To prevent a climate catastrophe and protect the planet for future generations, government, business and civil society must work together to achieve net-zero emissions by 2050. Decarbonizing the world’s $100 trillion economy will be one of the biggest economic transformations in history.
Getting there will require a coordinated effort that includes three key pillars: politics, finance and technology. This will also require future-back thinking — a strategy that starts with 2050 and works backward to understand the actions we need to take today.
The shared global experience of the COVID-19 pandemic has illustrated both the interconnectedness of our world and our vulnerability to the environment. This experience also provides us with an opportunity to build a better working world — one in which we focus on delivering results for future generations, not just the next quarter or the next election cycle.
Here are a few ways we can challenge short-termism and drive innovation in politics, finance and technology:
Politics: governing for a generation
Increasing political polarization and gridlock have emerged as recurring themes in global politics in recent years. The United States, for example, has witnessed a series of pendulum swings in nearly every election cycle that have resulted in major policy shifts on a wide range of issues, such as corporate taxation, immigration and health care. Climate policies have not been immune.
Too often, policymaking is geared toward winning the next election or the 24-hour news cycle, rather than long-term planning for current and future generations. While we are already experiencing the effects of climate change, its effects will be most acute in the decades ahead if we do not change our behavior today. EY analysis shows that nearly 60% of Gen Z — the cohort of 1.8 billion people between 10 and 24 years old — lives in countries with a high vulnerability to climate change, but with low readiness for responding to it. This underscores the threat climate change will have on this generation.1
One significant development in this regard, is the European Union’s development of a taxonomy for sustainable activities (EU taxonomy). The EU taxonomy is a classification system that establishes a list of environmentally sustainable economic activities (e.g., natural gas, nuclear energy, hydroelectric power), providing definitions to companies, investors and policymakers. The taxonomy is intended to help the EU meet its climate and energy targets for 2030 (including at least 40% cuts in greenhouse gas emissions from 1990 levels) and the objectives of the European Green Deal.
While debate on proposed definitions (e.g., the possibility for “shades of green”) continues, the EU taxonomy — at its heart — measures economic activities against where they should be if the EU is to meet its pledge to reduce carbon emissions to net zero by 2050, rather than making incremental improvements based on where they currently are. Adopting a future-back approach to this challenge will help all parties keep their sights on achieving meaningful progress.
Finance: reflecting the green premium
In recent remarks at the U.S. Department of the Treasury’s Financial Stability Oversight Council, Secretary Janet Yellen called climate change “an existential threat to our environment,” as well as one that “poses a tremendous risk to our country’s financial stability.”2
Despite the wide acknowledgment of climate change as a source of risk for financial stability, the pricing of climate-related risk is nascent and climate disclosure still lacks comparability and standardization. The failure to account for the externalities caused by human activities that generate greenhouse gas emissions causes assets to be mispriced, capital to be misallocated, and leaves investors and other stakeholders without access to relevant information for decision-making.
There are two key changes that can help us understand the causes and cost of economic activities on climate change. One is by calculating what Bill Gates calls green premiums. Green premiums refer to the additional cost of choosing a clean technology over one that emits a greater amount of greenhouse gases.
To illustrate the concept of the green premium, consider today’s cost of cement ($125 per ton) vs. cement after carbon capture, which adds anywhere from 75% to 140% more to that cost, creating a green premium of $94 to $175 per ton.3