Capital Market Policies to Achieve the Paris Agreement

The world is not currently on course to limit global warming to 1.5 degrees Celsius. Carbon dioxide emissions are increasing, emissions targets in countries’ Nationally Determined Contributions are not ambitious enough, and oil and natural gas production are expected to increase given current policies. A lack of investment in the low-carbon economic transition partly explains this limited progress towards the Paris Agreement’s goals.

Market imperfections explain this underinvestment in the low-carbon economic transition. Climate change is a tragedy of the horizons, as many of the costs of climate change are incurred in the future beyond the business cycle, the political cycle and the horizons of most investors, while in contrast the costs of limiting climate are borne in the short and medium term. Thus, sovereigns and markets may overinvest in carbon-intensive industries and underinvest in the low-carbon economic transition.