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A sunnier outlook


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How bad is the climate crisis? No doubt, it’s grim. But there are reasons for cautious optimism. EU climate bank experts explain.


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How bad is the climate crisis? No doubt, it’s grim. But there are reasons for cautious optimism. EU climate bank experts explain.


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By Edward Calthrop and Chris Hurst1

The 2020s are often described as the ‘’critical’’ decade. This is a shorthand to remind us that if we are to avoid the worst effects of global warming, global emissions must fall rapidly in the next ten years. In fact, they must be cut by half if we are to limit warming to 1.5 degrees by the end of the century.

This simple metric provides a useful way to think about 2021, the first year of this critical decade. Amongst all the noise around climate policy and finance throughout the year, what real signals have emerged? Should we start 2022 upbeat because the world has shifted focus to a 1.5˚C pathway? Or should we follow Greta Thunberg and dismiss many of the headlines as ‘’blah blah blah’’ from the global north?

It is easy to be skeptical. Global emissions in 2021 rebounded to pre-pandemic levels, the pricing of fossil fuels remains stubbornly inefficient, and many of the most recent net-zero pledges are light on detail, to put it generously. This is worrying. But it is equally important to recognize the progress being made. This article highlights three elements from 2021 that provide grounds for cautious optimism about the quick reduction of global emissions. In doing so, it highlights some of the key themes for climate finance likely to dominate the next year or two.

Tragic impact 

Any assessment of 2021 can only start by acknowledging the tragic impact of extreme weather events last year. The list of events in 2021 is lengthy2. In Europe, extreme rainfall hit parts of Western Europe in mid-July, with some regions experiencing more than 90 mm of rainfall in a single day – around one tenth of the annual average. The resulting floods killed at least 240 people, mostly in Germany and Belgium. This was followed swiftly by record-high temperatures. Sicily reached a new record of 48.8 degrees in early August and devastating fires swept across Greece and Turkey.

Extreme weather events were not limited to Europe. To give one example, in July, torrential rains in the Chinese province of Henan caused massive floods and the death of 302 people. In Zhengzhou, the capital of the province, approximately 620 mm of rain fell in three days – equal roughly to the annual average for the region. In one tragic event, rapidly rising water trapped evening rush hour metro passengers. Emergency services scrambled to cut off the roof of the train in time. 500 people were successfully evacuated. 12 people did not make it.      

The link between global warming and extreme weather events has been understood for many years. In 2021, in the first part of its sixth assessment report, the IPCC systematically reviews the latest evidence – and has become bolder in its language around the causal connection. At a regional level in particular, the risk of extreme weather events is increasingly well understood and quantifiable. Events in 2021 are consistent with the scientists have been saying for decades. The need to cut global emissions over the next decade is abundantly clear.

1. Emissions on the rise; prices still sending the wrong signal

With this in mind, the first question is therefore what happened to global emissions during 2021? The answer is depressingly predictable. Global emissions have rebounded to near pre-pandemic levels. As shown in Figure 1, emissions for 2021 are forecast3 at 36.4 GtCO2. That is, just over 7% of the available 1.5˚C carbon budget4.  Put differently, at this rate, we will exceed our global budget within 13 years. We are not yet “bending the emissions curve” – indeed it is not even clear from the Figure that we have yet broken the historic trend of inexorable year-on-year  increases in global emissions , except for a periodic economic crisis.


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Figure 1. CO2 emissions continue to rise in 2021

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This increase is perhaps not surprising. Much inertia remains in the global energy system. Tellingly, global fossil fuels remain underpriced – with governments providing either explicit subsidies to producers, or failing to correct for external costs associated with consumption/combustion. As shown in Figure 2, based on an assessment by the IMF, nearly 90% of the world’s consumption of coal is priced at less than 20% of the full social cost, which  includes the costs of global warming, local air pollution and other externalities. Coal is the most extreme, but underpricing is also a pervasive feature in global consumption of natural gas and oil (as road transport fuels).  This holds even in the context of the large current increase in the producer price for natural gas. Climate policy clearly requires more than pricing reform alone. But it is equally very hard to see how consumer and producer behavior will change radically this decade without more efficient price signals.


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Figure 2. Actual versus efficient fossil fuel pricing globally

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The critical decade requires global economic growth to be fully decoupled from emissions. This has not happened yet – and may still take several years. In this sense, Greta Thunberg has a point. Not all hope is lost, however. Several trends that emerged in 2021 are grounds for cautious optimism about structural change.

2. Reasons for cautious optimism

Three elements stand out from the last year. Firstly, the sheer scope of net-zero pledges across the world. Secondly, the move of sustainable finance into the very centre stage of capital markets. And, finally, the growing appreciation of adaptation at the heart of the international climate finance discussion. These elements will dominate climate finance and policy over the coming years.

