The Hon. Kevin Rudd
26th Prime Minister of Australia
President, Asia Society Policy Institute
Speech delivered at the BSR Annual Conference
1 November 2016
Next week, government, business and civil society leaders will gather in Marrakesh in our latest global effort to tackle the climate crisis. The task: translate the historic progress from last year’s Paris Agreement into meaningful action, and set the stage for more ambitious goals in the future. The stakes have never been higher.
In 2016 we will again record the warmest global temperatures ever measured; a dubious distinction that now appears to be an annual occurrence. Weather is becoming less predictable, storms more intense, and drought and flooding more pervasive. This is destroying livelihoods, impeding economic progress, and undermining the sustainable development gains we are working hard to achieve.
Paris provided new reasons for optimism while also laying bare the global climate and sustainability challenge. National commitments around the world coalesced in the Paris Agreement around a clear goal: keep the global temperature increase below 2 degrees Celsius above pre-industrial levels, and make efforts to keep this increase below 1.5 degrees Celsius.
Our current trajectory – even if all the commitments in Paris are met – falls short of these goals and places us on a track of approximately 3 degrees of warming by 2100. While this is an improvement over the business-as-usual scenario of a 4.1-4.8 temperature increase, 3 degrees of warming would compromise a litany of the natural systems on which we depend, and could create climate feedbacks that lead to further warming well into the next century.
Meanwhile, there is no guarantee that all the commitments in Paris will be fully honored and implemented. The agreement is based on good faith efforts to meet voluntary climate goals. Doing so in practice will require effective funding approaches, strong governance, technological advances, and redoubled political will in the future.
None of this is assured, but there are positive trends. High among these are the accelerating levels of climate change cooperation between the United States and China, and Beijing’s renewed prioritization of sustainable development policies.
Photo courtesy of BSR
Leadership from the US and China
The US and China are both ramping up their climate change ambition and, surprisingly, they are doing so in concert. Over the past two years, these countries – which combined account for over 40% of global emissions – forged a climate change partnership was unthinkable only a short time ago.
First, in 2014 they mutually agreed to substantial emissions reduction targets – with China aiming to peak its greenhouse gas emissions by 2030 if not sooner and the US committing to a 26-28% emissions cut below 2005-levels by 2025.
Second, in 2015 they entered into a number of subnational agreements between cities, states, and provinces aimed at making these goals a reality, and bolstered their climate partnership through technical cooperation on issues from carbon pricing to clean energy development to sustainable urban infrastructure.
Third, this past Spring, Presidents Obama and Xi released a Joint Presidential Statement declaring their intention to ratify the Paris Agreement and naming climate change as a ‘pillar of the US-China relationship’. On the cusp of this year’s G-20 in Hangzhou they followed through on Paris ratification, bringing other countries along with them and setting the foundation for the agreement to come into international legal force.
China and the US have thus come a long way. The much maligned Copenhagen conference of 2009 revealed longstanding fracture points keeping these countries apart. China emphasized its continuing poverty challenges, economic growth and development needs, and relative lack of historical culpability for the climate problem. Meanwhile the US trotted out its consistent refrain that having international negotiations is fine, but that they were pointless if China does not commit to considerably reducing its emissions in ways that are internationally verifiable. The result was mutual scapegoating and recrimination, similar to that which has hamstrung climate negotiations for much of the previous 15 years.
Despite its problems, Copenhagen Agreement achieved important outcomes. It recognized the scientific view that global temperature increases should be kept below 2 degrees Celsius, which set the foundation for our ongoing collective temperature goal. It called on developed states to commit to ‘economy-wide’ emissions targets by 2020, and on developing states to implement the ‘mitigation actions’ that they deemed appropriate. This subtle move has chipped away at the wall long separating developed and developing countries. Negotiators in Copenhagen also established the Green Climate Fund, and the goal of filling its coffers from a variety of sources with USD$100 billion per year by 2020 to address climate change.
That the conference was widely deemed a failure reflects the lofty goals that existed heading into it, and disappointment with what was then criticized as a hollow outcome. Events since 2009 show that we underestimated how impactful the Copenhagen Agreement would prove to be.
Things have changed politically since Copenhagen. Perhaps because of its perceived failures, international efforts to address climate change have become more flexible and less driven by mandatory national actions. Countries now voluntarily offer climate response goals, or ‘Nationally Determined Contributions’ in climate conference parlance, along with their strategies for achieving them. The United Nations and other institutions provide support, monitoring, and verification. And on finance, Multilateral Development Banks, the Green Climate Fund, individual nations, and private investors offer sources of funding.
