Carbon emission pricing the key, as investors underestimate the impact of ‘climate procrastination’

The report found that while achieving a Paris-aligned outcome would be cheaper and easier to achieve than ever before, the window to successfully meet a 1.5°C climate outcome is closing at a worrying speed. According to LGIM, the biggest policy lever available to help guide the transition and drive real change, is carbon pricing, however this solution remains largely unused. Indeed, in our view what is required is an effective, transparent and significant price on emissions that could be consistently applied and allow price signals to drive a market-led solution to the climate crisis.

 Today, around 23% of emissions are subject to a carbon price, but prices are often set at a level too low to make a difference¹. Globally, emissions currently cost on average $6 per tonne of CO₂, and only around 4% of emissions are covered by a carbon price within the range needed by 2030 to meet the Paris targets.

The report, which is based on LGIM’s extensive climate modelling, also found that costs may no longer be the most important barrier to the transition to net zero. A low carbon energy system is now so cheap, that further improvements in costs and efficiencies are no longer likely to have as large an impact on the pace of change as they have had historically. Instead, the modelling suggests that it is the speed at which capital can be deployed into low carbon energy systems that is now the most important driver and most pressing challenge.

The impact of climate procrastination

As well as outlining the need to transition sooner, the LGIM report goes on to suggest that, what should have been a market-led, managed and orderly transition to net zero over a quarter of a century, instead risks being compressed into a chaotic and disorderly transition where the bulk of the decarbonisation effort needs to take place in little more than a decade.

As a result of this, LGIM warns that the financial consequences of this sort of shock would be significant, with as much as 10% of global GDP estimated to be at risk by 2050². The delayed transition will almost certainly lead to a sustained building of inflationary pressures which may start to materialise just as the current wave of energy price led inflation starts to recede.

In addition, this current period of elevated market volatility is likely to persist and may over time worsen. As the fundamental inequity of a delayed transition starts to manifest, it is believed that emerging market populations, particularly South Asia and sub-Saharan Africa, will start to experience both serious physical climate risks³ (which they are likely to experience before those in developed markets), and the economic consequences of a delayed transition. The resulting geopolitical consequences are likely to be significant as politicians may look to raise trade barriers in response leading to the very real possibility of mass migration.