Theme 1: Net zero pledges cover (most of) the globe – EU shows the way to be credible

Many countries adopted net-zero pledges in the course of 2021. To be precise, 140 countries have now announced or are considering net zero targets, covering 90% of global emissions5. To those of us who remember the failure of international negotiations at COP21 in 2015, this is truly extraordinary. At that time, most projections were for warming at around 3.7˚C by 2100. With the 2030 NDCs in place, we are now on course for 2.4˚C, and with a shot at 1.8˚C under an optimistic scenario (see Glasgow’s 2030 credibility gap). This is not enough, but COP26 should be seen as a successful round in this larger process, ratcheting up pressure by a notch on global leaders.

Of course, questions can be asked about the credibility of such targets. The European Union has shown the way in this regard. On 29 July 2021, the European Climate Law came into force. It sets a legally binding target of net-zero greenhouse gas emissions by 2050. It sets out the necessary steps to deliver the target, notably with a new target for 2030 to reduce emissions by at least 55% compared to 1990 levels and a series of proposals to revise all relevant policy instruments to deliver this target. It also lays out a process for setting a 2040 target.

The law provides a general framework. Much EU political capital will be spent in the coming years to agree the detail. This is not surprising given what is at stake, and the potentially important impacts on different parts of society. But the destination is clear. This sends a strong message to markets, as demonstrated vividly in 2021 through the sharp rise in the price6 of emitting a tonne of carbon dioxide within the EU Emissions Trading Scheme to over €80 per tonne. Prices will inevitably fluctuate in the short term, but the expectation of high and rising carbon prices (compared to pre-2020 levels) is now firmly embedded in market expectations.

This price expectation begins to change the economicsof several technologies likely required to meet net-zero targets, such as carbon capture, utilisation and storage8, or the production of hydrogen9 through electrolysis. Conversely, all companies currently emitting significant quantities of greenhouse gases within the Emissions Trading Scheme bubble need to articulate a growth strategy to investors in a world with a sustained, high carbon price. Leading European companies are doing precisely this – with detailed and credible decarbonisation plans. As many chief financial officers now readily admit, disclosure around corporate sustainability is increasingly central to minimizing the corporate cost of capital.

This is now also the case in terms of accessing European Investment Bank funding. In 2021, the EU bank put forward a comprehensive counterparty framework, notably for corporates engaged in high-emitting activities, or at significant risk from current or future climate change. The framework sets out the minimum requirements the Group expects from corporate alignment plans, including activities that are difficult to reconcile with the goals of the Paris agreement.

In short, for governments that are serious about building credibility, the EU climate law provides a template. The UK and Japan have taken a similar approach. Some may take a different approach – but the very act of having committed to a target will invariably be used to hold future leaders to account by citizens, consumers and voters alike. If there is one country that could do more – simply by virtue of its historic responsibility for emissions – it is the US. It continues to send a mixture of messages. If you are in doubt, watch the sobering testimony given by Carl Sagan to the US Congress in 1985. Then fast forward 36 years to COP26 to see the US unable to join with 23 other countries  to commit to phase out coal power.

Theme 2: sustainable finance finally moves to centre stage

In 2021, the EU adopted the EU Taxonomy. The idea is simple and powerful. Deepen the internal EU capital market with clear criteria to label activities as sustainable. In doing so, root out greenwashing. This is achieved through a conceptually simple framework: develop technical criteria to establish that an activity makes a substantial contribution to one environmental objective (e.g. climate mitigation), whilst doing no significant harm to any other environmental objective (climate change adaptation, protection of water resources, circular economy, pollution prevention, protection of biodiversity).

Agreeing on the concept is one thing. Agreeing on actual criteria is, of course, something else. The EU successfully achieved this in late 2021 through the adoption of the first Climate Delegated Act. In doing so, it has certainty caught the attention of the market – as witnessed through the 46,589 responses to the Commission’s consultation exercise. It is also likely to have a direct impact upon project development. In a world with tight financing margins, and against the backdrop of inflationary pressure, developers will explore all channels to reduce their cost of capital. Having a project displaying the EU Taxonomy badge will undoubtedly help. Details will matter, so property developers may well start to pay more attention to performing air tightness tests; or windfarm developers will look more closely at the recycling of key components or resilience to future climate change. Banks and financial advisors are already asking questions. Auditors and the consultancy industry are warming up. This particular train most definitely left the station in 2021.

Having robust definitions for green finance is one thing. But it doesn’t help very much if financiers continue to support other types of investment that is difficult to reconcile with the temperature goals of the Paris Agreement. This concept of alignment is increasingly being put into practice, perhaps best demonstrated at COP26 by the Glasgow Financial Alliance for Net Zero, an initiative from signatories overseeing $130 trillion to set clear targets and timelines for green investments. This includes 98 banks across 40 countries with 43% of global banking assets, or $66 trillion. This scale matters10: The International Energy Agency estimates global annual investment to meet net zero at around $5 trillion.

The rise of sustainable finance is to be welcomed. But we should not get too carried away yet – much work remains. In November, the European Central Bank published a supervisory review of banks’ approaches to managing climate and environmental risks. The result? Based on a self-assessment conducted by 112 significant institutions, not one is close to aligning fully their practices with the supervisory expectations.