International summits now increasingly serve the more technocratic roles of measuring progress, negotiating shared standards and practices, and seeking greater collective ambition through political peer pressure. While critics argue that this is a toothless and convoluted approach, it has helped tame longstanding tensions across the developed-developing world divide. It has also created political space for the US and China to act – as both of these countries, for different reasons, have long bristled against the structural constraints of international law.
While the future of US climate policy is currently hostage to the outcome of an election which you may have heard is scheduled for next week, the tea leaves for China’s climate future are relatively easier to read. And they reveal a fundamental shift in priorities toward a more sustainable future.
China’s Growing Ambition for Sustainable Development
China is undergoing an economic and environmental transformation. When China opened up its economy in 1979 it did so with rapid industrialization in mind. The decades that followed saw growth on unprecedented scales, defined by investment in heavy industry such as steel and cement, a domestic construction boom of an order of magnitude the world had not seen before, low wages, and an emphasis on manufacturing for export. This model was fueled largely by coal; the national consumption of which tripled between 2000 and 2013, at which point China was burning roughly half of all the coal processed in the world. These boom years pulled over 300 million people out of poverty, but left in their wake a trail of income disparity, new economic stresses, and severe environmental challenges.
The Chinese Academy of Science estimated that in 2005 the national cost of resource depletion, environmental pollution, and ecological degradation was 2.5 trillion RMB – or 13.5 percent of China’s GDP that year. Economic and social problems attending China’s rapid growth were growing apace, with the saturation of steel production and many manufacturing sectors, growing labor costs, and a widening wealth divide between modern urban zones and China’s rural periphery. Meanwhile air pollution was fast leading to public health and quality-of-life crises – by some accounts responsible for over 1.5 million deaths annually.
None of this was lost on the Chinese leadership, with President Xi calling air pollution the ‘most prominent’ problem facing Beijing in 2014, and a Shanghai Academy of Social Sciences report saying that Beijing was “barely suitable” for living. For China, addressing air pollution, its core relationship with climate change, and other environmental challenges came to be viewed as matters of stability and prosperity. National priorities began to shift.
The Xi leadership is responding to these challenges by focusing on lower, higher-quality growth, expanding services and innovation, improving sustainability, and reducing inequality. China is in an early stage of this transition, but some impacts are visible. Alongside lower GDP growth, primary energy consumption growth has slowed to a near halt, while energy intensity rates and the share of heavy industry in overall GDP are both decreasing. For example, during the recently-concluded 12th 5-year plan, the share of services in the Chinese economy grew from 43 to 51 percent, while the economic footprint from manufacturing declined from 47 percent to 41. Last year China’s energy intensity rate dropped by 5.6 percent, exceeding its annual target of a 3.9 percent and contributing to a 20 percent decrease in energy intensity over the past 5 years.
At the same time, China is transforming its energy production systems. Non-fossil fuel energy generation increased 73 percent between 2010 and 2014 – making China a global leader in the pace of its expanding wind, solar and hydro sectors. In 2015 alone, China’s solar capacity increased by 74 percent and wind by 34 percent, all while coal consumption dropped by 3.7 percent. Both wind and solar installations during 2015 exceeded initial goals and estimates. Natural gas is also growing in importance – expanding at a compound rate of 14% from 2010-2014 – which lowers demand for coal still further.
This growth in renewables and natural gas enjoys strong state prioritization because it reduces air pollution and traditional fossil fuel imports while moving China toward the higher tech, higher value segments of the global economy that it seeks to access. These successes are fueling growing political ambition. China now aims to increase its solar capacity to up to 200 gigawatts by 2020, which would quadruple its previous target if achieved. It plans to increase electric vehicles by a factor of 10 over the next five years, and has a new energy intensity target of a 65% reduction below 2005 levels by 2030.
The recently enacted 13th 5-year plan emphasizes this energy efficiency target and sets a new goal for overall energy consumption at 5 billion tons of coal equivalent. This goal is significant because it provides an absolute quantitative ceiling for energy consumption in China, rather than a target that move based on the country’s economic growth.
Fines for environmental violations – which used to be nominal – have also been increased by the Environmental Protection Law of 2015 and monitoring is better resourced. Perhaps most importantly, local government officials are now evaluated on their environmental performance, including how many days they enjoy with low air pollution levels. This carrot of career progression, and stick of censure at a local level, makes it more likely that China’s national policies will be enacted.
