Thank you, Annika [Minister Saarikko, Finnish Co-Chair] and Sri Mulyani.
Mr. Secretary-General, Excellencies, Ms. Georgieva, ladies and gentlemen.
I’m pleased to join the Sixth Ministerial Meeting of the Coalition of Finance Ministers for Climate Action.
The foundation for integrating climate and development is a country’s incentive structure. You, as finance ministers, play the central role in building an economy’s incentive structure and helping it change.
I will focus my remarks on three topics: (1) fossil fuel subsidies, (2) pricing carbon, and (3) incorporating climate considerations in budgetary decisions.
First, on fossil fuel subsidies: recent analysis by Bloomberg shows that G20 countries have funneled $3.3 trillion into fossil fuel subsidies since 2015. Fossil fuels tend to be subsidized both explicitly, and implicitly through tax exemptions. If the use of fossil fuels continues to be subsidized despite its impact on greenhouse gas (GHG) emissions, it encourages individuals and firms to continue to overuse such fuels. The longer such subsidies remain in place, the more the economy adapts to their existence and the greater the political obstacles and economic disruptions caused by their removal. It’s critical for finance ministers everywhere to take a hard look at their fossil fuel subsidy regimes.
Second, on appropriately pricing carbon: it’s critical to have the political will to reduce GHG by changing tax structure incentives. I’ve said before that carbon taxes are the most impactful explicit carbon pricing instruments. In considering carbon taxes and other incentives for carbon reduction, it’s important to recognize that climate adjustment may create adverse impacts on some groups in the short and medium term, such as job losses in coal mines to economic losses for investors. Once subsidies are reduced, the evidence suggests that raising domestic revenue from environmental taxes tends to be less distortionary—and less likely to hamper growth—than labor taxes. This is especially the case when the starting point for environmental taxes is low, as is the case for many developing countries.
Third, it’s critical to have better linkage between climate commitments, via NDCs and LTSs, for example, and fiscal and budgetary planning. Without adequate budgetary support for climate planning in national budgets, climate commitments will only be rhetorical.
All these efforts must be complementary, and overall allocation of public resources must be optimized to address development and climate goals.
A final point on scaling climate finance: as the world considers ways to ramp up climate finance, it’s important to consider the parameters of the exchange between providers and users of capital. For example, institutional investors are increasingly interested in ESG compliant investments, such as green and blue bonds. This requires standardized and consistent taxonomies and capital markets frameworks that enable this. The World Bank Group is working with countries on this.
Private sector companies that have made net zero commitments will in the short-to-medium need carbon credits. The world has an opportunity to pool these resources and invest them in high impact mitigation projects, in return for high quality and transparent carbon credits. We’re in the early stages of working on a concept that helps with this.
Private foundations, such as Rockefeller and Bezos Earth Fund, are also increasingly interested in playing a role. Pooling their sources to finance certain aspects of mitigation engagements, such as project preparation, can achieve results.
Finance ministers have a critical role to play in integrating climate and development goals, and help build momentum around policy actions that can yield results.