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To date, 17 G-20 countries—which account for 67 percent of global greenhouse gas pollution—have officially joined the Paris Agreement, bringing the pact into effect sooner than anyone expected.¹ If they follow through with their commitments to reduce emissions, it will represent unprecedented progress in the global effort to curb climate change.

U.S. President-elect Donald Trump, meanwhile, has suggested a number of actions, including dismantling the Clean Power Plan and pledging to “cancel” the Paris Agreement, that would drive the United States—and potentially other countries—in the opposite direction.² In light of this, the G-20 summit in July 2017 provides an important opportunity for committed major powers to resist backsliding by any and all G-20 countries—and even to make some progress in meeting the climate challenge.

To its credit, the German government, which officially assumed the G-20 presidency in December 2016, has taken steps that position the summit well for just such an effort. When German Chancellor Angela Merkel announced her three “pillar” objectives for the summit, she explicitly identified climate change as a priority. These pillars include fostering global economic stability; making the global economy viable for the future, including through the Paris Agreement and the 2030 Agenda for Sustainable Development; and establishing the G-20 as a “community of responsibility,” including by promoting a compact with Africa that would address infrastructure investment, among other topics.³ 

Making progress on climate—and economic stability—through climate-compatible infrastructure

The G-20 has expanded its infrastructure initiatives in recent years. These initiatives, however, have insufficiently considered the reality of climate change.⁴ Despite the fact that three of the four infrastructure sectors in which the G-20 is promoting investment—energy, transport, and water—are inextricably linked with climate issues, climate change has remained a topic that the forum has addressed only in parallel and, for the most part, has avoided.⁵

Developing a focus on making infrastructure low-carbon and climate-resilient, however, would allow the G-20 and the German presidency to make progress across the objectives of the summit, including economic stability. Infrastructure projects that are vulnerable to the physical effects of climate change can cause profound economic damage, while infrastructure projects that are high-carbon can face early obsolescence as global markets pivot to clean energy. High-carbon projects also drive further climate change—infrastructure already accounts for some 60 percent of global greenhouse gas pollution—and further economic risk.⁶
The G-20 is uniquely positioned to become a leader on climate-compatible infrastructure. First, the founding purpose of the forum is to promote global economic resilience: Divorcing its climate and infrastructure conversations runs counter to this core objective. Second, G-20 countries account for more than 75 percent of greenhouse gas pollution and more than 85 percent of global gross domestic product. They therefore have both the responsibility and the capacity to drive the necessary investments. (see Figures 1 and 2) Third, G-20 leadership on this issue would have effects beyond its member nations, given that they play a dominant role in development and climate finance through their leadership and support of multilateral development banks, national development banks, project preparation facilities, and other channels of investment in less developed countries.⁷

This report proposes that the German presidency and the G-20 adopt an integrated climate and infrastructure agenda. It first analyzes the G-20’s traditional approach to infrastructure, which undermines sustainable development and economic stability. It then presents a menu of options—on topics including climate risk disclosure, fossil fuel subsidy reform, national growth plans, climate-related risk insurance, and proxy carbon pricing—that would allow the German presidency and the G-20 to promote climate-compatible infrastructure in order to help fulfill the goals of the forum and the 2017 summit

There is a global shortfall in infrastructure investment. In developed countries, chronic underinvestment is resulting in a growing amount of decaying and outdated infrastructure.⁹ In developing countries, infrastructure investment often fails to keep up with increased industrialization and urbanization.¹⁰ At the same time, billions of people still lack access to basic infrastructure: Globally, 1.3 billion people lack access to electricity, 768 million people lack access to clean water, and 2.5 billion people lack access to adequate sanitation.¹¹

Unmet demand for infrastructure development is currently estimated to be $1 trillion per year: Global demand is approximately $3.7 trillion, while $2.7 trillion is invested.¹² Looking to the future, an estimated $90 trillion in infrastructure investments will be required by 2030 to accommodate global growth.¹³ Indeed, it is hoped that the trillions in investment will provide a major stimulus to the global economy.¹⁴

Impediments in both the public and private sectors contribute to the infrastructure investment gap. In the aftermath of the global financial crisis, fiscal constraints and banking rules have cut the capacity for investment in general and the capacity of European banks to prepare infrastructure projects in particular.¹⁵ In addition, advanced and developing countries with weak institutions can lack the policy and regulatory capacity to support beneficial projects.¹⁶ In the private sector, investors can be reluctant to commit capital to long-term and potentially risky projects.¹⁷

