Accelerating Paris-Aligned Financial Flows: a Typology for Facilitating a Paris-Aligned Covid-19 Recovery

WORKING PAPER ACCELERATING PARIS-ALIGNED FINANCIAL FLOWS: A TYPOLOGY FOR FACILITATING A PARIS-ALIGNED COVID-19 RECOVERY LORENA GONZÁLEZ, NISHA KRISHNAN, CAITLIN SMITH, JULIE BOS, AND NATALIA ALAYZA EXECUTIVE SUMMARY Highlights CONTENTS The converging economic, health, and climate crises Executive Summary .......................................1 ▪ present a rare opportunity for the Group of 20 (G20) Introduction ............................................... 5 countries to align their economic policies with their Context: Paris Alignment and COVID-19 climate commitments. Recovery Efforts .......................................... 5 This study analyzes the available literature and ▪ five existing COVID-19 stimulus trackers to build Research Approach........................................7 a typology of the policies and interventions available Synthesis of Government-Led COVID-19 to G20 countries to promote Paris alignment Response and Recovery Efforts ........................ 14 domestically and internationally. Implications .............................................. 18 Between March 1, 2020, and January 31, 2021, G20 Appendix A. Supplementary Figures and Tables 21 ▪ members primarily used business-as-usual (BAU) ...... policies, incentives, and investments during the Appendix B. Interview Protocol and Questions ....... 31 COVID-19 response and recovery. BAU policies and Abbreviations ............................................33 investments benefit carbon-intensive activities, delay References ...............................................34 climate action, and lock in the use of high-carbon Acknowledgments ....................................... 37 technologies and business models that will be more expensive to replace later. About the Authors ....................................... 37 During the COVID-19 response and recovery, G20 ▪ countries have used a small subset of the levers and Working Papers contain preliminary research, analysis, interventions available to reach their Paris goals. findings, and recommendations. They are circulated to G20 members should ensure that their recovery inter- stimulate timely discussion and critical feedback, and to ▪ ventions across all economic sectors are fully aligned influence ongoing debate on emerging issues. Working with the Paris Agreement. We have nine years to papers may eventually be published in another form and their content may be revised. cut emissions in half, as is required to limit global warming to 1.5°C. Suggested Citation: González, L., N. Krishnan, C. Smith, J. Bos, and N. Alayza.. 2021. “Accelerating Paris-Aligned Financial Flows: A Typology for Facilitating a Paris-Aligned COVID-19 Recovery.” Working Paper. Washington, DC: World Resources Institute. Available online at http://www.wri.org/publication/financial- typology-for-green-recovery-g20 WORKING PAPER | July 2021 | 1 Context looking recommendations. It will inform the Italian G20 presidency and the G20 Climate Sustainability and Energy While the world navigates the COVID-19 pan- Transition working groups. demic and its economic crisis, the climate crisis continues to worsen. Advanced and developing We conducted an extensive literature review to economies have announced COVID-19 spending measures build a typology of Paris-aligned policies and worth roughly $12 trillion and $2.6 trillion, respectively, interventions and tested this typology against five or 22.5 percent and 10.6 percent of their gross domestic existing COVID-19 stimulus trackers to identify product (GDP) (O’Callaghan and Murdock 2021). Govern- trends among G20 countries and their public ments have an unprecedented opportunity to integrate financial institutions. We complemented this analy- planning processes, policy frameworks, and investment sis with semi-structured interviews with governments patterns compatible with the Paris Agreement into their to understand countries’ and institutions’ motivations, economic recovery packages. processes, and challenges. Through our analysis and discussion of implications, we aim to contribute to ongoing The 2015 Paris Agreement sets three long-term efforts to accelerate the alignment of global finance flows goals that would ensure low greenhouse gas emis- with the Paris Agreement. sions and a climate-resilient future.1 Article 2.1.c states the goal of making finance flows consistent with This study identifies trends among policies and such a future. Literature has examined Paris alignment interventions used; it does not attempt to quantify considerations and proposed policies and interventions the size of financial investments or their impacts. that could drive the transformational change required Although some of the reports and trackers in our literature to reach