Last November, delegations from 197 countries gathered in Glasgow for the United Nations Climate Change Conference (COP26). During the summit, the IDB Group announced an aspirational target to align all its loans and projects with the Paris Agreement (PA) by the start of 2023.
To explain what this means, let us return to one of the PA’s main objectives: to ensure a pathway that leads to climate-resilient development and holds the increase in the global average temperature to well below 2°C above pre-industrial levels (in COP26, a resolve to pursue efforts to limit the temperature increase to 1.5 ° C was reached, setting a new benchmark).
Based on these goals, we can define “Paris Alignment” as the process by which financial institutions –among them the Multilateral Development Banks (MDBs) such as the IDB Group– will verify that their investments are consistent with development trajectories considered compatible with the PA’s temperature and climate resilience targets.
This verification process consists of two main steps: i) define the pathway to be used as a reference and ii) identify how investments fit within it.
Step 1: Trajectories Consistent With the Paris Agreement
The Intergovernmental Panel on Climate Change (IPCC) and the International Energy Agency (IEA) have modeled the evolution that CO2e emissions need during the rest of the century to meet the 1.5 ° C target, setting several key milestones (see figure). These trajectories are global in scope but underscore the need for all countries to move towards development pathways that reach net-zero emissions by 2050.
The scale and timeline for action to achieve this transition vary depending on the country and sector. Nonetheless, we know it may include objectives such as: the elimination of coal-based thermal plants before 2035, total renewal of vehicles to zero-emission models before 2040, etc.
Graph 1. The Global Path to Net Zero Emissions by 2050
Source: International Energy Agency Net Zero by 2050 Flagship Report May 2021
To be a realistic and implementable exercise, this projection and prioritization of investments needs to be anchored in the reality of countries. For this reason, the IDB collaborates in the region to develop Long-Term Strategies (LTSs). These replicate the modeling exercise of the IPCC and the IEA, but at the national level and with the plural participation of all sectors within countries. Based on this, LTSs identify the mitigation and adaptation measures necessary to achieve decarbonized and climate-resilient economies and societies by 2050.
Examples of this work are the National Decarbonization Plan of Costa Rica, the Long-term Climate Strategy of Chile, the Long-term Climate Strategy of Colombia E2050, and the assistance provided for updating the National Strategy Against Climate Change of Peru by 2050, all of them supported with the technical knowledge of the IDB.
National LTSs are important to better understand the rate at which replacing GHG-intensive investments with low-carbon alternatives is feasible; as well as the types of investments and capacity-building support that will can deliver successful adaptation to changes in the climate. All this considering the priorities, differentiated responsibilities, respective capacities and market conditions of the countries that will allow a fiscally sustainable and just transition in countries.
Step 2: Align Specific Investments with Carbon-Neutral Trajectories
LTSs and Nationally Determined Contributions (NDCs) are the starting point to identify whether loans, guarantees and technical assistance are aligned with the PA. This is established by the Joint Framework to Assess Paris Alignment, published with the rest of the MDBs during COP26. Because of this, IDB is redoubling its efforts to help develop/update these documents, aided by a series of principles to support LTS.
Likewise, and particularly in cases yet lacking an LTS, the process of the MDBs to align their financial flows with the PA involves reviewing two main additional aspects. First, it is proposed to analyze projects with a view on avoiding “carbon lock-ins”. These are generated by investments in assets or development models that operate with a high carbon intensity in contexts where technically and economically feasible low-carbon alternatives already exist (we will explain this in detail in another blog). Second, it becomes necessary to identify and adequately manage the “transition risks” associated with the adjustment that will take place in the world economy to achieve the global temperature and resilience goals in the PA.
The latter includes physical risks well covered by the Disaster and Climate Change Risk Assessment Methodology that is part of the new IDB Environmental and Social Policy Framework. But transition risks also involve those stemming from political and economic transformations to a low-carbon world economy, such as: the placement of border adjustments and carbon taxes on products with high emissions in their life cycle; the accelerated depreciation of fossil-based technologies, as well as shifting consumer preferences. All this in response to a growing awareness, both in markets and governments, around the standards needed to avoid the most serious impacts of climate change.
Starting in 2023, the consideration of these elements in project preparation will help our partners to strengthen the financial analysis of their investments and mainstream resilience at the pace and scale necessary to adapt to climate change.
A Unique Opportunity for Economic Recovery in the Region
Overall, Paris Alignment relies on approaches that the IDB has already developed as part of its climate agenda. It is a process that will continue to strengthen all investments with tools for decision-making in contexts of climate risk and high uncertainty. It will be a key mechanism to ensure that the IDB Group supports a truly sustainable and climate-resilient economic recovery in Latin America and the Caribbean (LAC).
This approach has already materialized in the Program for Sustainable and Resilient Growth in Colombia, where the emphasis on facilitating the climate transition has succeeded in mobilizing $ 600 million, almost doubling IDB’s initial funding.
We are confident that examples like this one are a testament to the capacity that the process of Paris Alignment has in terms of mobilizing additional resources towards the region. This, combined with the work already led by IDB specialists in sectors and countries, becomes an added value that will help countries reduce investment gaps and trigger development that is competitive because of its sustainability and climate resilience.
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