The expansion of infrastructure initiatives 

In recognition of the infrastructure investment gap, there has been an expansion of infrastructure initiatives in the G-20. At the 2016 summit in Hangzhou, for example, the G-20 launched a Global Infrastructure Connectivity Alliance to strengthen and link the infrastructure master plans in the regions and continents of the world, particularly in four sectors: energy, transport, water, and information and communications technology.¹⁸ Each regional master plan has its own funds, such as the European Fund for Strategic Investments or the Silk Road Fund. To achieve its goals, the Alliance promotes billion- or trillion-dollar projects that are financed, built, and operated especially through public-private partnerships. At the Summit, multilateral development banks issued a declaration to support infrastructure investment with a minimum of $350 billion in 2016-2018.¹⁹

There has been an expansion of infrastructure initiatives by individual G-20 member countries over the past few years as well. Recent ventures include the China-led Asian Infrastructure Investment Bank, which became operational in 2015, and the New Development Bank, which was established by the so-called BRICS countries in 2014 and has authorized $100 billion to mobilize resources for infrastructure and development projects.²⁰

More established institutions are also placing increased emphasis on infrastructure. The World Bank, for example, launched the Global Infrastructure Facility in order to provide a platform to coordinate the development of public-private partnerships on infrastructure.²¹ Private-sector partners and financial institutions involved in the Facility represent approximately $10 trillion in assets. Meanwhile, the African Development Bank has established the Africa50 Infrastructure Fund—which has a target capitalization of $3 billion—in order to support infrastructure development across the continent.²² Some national development banks—including those in China, Brazil, South Africa, Algeria, and Germany—are also focusing on infrastructure by adopting investment targets.²³

The G-20 has developed a focus on infrastructure since 2010, but it has yet to effectively incorporate the reality of climate change in its plans. For example, the Global Infrastructure Hub, launched by the G-20 in 2014, does not consider the infrastructure investment gap in the context of climate change—or explicitly grapple with climate implications at all. In addition, the G20 Investment and Infrastructure Working Group, which operated from 2014 to 2016, launched several major infrastructure initiatives that did not tackle the climate dimension of their work.²⁹

Failure to integrate the topics of infrastructure and climate change, however, invites economic instability. It is fiscally unwise to attempt to narrow the infrastructure investment gap by funding projects that are vulnerable to the physical effects of climate change. Likewise, it is fiscally unwise to narrow the infrastructure investment gap by funding projects that are high-carbon, incompatible with the global pivot toward clean energy, and at risk of early obsolescence.

Of course, high-carbon projects not only face the prospect of devaluation but also drive climate change and the associated economic damage. There were more than 1,000 natural disasters inflicting some $100 billion worth of economic damage in 2015 alone.³⁰ These natural disasters were spread across the globe, affecting both developed and developing countries. A growing body of research has shown that the recurrence of these events is increasing, even when controlling for changes in exposed values caused by population growth and development.³¹ Going forward, climate change has the capacity to put trillions of dollars in global financial assets at risk—it also has the capacity to push more than 100 million additional people into extreme poverty.³² Experts in the World Economic Forum now identify climate change as the greatest global threat due to its ability to cause a cascade of risks, including migration and conflict.³³

To date, the G-20 has largely avoided climate issues at the leaders’ level, leaving them to the U.N. Framework Convention on Climate Change. At the 2016 summit, for example, the forum avoided key climate priorities, such as a deadline for phasing out fossil fuel subsidies and the integration of long-term emissions reduction plans into each G-20 country’s Growth Strategy. The forum has also been agnostic on energy sources, as demonstrated by the 2016 Energy Ministers’ Statement and the Leaders’ Communique.³⁴ Indeed, the Communique promotes diversification of energy sources, especially natural gas. G-20 countries themselves exhibit a wide range of renewable energy adoption. (see Figures 3 and 4)

But while climate change has not been a primary focus of the forum, it certainly has proven itself willing and capable of taking up the issue both directly and indirectly, providing a foundation for more substantive work. In 2009, for instance, G-20 countries committed to eliminate fossil fuel subsidies—and this remains an item on its agenda. Over the years, the G-20 has also launched several climate and energy initiatives, including the G20 Energy Access Plan, the Voluntary Action Plan on Renewable Energy, and the Energy Efficiency Leading Programme.³⁵ It has an established Climate Finance Study Group and, in 2016, also created a new Green Finance Study Group.³⁶ In 2015, the Turkish presidency launched the GreenInvest Platform to facilitate green growth investments, a commitment first made during the 2012 Mexican presidency.³⁷

Developing a focus on climate-compatible infrastructure that spans the forum would be a natural—and constructive—step for the G-20 to take in 2017. It would allow the forum to protect global progress on climate change and to pursue the “pillar” objective of supporting sustainability, including sustainable energy. It would also allow the forum to pursue its overarching goal of promoting global economic stability and would build on several of its existing strands of work.

