US Treasury Secretary calls for mainstreaming of climate action into economic policies

US Secretary of the Treasury Janet Yellen called on finance ministers to fold climate action into the fiscal and economic policies.

"Existing fossil fuel infrastructure is working against us, driving us instead towards reaching climate tipping points this decade," Yellen warned in remarks made 19 April to the Coalition of Finance Ministers for Climate Action at the sidelines of the World Bank and International Monetary Fund spring meetings, which run 18-24 April in Washington DC.

Launched in April 2019, the coalition, which met for its 7th Ministerial meeting, represents finance ministers from more than 70 countries that seek to promote national climate action through fiscal policy and use of public finances.

"Today we need to collectively choose the future we want through public policy design and expediting investments in sustainable infrastructure," she said, pointing to the coalition's launch of a report, "Driving Climate Action through Economic and Fiscal Policy and Practice."

Factoring in price of carbon

In addition to incorporating the cost of carbon into government budgetary decisions to achieve climate policies and goals, Yellen emphasized that "we must also not lose sight of the global needs to adapt to the impacts of an already changing climate."

Other ministers at the coalition's meeting agreed with Yellen that carbon pricing should be considered a key policy lever to address climate change, but they added that careful consideration should be given to national and international implications when designing carbon pricing policies. They cautioned that high carbon prices could lead to heightened carbon leakage risks, where businesses shift to countries with lax emission regulations, and related potential negative spillover effects, and distributional impacts, especially on poor and vulnerable communities.

"Putting a price on carbon is an important step forward in advancing low-carbon economy policy," Indonesian Finance Minister Sri Mulyani Indrawati who also serves as the coalition's co-chair, said in a 19 April statement.

The coalition's report also recommended finance ministers "tip the balance to green energy by shifting spending and regulation to eliminate the advantage of fossil fuels and provide a level playing field for clean energy." It urged greater mobilization of finance through the use of green bonds, concessional climate financing, and leveraging private capital for building green, resilient infrastructure and industries.

The report said the cost of inaction can translate into more frequent budgetary shocks as physical impacts of climate change, such as wildfires, droughts, and torrential downpours adversely affect asset values, economies, and jobs. These in turn would result in shocks as the failure to assess, mitigate, and adapt to climate change results in the higher public expenditure associated with reconstruction, disaster relief, and write downs of stranded assets.

Diversifying energy supplies

Yellen acknowledged that Russian "war of choice" with Ukraine has made it more challenging to tackle the goal of limiting global warming to 1.5 degrees Celsius, as developed countries grapple with the fallout of a major geopolitical and humanitarian catastrophe that imperils international economic cooperation.

"Europe is currently focused on its plans to reduce dependence on Russian fossil fuels by diversifying supply chains and doubling down on clean energy investments," Yellen said. "These efforts highlight the need for us all to take actions that safeguard our energy needs and build resilience to market volatility."

Germany, for instance, is seeking to reduce its dependency on Russian natural gas exports. The German cabinet announced planned revisions to the country's energy laws that would require "almost all" of the electricity to be supplied from renewable sources.

Tapping clean energy

In March, Pierre-Etienne Franc, who heads the pure-play hydrogen investment fund known as FiveT Hydrogen that has raised $1 billion to date, toldNet-Zero Business Daily by S&P Global Commodity Insights that inflation driven by fossil fuels, or "fossilflation," exacerbated by the war with Ukraine has made green, renewable sourced hydrogen more attractive as an investment compared with gray hydrogen derived from oil and natural gas extraction equipped with carbon capture and storage technology.

At the 2022 CERAWeek by S&P Global meeting in Houston this March, financiers said the momentum for a transition away from fossil fuels picked up in the aftermath of the COVID-19 pandemic. This momentum has now accelerated further with the onset of the war in Ukraine, especially as oil and gas prices remain at record high levels.

Stephen Pang, managing director with TortoiseEcofin, a renewables investment firm, said investors are looking not only to capitalize on the near-term opportunities presented with high oil and gas prices, but also to accelerate the transition to renewables.

Morgan Stanley Vice President and Managing Director Tom Greenberg said governments play a key role in pricing carbon, which is essential to unlocking the allocation of capital for climate adaptation and mitigation projects.

Once a price on carbon has been set, he said, "you will truly see capital start to unlock in a significant scale to build the type of infrastructure that we need to generate for the ongoing transition."

Posted 19 April 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.