Finally, China is pursuing sophisticated financial measures to drive its transformation to a lower carbon economy. Chief among these is its plan to implement a nationwide carbon market. In 2011 China launched seven emissions trading scheme pilots in major cities and provinces across the country. Combined these carbon market test beds would constitute the second-largest carbon market in the world, and they have set the stage for a nationwide emissions trading scheme to be progressively brought online from late-2017. This national scheme will be the largest in the world. It is planned to become the linchpin of China’s strategy to meet its climate and clean energy goals, and it seeks to create financial incentives rather than top-down regulation to meet China’s climate challenge and the world’s.
Photo courtesy of BSR
The Importance of Business, Finance, and Incentives
Economic, financial and business incentives are the key to acting substantially on climate and sustainability challenges around the world. This audience needs no reminder of the importance of the bottom line. The same applies to any form of sustainable investment strategy. Sustainable investment is business. It is not philanthropy. Otherwise, it just won’t work.
Developing the infrastructure necessary to support sustainable development is fundamental. The World Bank estimates that developing countries require approximately $1.6-2.5 trillion dollars per year for the investment and maintenance of current infrastructure. That is before we add a further $200-300 billion per year to ensure that infrastructure investments are low emitting and climate resilient.
In the face of this demand, the world’s six large multilateral development banks delivered roughly US$28 billion in infrastructure financing last year to help developing countries and emerging economies mitigate and adapt to climate challenges. This brings the collective commitments of the past four years to around US$100 billion. This is useful, but not sufficient. In fact, it is nowhere near the level needed to meet the SDGs in full or to act decisively on climate change. In best case scenarios, pledged climate funding by governments combined with the strong prioritization of sustainability by multilateral development banks, may lead to a total lending capacity of roughly US$500 billion. In other words, of the US$1.9-2.8 trillion dollars needed annually, the public investment dollar could be stretched in the long term to cover about one-quarter to one-sixth of what is required – and that is if we are serious.
It is therefore essential to match the demand for sustainable infrastructure finance in the developing world with private capital, which would create new markets while revitalizing existing ones. Current investment in infrastructure with private involvement runs at about $180 billion a year to developing countries. And poorer countries and regions such as South Asia and sub-Saharan Africa get a small percentage of that.
Government lending and multilateral development banks are not set to make up these and other shortfalls, which lead to poor infrastructure, absent job prospects, and a raft of social and environmental stresses.
Therefore, private sector finance must be more effectively leveraged, which requires creative approaches to infrastructure profit-making and public-private partnerships. The challenge is here is to mitigate risk and creating bankable projects.
Private sector financial organizations and public development banks should cooperate with multilateral institutions to grow such a pipeline of bankable projects. They should also create alternate sources of finance such as local capital markets. And they should leverage the private sector through a range of guarantees that cover, or reduce, sovereign risk to infrastructure projects.
There is already a basis of innovative financial architectures to work from that facilitate private capital flows through such risk mitigation policies by the public sector. They include ministerial guarantees designed to reduce risks from changing currency values and shifting regulatory environments. They include central bank funds with liquid collateral that cover part of the risk of a sustainable development project. They include providing access to capital in places where borrowing rates are traditionally high through concessional loans that are long-term, supplemented by public dollars, and offer grace periods for repayment at low interest rates. They include national government policies that support private capital flows to sustainable development projects through investment incentives, tax breaks, and insurance provisions.
Within these structures, markets and private sector involvement remains essential for ensuring financial viability. Mechanisms such as ‘green banks’, feed-in tariffs, and carbon prices supply front-end incentives for renewable technology adoption. Markets likewise encourage technological progress in sectors such as recycling, waste processing, and energy efficiency if government regulations create effective price signals. Such complementary relationships between public and private sectors are the key to moving sustainability practices forward.
Major countries such as China and the US have a leading role play in addressing the climate challenge and meeting global sustainable development goals, and recent developments both in these countries and further afield suggest that we are on a positive trajectory.
However, our current levels of practical ambition must be redoubled. Meeting the goals of the future will only be possible through the innovative inputs of private business and finance around the world. I look forward to our conversation on how together we can shape such a future.
Otherwise, all the Copenhagen, Paris, and Marrakesh conferences in the world will not move the dial in the real world of our global environment and climate.
The policy settings are generally now fine.
The current level of financial investment in transformational infrastructure, technology, and renewable energy is not.
And ultimately, the planet does not lie.