1. Identify and disclose transition risk

Discussion of climate risk typically focuses on the disruptive and costly physical effects of climate change, but there is another category of risk that threatens the global economy: transition risk.

Transition risk arises from the global pivot toward nonpolluting energy. The recent surge of international support for climate action—even in the face of the 2016 U.S. presidential outcome—is just one indication that this pivot is well underway.³⁸ More than 100 countries representing more than 75 percent of global greenhouse gas pollution have now officially joined the Paris Agreement within just a year of its finalization.³⁹ Moreover, the entry into force of the Agreement in November 2016 follows on the heels of other multilateral climate successes, including the amendment to the Montreal Protocol to phase down hydrofluorocarbons, or HCFs, and the agreement in the International Civil Aviation Organization, or ICAO, to limit greenhouse gas pollution from air travel.

It is not only governments that are turning toward nonpolluting energy—the marketplace is as well. In 2015, global investment in renewables reached a record $286 billion, with developing countries accounting for more than half of this amount.⁴⁰ Renewables also made up the majority of global installed capacity for the first time in 2015, with investment in renewable energy capacity equal to more than twice the amount allocated to new coal and gas generation.⁴¹ In the same year, global employment in the renewable energy sector was just more than 8 million.⁴² This growth is being driven by the continued reduction in renewable energy costs, a trend that is expected to continue as wind and solar become the cheapest way to produce electricity in most of the world in the 2030s.⁴³

As investors and civil society increasingly turn away from greenhouse gas pollution—and as many governments pursue policies to implement their national and collective climate goals—the value of assets will shift. High-carbon assets will decline in value or even become stranded: The fossil fuel industry, for example, could lose more than $30 trillion over 25 years.⁴⁴ The flipside of transition risk, of course, is transition opportunity: low-carbon alternatives will increase in value. An abrupt reassessment of asset values, however, could have a destabilizing effect on the global economy.⁴⁵

The first step in mitigating transition risk is identifying it. This is not only a green issue. It is in the economic self-interest of companies, investors, and nations to have a clear view of the financial risks and opportunities presented by climate change. This is particularly important in the context of infrastructure projects, which can lock in greenhouse gas pollution through lifespans that measure in the decades.

Currently, too few companies accurately and thoroughly report their exposure to the physical and transition risks posed by climate change. In the United States, for example, the Sustainability Accounting Standards Board analyzed the disclosures of more than 600 companies and found that more than 60 percent of the entries contained either no acknowledgment of climate risk or only boilerplate statements.⁴⁶ In addition, there is a vast diversity of reporting regimes.⁴⁷

To counter this irregularity, the Financial Stability Board—an international body that aims to promote global financial resilience—created the Task Force on Climate-related Financial Disclosures at the request of the G-20. This has been among the foremost positive developments in the G-20 on climate change. The current objective of the task force is to develop guidelines for companies to publicly disclose climate risks to investors. The task force delivered its initial recommendations and launched a 60-day public consultation in December 2016.⁴⁸ The final report will be released in June 2017, in advance of the G-20 summit.⁴⁹

With the disclosure guidelines in hand, the G-20 and the German presidency should turn to the task of promoting implementation. To this end, it would be helpful for G-20 members to adopt a leadership role in climate risk disclosure. There are a number of steps that they could take. For example, G-20 countries could commit to considering and publicly disclosing physical risks and transition risks in major federal projects and actions in order to protect their national economies over the long term.⁵⁰ Given the influence they have in international development finance, they also could work to institute responsible climate-disclosure practices among the development banks of which they are members. And, in order to promote adequate climate risk disclosure practices in the private sector, they could implement policies to contract only with companies that adhere to the task force’s disclosure guidelines.⁵¹

2. Strengthen fossil fuel subsidy reform

In order to improve investment in climate-compatible infrastructure, countries will need to increase public expenditures and foster the market conditions necessary to attract an influx of private finance.

Fortunately, G-20 countries committed in 2009 to take a step that would drive progress on both of these fronts