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Fighting human-induced climate change

The purpose of the global financial system is to allocate the world’s savings to their most productive uses. When the system works properly, these savings are channeled into investments that raise living standards; when it malfunctions, as in recent years, savings are channeled into real-estate bubbles and environmentally harmful projects, including those that exacerbate human-induced climate change. The year 2015 will be a turning point in the effort to create a global financial system that contributes to climate safety rather than climate ruin. In July, the world’s governments will meet in Addis Ababa to hammer out a new framework for global finance. The basics are clear. Climate safety requires that all countries shift their energy systems away from coal, oil and gas, toward wind, solar, geothermal, and other low-carbon sources. We should also test the feasibility of large-scale carbon capture and sequestration (CCS), which might enable the safe, long-term use of at least some fossil fuels. Instead, the global financial system has continued to pump hundreds of billions of dollars per year into exploring and developing new fossil-fuel reserves, while directing very little toward CCS. Many investments in new fossil-fuel reserves will lose money owing to the recent fall in world oil prices. And many of the fossil-fuel reserves that companies are currently developing will eventually be “stranded” (left in the ground) as part of new global climate policies. The simple fact is that the world has far more fossil-fuel resources than can be safely burned, given the realities of human-induced climate change. Though market signals are not yet very clear, this year’s more successful investors were those who sold their fossil-fuel holdings, thereby avoiding the oil-price crash. Perhaps they were just lucky this year, but their divestment decision makes long-term sense, because it correctly anticipates the future policy shift away from fossil fuels and toward low-carbon energy. More governments around the world are now introducing carbon pricing to reflect the high social costs inherent in the continued use of fossil fuels. As more countries and companies introduce carbon pricing, the internal accounting cost of carbon emissions will rise, investments in fossil fuels will become less attractive, and investments in low-carbon energy systems will become more appealing. With international oil prices dropping, this is an ideal moment for governments to introduce carbon pricing. Rather than let the consumer price of oil fall by that amount, governments should put a carbon tax in place. Moreover, new revenues from carbon taxes would be a boon for governments. High-income countries have promised to help low-income countries invest in climate safety, both in terms of low-carbon energy and resilience against climate shocks. The math is simple. High-income countries emitted around 18 billion tons of CO2 this year — roughly half of all global emissions. If these countries earmarked just $2 per ton of CO2 for global financing organizations like the new Green Climate Fund and the regional development banks, they would transfer around $36 billion per year. By using part of that money to mobilize private sector financing, the full $100 billion of climate financing could be reached. Both Big Oil and Big Finance have made major mistakes in recent years, channeling funds into socially destructive investments. In 2015, these two powerful industries, and the world as a whole, can start to put things right. We have within our reach the makings of a new global financial system that directs savings where they are urgently needed: Sustainable development and climate safety. — ©Project Syndicate