The private sector will be forced to stump up to 90 per cent of the cost of climate change mitigation investment, with government spending in developing and emerging economies to fall well short, the International Monetary Fund has warned.
A timely global transition away from coal is likely to be jeopardised, the fund says in its latest report, because countries still using it as a widespread source of power lack the investment-grade credit ratings — limiting their potential investor base and meaning financing costs are high.
The report shows global gross climate mitigation investment will need to reach about $US5 trillion ($7.7tr) each year by 2030, of which about 60 to 70 per cent are in the energy sector.
The IMF says while no single policy can deliver on climate goals on its own — highlighting carbon pricing as a clear case in point — governments must facilitate the green transition for companies.
“Regulations mandating firms to set or monitor emissions targets are often associated with higher firm investment in low-carbon technology,” the report states.
But it also warns that while the private sector will fund most clean investments for decarbonisation, large-scale investments such as clean hydrogen and carbon capture and storage pipelines and electric vehicle charging stations could be undersupplied if left entirely to the market.
The report calls out a $US5 billion ($7.7b) investment by the US Government to expand infrastructure for electric vehicle charging over the next five years, and to establish a connected national network as an example of green public capital investment complementing private investment by companies.
The IMF also advocates for further public funding of research and development, patents and tax incentives and subsidies for further research into carbon capture and storage and other emerging technologies — particularly those for which adoption has been advocated for decades.
Companies have been resilient to large energy price shocks to date, and the report suggests they “likely could adapt to higher energy prices by reducing … consumption, investing in energy efficiency and passing on higher costs to consumers”.
The IMF says concerns about companies not being able to adjust to higher prices appear less relevant — strengthening the case for carbon pricing policies. The report cited firm-level evidence from last year in the United States, where less than 10 per cent of surveyed firms reported a cut in production or employment, but a large share reported an increase in either or both.
“Balance sheets of US firms surveyed seemed to have remained resilient to the energy price shock,” the report states. “Most firms … did not respond to higher energy prices by improving their energy efficiency.”
Governments have also been advised to plan early for the post-emissions environment, as any measures to tax carbon will eventually lose impact as companies and other polluters pull back their emissions to net zero.
But equally they have also been told that relying on spending-based policies to reach net zero will lead to fast-rising debt and creating further risks for financial stability — while relying solely on carbon pricing to reach net zero was likely to be politically unpalatable.