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The outcome of the COP29 conference in Baku on climate finance was disappointing. It delivered much less than needed in terms of decarbonisation commitments, in terms of the amount of money allocated to climate finance in the Global South, and in how this money will be disbursed, says Irene Monasterolo, professor of Climate Finance at the Utrecht ľ¹Ï¸£ÀûÓ°ÊÓ School of Economics (U.S.E.). The internal politics of countries, and their own economic and financial interests prevailed in the political negotiations over the common climate goals. This is a lose-lose situation for every country.

We already see climate change impacts now. We know that we have to act now. We know that acting earlier would be cheaper and safer for all. On the private finance side, lack of policy coherence is a main issue. There is a lack of common incentives to move from the problem to the solution, and this keeps aggravating the problem. Recent developments following up the US withdrawing again from the Paris Agreement will make climate finance and the low-carbon transition more difficult, in particular in the global South.

Climate change is forward-looking and endogenous, meaning the future of climate change depends on our risk perception and investment decisions today, says Monasterolo, we need a forward-looking approach to Climate Finance and its risk assessment. Accordingly, she also stresses the need for vision. We need to have a clear, long-term climate policy and investment plan at the highest policy level. Here, the political economy is back in the game. Climate investments in mitigation and adaptation should be planned consistently with a vision of how we want our economy and society to be in ten, twenty, thirty years in terms of its energy and sustainability transition and climate resilience.

Policy makers need programming and planning ahead now, in order to avoid losing a huge amount of money, jobs and lives later. The time is running out, as scientist clearly showed us. But policy makers are trapped in a predator-prey game, instead of looking for common solutions which will be more efficient in the midterm.

The EU is one of the losers of the COP on climate finance. The EU has been at the forefront of climate finance and climate action for the last fifteen years. But the lack of a common push towards the transition and individual reactions of EU Member States to the energy crisis weakened the common EU efforts. The result is the watering down of several climate initiatives, and the loss of credibility as a climate actor in the international arena. And this result is all linked to internal EU political decisions.

Nevertheless, she keeps contributing to the necessary change: I work regularly with central banks, financial regulators, and the industry, bringing research results and methods at the service of decision making. 

In particular, right now I am collaborating with the Network for Greening the Financial System (NGFS), which comprises circa 130 central banks and financial regulators in the world. We are developing short term climate scenarios that will be used by the NGFS and the industry for climate stress-tests of both physical risks and transition risks. Actually, I’m really impressed, because despite the less than favourable policy environment and their regular job, several central banks including the ECB, are really working hard on this. Some central banks, such as the Dutch National Bank, have even started to work on nature and biodiversity risk.

The ‘deal’ at COP29

I am not very surprised about the COP29, it follows the line of the last two COP’s, Monasterolo goes on. There is a deal which is better than no deal at all. But the deal is very unsatisfactory, from several points of view.

The question of timing is also related to the amount that is needed; doing nothing now, means that much more investments are needed later

From the point of view of climate finance, it is unsatisfactory – 300 bn per year by 2035 is peanuts, in comparison to what low income countries already need now to face climate impacts and disasters. The money comes late and will not be enough, for two reasons; building investments for climate change adaptation and mitigation (that is: limiting new emissions) are needed now, not starting in 2035. There is always time delay from when you have the money when the project is implemented. And also, it will most likely, not be much relevant anymore in terms of quantity. The question of timing is also related to the amount that is needed; doing nothing now, means that much more investments are needed later.

Global North - Global South dimension

Plus, there is also a Global North-Global South dimension. Most low-income countries are already suffering now from climate change, and have been contributing the least to that. But they have to pay the highest price.

On the one hand, bold mitigation action from the polluters is needed but not there yet. This, in turn, increases the need for investments in building resilience to climate change, and the related financing needs, in particular in low-income countries.  

On the other hand, being already highly exposed to and affected by physical climate risks, low income countries are perceived (in terms of their economic performance) as riskier by rating agencies and investors, so the more expensive it will be for them to borrow on international markets and to invest in climate mitigation and adaptation.

The Green Deal

The EU is a good mirror of what is happening at a broader, international level, Irene Monasterolo says. The EU was very ambitious in setting up climate policies. We have ETS, some countries already have carbon pricing on top of the emission risk scheme (for markets). And very bold, emission reductions programmes, including the carbon neutrality by 2050. These targets were structured in funding programmes (the Green Deal), in the Next Generation EU program, and was also supported by an enforcement of green standards like the EU taxonomy of sustainable activities, green bonds standards and low-carbon benchmarks.

In addition, the European Central Bank was among the first central banks in the world to implement a climate stress test and to ask its supervised institutions, to run a climate stress test every year.

Energy security and economic competitiveness cannot be achieved without climate action

So, a very ambitious programme, and for over ten years this pushed the transition efforts in terms of policies, money and financial regulation. However, since the energy price crisis stemming from the Russian invasion of Ukraine (which was the turning point), the ambition was weakened instead of strengthened. A big opportunity to get closer to energy independence and to the transition was missed, when EU member states just replaced Russian gas with other sources, instead of getting together for energy security focusing on renewable energy. The money was there (we had years of very low or negative interest rates) to make it possible.

What was missing was the political momentum and ambition. This is unfortunately driven by the short-termism of policy making, including within the EU and the Commission. And the new European Commission (after the elections) turned its back to the Green Deal agenda, but lacking a common vision on the future of European climate resilience, energy security and economic competitiveness. Energy security and economic competitiveness cannot be achieved without climate action.

The energy crisis was a stress test – but for real?

People, even academics, tend to think these shocks only happen in the future. They fail to consider that finance is all about expectations. And expectations of the risk not making the transition or some sectors being penalysed (higher costs, lower revenues) could change abruptly, given the inflow of new information, for example the central bank saying we will do a green asset purchasing programme, or having a larger shock on an energy crisis. So, this was a very good example of how unprepared we are. The good news is that we are integrating new short term climate scenarios, including also the shocks of the energy crisis.

What do you aim for with your Chair in Climate Finance at Utrecht ľ¹Ï¸£ÀûÓ°ÊÓ?

My goal is to continue the work I did in the last fourteen years on climate economics and finance, producing research that delivers impact on decision making, being it within policy making, financial regulation or investment decisions. In terms of research, given the backstop on climate mitigation, I am focusing on the analysis of the climate insurance protection gap and the design of policies and financial instruments to fill the gap. I am also looking beyond climate change, focusing on nature related and biodiversity risk, including a biodiversity stress-test, and the assessment of nature-based financial flows and needs.

Would you consider yourself an activist or an engaged researcher?

I am an economist. But I also believe that research can support decision making and have a positive impact on people’s life. In Italy, we had a very brilliant economist called Federico Caffè, who used to say ‘L’economia è politica’ – Economics is politics.

More information

Would you like to know more? Please contact Irene Monasterolo: i.monasterolo1@uu.nl