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Deliverable 3.5

Filed in Deliverables

Report on quantitative and qualitative analysis of the financial system implications of decarbonisation

The financial sector must play a key role in facilitating the transition towards the Paris Agreement goals. This analysis undertakes both quantitative and qualitative approaches in order to provide key recommendations to stakeholders and policymakers related to climate finance. The modelling analysis soft-links three different model types (TIAM-UCL, MEWA and ENGAGE) to consider investment requirement pathways and how the levels of investment are achieved through different financial instruments.

The TIAM-UCL modelling shows that strong climate ambition requires ramp-up of investments immediately. Another strong conclusion from the MEWA and ENGAGE models is that the economic impacts of decarbonisation are unevenly distributed between high-income and low-income regions, the latter of which are more reliant on fossil fuels out to 2050, and therefore financial mechanisms can play a significant role in rebalancing impacts with minimal cost. Therefore ending fossil fuel subsidies must
be supported with other policies to direct inter-regional financial transfers to those regions which will lose out from such a transition.

The qualitative analysis suggests easing lending conditions for low-carbon investments, and relaxing macroprudential regulation could leverage more funds towards low-carbon assets. The Green World Bank and Green Fund modelling scenarios suggest that policies like this could lessen the economic burden on those who are most likely to lose out from undertaking climate mitigation. A mix of concessional financing approaches may be appropriate and more politically feasible.

Therefore one clear outcome is that public financial institutions (e.g. G20, World Bank) are correct to rethink their approaches towards concessional finance as these may be one way to achieve the rates of change required.

Published: 21st October 2019
Author: Matthew Winning et al. 2019