The Paris task: we’ve accepted financial instability but still failing to act
IMF’s managing director Christine Lagarde warned in January that the “world economy is growing more slowly than expected and risks are rising. Photo by Paolo Nicolello

Contributor: “With risks to the world economy rising, there’s precious little appetite to discuss how the Paris objectives might drive short-term financial stability risks. That’s a problem if we want to achieve them.” 

Perhaps it’s now official following RBA’s Guy Debelle’s recent speech “Climate Change and the Economy”climate change will trigger financial instability. But go one step further and suggest that climate change could trigger short-term financial instability and suddenly everybody leaves the room. The reasons why appear as obvious as they are alarming.

Speaking in January at the World Economic Forum’s annual meeting in Davos, IMF’s managing director Christine Lagarde warned that the “world economy is growing more slowly than expected and risks are rising”. 

And with risks rising “significantly” Lagarde inferred that the world economy must maintain a certain momentum to contain financial vulnerabilities, with tightening financial conditions a “major risk factor in a world of high debt burdens”.

This debt burden and its role in aggravating financial vulnerabilities appears to be warping the IMF’s traditional “growth is good” maxim into something of a “growth is imperative” obsession.

Take the IMF’s most recent 2018 World Economic Outlook and Global Financial Stability Report 2018. Both reports depict potentially dire consequences of not maintaining strong, steady growth, with a similar message presented in the IMF’s April update.

The Paris task

With strong and steady growth so imperative to containing financial vulnerabilities it’s no wonder the Paris Agreement’s targets incite dread among financial elites.

According to the IPCC special report, nothing short of a “rapid and far-reaching” transition in land, energy, industry, buildings, transport, and cities is required to keep global warming to 1.5°C. As UNEP’s graph suggests, that’s like going cold-turkey on emissions overnight.

Even if we aim for “well below” 2°C the task remains overwhelming, and with global emissions likely rising a further 2 per cent in 2018, UNEP’s graph might sooner depict an emissions reduction cliff rather than the vertiginous waterslides.

Source: Figure ES.3 of the latest UN Environment Programme Emissions Gap Report. (y axis: Gt CO2-e)

Sure, the early stages of the transition are already creating new growth and investment horizons but remember that with all the renewables in the world, emissions are still rising. Enacting a truly Paris-aligned transition would inevitably heighten potential for widespread stranded assets, failed investments, and unjust transitions for workers, with associated short-term downside risks to the global economy.

The Paris snub

Strangely, the IMF’s 2018 Global Financial Stability Report does not consider climate change as a short-term instability trigger. Likewise, the IMF’s World Economic Outlook consistently frames climate change as a longer-term threat to the world economy primarily through its physical impacts.

Why? Well, given the many downside risks already facing the world economy, referring to another instability trigger as complex as this one would probably shatter the IMF’s normally cautious optimism. And perhaps the IMF genuinely doesn’t believe that we can enact a Paris-aligned transition, all things considered, and that we’re instead doomed to deal with the effects of 3°C-plus warming.

It seems that much of the corporate world is wearing the same coloured glasses.

Following the release of the (TCFD) final recommendations, corporations have started to disclose the findings of preliminary climate-related scenario analysis. Read carefully and you’ll note that whilst several corporations confirm a commitment to Paris, they also state a base-case assumption that a Paris-aligned transition is improbable, hence downplaying short-term transition risks.

Give up on Paris?

If there’s one thing scenario disclosures are telling us, it’s that Paris is only achievable with seamless global cooperation.

So, it’s a bit of a shame that we no longer “do” global cooperation; as the WEF’s 2019 Global Risk Report despairs (in its chapter “Global Risks, out of control”). “Global risks are intensifying but the collective will to tackle them appears to be lacking… we are drifting deeper into global problems from which we will struggle to extricate ourselves”.

This sense of desperation was also evident last December at COP24. UN Secretary-General Antonio Guterres stressed the importance of “inclusive multilateralism” and improved coordination between national and sub-national levels if we are to achieve Paris. 

Similarly, Maros Sefcovic (vice president of the European Commission) stressed “our challenge is to create policies that are coherent rather than fight each other”. You could almost hear the chuckles in the auditorium from negotiators sent to thwart progress and “advance” isolated national agendas.

So why not aim for 2°C warming or something higher? Doesn’t everybody hate winter anyway? Well, the IPCC’s special report discusses these options along with the “unacceptable risks” to health, livelihoods, food security, water supply, human security, and economic growth. It’s truly sobering reading for anybody who can stomach it.

Alas, Paris it is, and 1.5°C it must be.

The reality check

The RBA’s Guy Debelle asserted that “financial stability will be better served by an orderly transition rather than an abrupt disorderly one”Surely here we’re presented with a false dichotomy; at this late stage the only safe option is a transition that’s both orderly and abrupt.

Hence the burning question; can we enact an orderly and abrupt net-zero emissions transition against a backdrop of “out of control” global risks that are threatening already-weak global economic growth?

Unsurprisingly, it’s a question that most still run from.

Many in the climate world, possessed by the need to transition urgently, gloss over short-term risks from this particularly delicate economic backdrop. Equally, many in the corporate and finance world dismiss short-term transition risks, perversely comforted perhaps that economic vulnerabilities are rendering an aggressive transition improbable.

But as improbable as an aggressive global transition might seem, it’s also imperative, and so our collective mindset should be that it is unavoidable. By extension, we should also then accept that enacting a 1.5°C transition mandates a frank and cooperative dialogue on short-term transition risks.

Perhaps the IMF could muster the courage to contemplate climate change as a short-term risk driver in its 2019 Global Financial Stability Report. Because if we want to make 1.5°C a reality we need to first acknowledge short-term risks, and then cooperatively work our way through them.

Evan Stamatiou is managing director of Carbon Risk Management, which advises Australian and international corporates on climate-related risks, based in Melbourne.

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