Can we still afford to invest in climate change mitigation in times of recession? Yes; in fact, such investment could be part of the solution to the current global economic crisis.

The double crisis

Climate change is threatening the world’s prospects and prosperity. Strong scientific evidence shows that humankind needs to limit the increase of global mean temperature to at most 2°C above pre-industrial levels. Beyond this threshold, climate change is likely to become unmanageable and dangerous, pushing the Earth’s complex ecology past known and as yet unknown tipping points, which may fundamentally and irreversibly alter the way our planet functions. Staying below 2°C will be challenging, as the latest scientific evidence suggests that the climate system already contains substantial warming potential due to the increase in greenhouse gases in the atmosphere and the planet’s decreasing capacity to sequester carbon in natural sinks. The threat is enormous and the solution equally so: a drastic decarbonization of our energy system—in effect, a third Industrial Revolution.

But it is not only nature’s capital that is melting: the worldwide meltdown in financial assets has induced a global recession of worrying extent. A squeeze on credit, falling housing prices, and tumbling stock markets are all reinforcing a plunge in consumer confidence, consumption, and investment, putting households and companies around the world under severe pressure. The fear is that this situation will worsen still further—that investment and consumer purchases will be curtailed, sparking a vicious cycle of falling demand, investments, innovation, and employment.

Killing two birds with one stone

But there is opportunity in the twin crises of climate change and economic decline: tackling the latter can help to solve the former, if we get it right. The growing interest of national governments in kick-starting a worldwide recovery presents a unique chance to address crucial long-term economic and environmental challenges together. Failure to seize this opportunity will mean that tax money will be wasted on quick and easy fixes that in fact fix little. Governments will not achieve a satisfactory return on investment if they fail to leverage the economic benefits of climate change mitigation.
Capital- and labor-intensive initiatives (such as enhancing energy efficiency in buildings and appliances, upgrading power grids, developing renewable energy sources, building demonstration plants for carbon capture and storage, and extending public transportation) will create jobs, increase energy security, and help to head off dangerous climate change. The policies, investments, and incentives aimed at economic recovery and job creation can and must be compatible with developing a low-carbon world economy.

By enabling large-scale infrastructure investments and technological innovation, a global deal on climate change could help to bring the world economy back on track, laying the foundation for quicker recovery and future prosperity. The costs of stabilizing the climate system could be relatively low, perhaps just 1 to 2 percent of global GDP. This amount would slow economic growth by only a few months by 2030—a modest investment compared to the cost of not acting. However, this low-cost scenario requires that action be taken quickly and that effective institutions and technologies be put into place on a global scale. Such a global deal should enshrine four key elements.

A global carbon market

First, we need to create a global carbon market based on tradable emission permits. This would internalize the social costs of emitting greenhouse gases. This price signal is necessary for guiding private investment in a socially desirable direction. At the same time, the auctioning of emission permits would provide governments with funds for public investments in infrastructure, education, and research and development.
For maximum efficiency, the price for emissions should remain constant across all sectors and countries. In an international carbon market, developing countries should participate by means of one-sided trading mechanisms, such as a reformed Clean Development Mechanism. A global trading system could be implemented via UNFCCC^1^ negotiations or from the bottom up, by linking regional schemes through the International Carbon Action Partnership. Ideally, these approaches would complement each other. But bottom-up linking can be a fallback option if a more comprehensive approach turns out to be politically unfeasible during the December 2009 United Nations Climate Change Conference in Copenhagen.

Technology development

Second, we need to enhance funding for low-carbon technologies, for demonstration projects for complex technologies (such as carbon capture and storage), and for bringing renewable energy sources to market. Why is this important? Even a well-designed carbon market cannot achieve the fundamental transformation of the energy system that’s needed. Although many renewable energy technologies are likely to be profitable in the mid- to long-term (some of them even in the absence of stringent carbon constraints), most of them fail to attract the capital they need because of high initial costs–in spite of their significant cost-reduction potential. Public funding is needed to jump-start their development.

The investment requirements are significant but will benefit all countries. Therefore, industrialized nations should shoulder the research and development effort. In addition, a sustainable energy provision for developing countries is of key importance for a long-term, global solution to the climate problem. Sharing technologies, making low-carbon development a priority as countries build their infrastructure, and setting up a low-carbon fund could all help poor countries to leapfrog directly into a modern low-carbon economy.

Avoiding deforestation

Third, steps must be taken to stop deforestation and forest degradation, which accounts for roughly 20 percent of global anthropogenic greenhouse gas emissions. According to most estimates, these emissions can be reduced at low cost. Also, the UNFCCC’s Reducing Emissions from Deforestation and Degradation (REDD) program comes with significant ancillary economic benefits. Important challenges in establishing an environmentally effective REDD regime lie in ensuring permanent forest conservation and limiting leakage. Funding for forest preservation would stimulate the economies of developing countries and ensure local populations do not respond to the current downturn by accelerating the destruction of natural resources.

Adaptation

Fourth, even if the most ambitious mitigation target can be realized, adaptation to climate change will be required. The funding necessary to finance adaptation is significant, especially in the developing world. As the adaptation fund set up under the Kyoto Protocol is inadequate in meeting these needs, we need to install a broadened funding mechanism.

Time to act

Together, these four pillars of a global deal on climate change should achieve at least a 50 percent reduction in global greenhouse gas emissions by 2050, compared to 1990 levels. This is an absolute minimum requirement to avoid dangerous climate change. A global deal would deliver immediate and long-term economic benefits and reduce sources of global instability such as energy insecurity and resource competition. If we act quickly and decisively, a global deal could unleash a wave of economic prosperity. It would be effective in addressing climate change and bringing down greenhouse gas emissions. It would be efficient in ensuring that scarce resources are used to the greatest benefit. And it would be equitable by acknowledging the common but differentiated responsibility of rich and poor countries and by advancing economic prosperity in the underdeveloped world. After all, the fight against climate change and the fight against global poverty and economic decline can only be won or lost together.

¹ United Nations Framework Convention on Climate Change.

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