2021-30 is required to meet the objectives of Fit for 55 and REPowerEU.^[2] That estimate would add around two-thirds, or €500 billion, to the level of annual investment in climate and energy security seen during the previous decade.^[3]

This is clearly a huge investment effort with an upfront cost that will need to be borne by our societies at a time when economic uncertainty is high. But analysis consistently shows that the benefits of a timely transition far outweigh the costs, especially when assessed against the alternative scenarios of doing nothing or doing too little too late. This has also been confirmed by a recent ECB stress test exercise and updated climate scenarios published by the global Network of Central Banks and Supervisors for Greening the Financial System last week.^[4]

Half-time evaluation

So at half-time, where do we stand on the path to Paris? While many steps have been taken, we cannot yet conclude that we are on track for a timely transition scenario. Rather, it is becoming increasingly likely that we will see an intermediate scenario with increased transition risks and physical risks from extreme weather events and nature degradation.

 

SSM

© ECB - European Central Bank