the Paris goals. The literature also clarifies that review do quantify the financial investments, their data continuing to invest in BAU policies and investments could not be compared or synthesized. Where relevant, raises the long-term costs of climate action. Consistent we cite their findings, but our focus is on the polices and with the literature, BAU is defined as continued invest- interventions. Additionally, because we rely on second- ments in carbon-intensive and non-resilient infrastructure ary sources—the COVID-19 stimulus trackers—for data systems, processes, and policies that have been shown about domestic and international actions, the data used to to be misaligned with the goals of the Paris Agreement inform our findings are only as accurate and comprehen- (OECD 2020; O’Callaghan and Murdock 2021; Hepburn sive as the trackers’ data. et al. 2020; Vivid Economics 2020; Larsen et al. 2020; CarbonBrief 2020). Key findings G20 countries have several roles to play in the Public sector policymakers and financial institu- COVID-19 economic response and recovery. One, tions can pursue a wider range of interventions to enact domestic economic recovery spending and policy advance a greener recovery. Our typology of interven- responses within their borders. Two, receive or give inter- tions (see Figure ES-1) provides decision-makers with a national aid. Three, lead by example and demonstrate that guide to the available tools that can advance a greener ambitious climate action can propel an economic recovery, recovery and build a Paris-aligned future. including by creating a sizeable number of green jobs. Emerging trends of the initial stimulus packages About this working paper show a preference for BAU investments in COVID- 19 recovery packages.2 BAU policies and investments This working paper aims to help governments perpetuate carbon-intensive activities and threaten to identify policies and tools to align COVID-19 eco- derail efforts to reach the Paris goals. Despite the trans- nomic recovery policies, finance, and investments formative opportunities presented by the recovery, with the Paris Agreement goals. To do this, it takes countries are only using a small subset of the levers and stock of how G20 countries have implemented Article 2.1c interventions available to advance the transition to low- at home and in their international actions. After assessing carbon and climate-resilient pathways. which climate-related levers and interventions they used from March 2020 to January 2021, it provides forward- 2 | Accelerating Paris-Aligned Financial Flows: A Typology for Facilitating a Paris-Aligned COVID-19 Recovery Figure ES-1 | Typology of Paris-Aligned Interventions MONETARY POLICY FINANCIAL AND REAL ECONOMY FISCAL POLICY AND BUDGET SUPPORT PUBLIC FINANCE FROM GOVERNMENT INFORMATION INSTRUMENTS POLICIES AND REGULATIONS OWNED FINANCIAL INSTITUTIONS Addition of climate risks to macro- Climate-informed stress testing of financial Consumer-specific subsidies and tax rebates Investments in climate-positive infrastructure Strategies, voluntary disclosures, standards economic models and forecasting tools institutions for green goods and services or frameworks, roadmaps, guidance documents, etc. (nonbinding) Adjustment of collateral requirements for Mandated disclosure of climate risks Design or implementation of climate-driven Liquidity support to financial inter- financial institutions to reflect budget process mediaries, SMEs, or other institutions with climate-related risks decarbonization or climate conditions Adjustment of interest rates for financial New or reinforced climate or environmental Divestment of public funds from Structure, issuance, or purchase of sovereign institutions to reflect climate-related risks policies or regulations emission-intensive holdings green bonds Analysis of climate-related implications for Establishment and/or reinforcement of current monetary policy regimes and risk carbon pricing mechanism management practices Climate-informed quantitative easing Investments in climate-positive infrastructure from government expenditures and public budget programs Issuance of sovereign green bonds Investments in workforce development, including skills training and provision of educational opportunities Liquidity support for companies in carbon-intensive industries with decarbonization or climate conditions Liquidity support with climate conditions for small and medium enterprises (SMEs), non-carbon-intensive businesses or institutions Mandated green public procurement Removal or reduction of publicly funded support for coal, oil, gas, or other fossil fuel subsidies Research and development in green and/or sustainable technology Note: This typology is based on an extensive literature review and meant to be indicative,

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