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Figure 3: The state of Climate and Environment risk management in the banking sector

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The good news is that virtually all institutions that performed a thorough assessment expect climate risks to have a material impact on their risk profile in the coming three to five years. In other words, the problem is universally recognized. The ECB concludes that, while steps are being taken to adapt policies and procedures, few institutions have yet put into place risk practices with a discernible impact on their strategy and risk profile. Figure 3 gives an impression of the challenge ahead. It notes that “most institutions have a blind spot for physical climate risk and other environmental risk drivers, such as biodiversity loss and pollution.” All in all, whilst welcoming the enormous progress, our feet should remain firmly on the ground.

Theme 3: recognition of adaptation at the heart of international climate finance

In Glasgow, developed countries agreed to a goal of doubling the amount of adaptation finance provided to developing countries by 2025 – expected to amount to around $40 billion per year. This is the first time an adaptation-specific financing goal has been agreed. It sits within the wider context of the Glasgow Climate Pact that charts a course for increased climate finance – for adaptation, mitigation, sustainable development.  

This is good news. Failure by the developed world to deliver on the commitment to fund $100 billion per year by 2020 was understandably perceived by the developing world as a breach of trust. The Climate Finance Delivery Plan and the resulting Pact helps put the show back on the road. In addition, the Pact puts a clearer focus on adaptation and thus addresses a long-running point of contention for many developing countries. Developing countries bear almost zero historic responsibility for climate change. Yet, they need to integrate resilience to current and future climate change into their core development strategies.

Adaptation investment is central to a stronger, cleaner, more resilient and more inclusive growth model. Blessed with high solar radiation and – in parts – strong wind speeds, together with hydro and geothermal, significant parts of the African continent have a comparative advantage in producing baseload renewable energy. In 2021, Namibia advanced on its ambitious plan to produce hydrogen from baseload green power and then export this to Europe as green ammonia.  Whilst many challenges remain,  the agreements  signed last year with Germany, Belgium and the Port of Rotterdam are testimony to the seriousness in the market.   

This type of green development is not possible without investment in basic resilience to future climate change. The agriculture sector – amounting to 60% of African GDP and 80% of Africa’s food supply – needs to be able to withstand more prolonged periods of drought. Long-term urban and regional planning needs to grapple with rising sea levels, an increase in water stress, higher temperatures. Infrastructure development requires well-judged design standards – based on forward-looking climate data and complemented by robust maintenance schemes during operation. This is a relatively new field, and yet it needs to be introduced in a context of limited public sector capacity and financial resources.   

Public banks and development agencies have an important role to play in promoting adaptation investment. In its first ever dedicated Climate Adaptation Plan, the EIB has set out an ambition to work more closely with the Global Center on Adaptation and the African Development Bank in the context of the Africa Adaptation Acceleration Program. This initiative, approved by the African Union and launched at the 2021 Climate Adaptation Summit, focuses on improving food security through the roll out of digital technology to farmers. It helps to improve the resilience of existing infrastructure through targeted adaptation investment and targets the development of appropriate financing models. 

Adapting to future climate change gives rise to challenging public policy issues, particularly where the opportunity cost of public funds is high. Strong technical analysis is needed to identify and prioritise cost-efficient investments in an environment characterised by significant long-term uncertainty. Consider making a decision on an adaptation investment in a local hospital. Investment A costs €100 and provides a benefit of €2000, if temperatures remain at 1.5 degrees, but is rendered ineffective if temperatures exceed 2 degrees. By contrast, investment B costs €300 and provides a benefit of €2000 at all temperatures up to and even beyond 2 degrees. Which one do you choose? A sure return of €1700 or a higher return of €1900 if temperatures remain below 1.5 degrees?  The willingness to pay (by the international community) to mitigate risk to some of the most vulnerable parts of the world will be tested these next years.

2021 saw a stronger recognition of the importance of adaptation finance in the context of developing countries. The challenge for the development finance community – including multilateral development banks – is to help use this fixed resource to maximum effect and in doing so spur a new model of development.

A final word

2021 was the first year of the critical decade. In emission terms, global emissions rebounded to pre-pandemic levels. Despite all the progress in scaling up renewable technologies, net zero pledges, policy reforms. The inertia, the sunk costs, the sheer legacy of the industrial revolution means we have not yet even bent the global curve – at best, we are just about flattening it.

Cause for despair? No. Looking back over 2021, there at several reasons for optimism. Cautious optimism perhaps – but optimism nonetheless. The adoption of net zero pledges by over 90% of the global economy – unthinkable even a few years ago – sends an unambiguous message about the direction of travel. You can argue about the speed at which demand for fossil fuels declines – but the end game is clear. 

As we learnt from the solar industry, things can happen quickly once markets reach inflection points.  Still not convinced? In 2019, 3.1% of Germany car sales were fully electric. In 2021, it was 25%. Climate policy is now industrial policy and the race is on.


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Chris Hurst is Director-General of the Projects Directorate at the European Investment Bank. Edward Calthrop is head of the climate policy unit in that directorate.


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  1. Chris Hurst is the Director General of the Projects Directorate at the European Investment Bank. Edward Calthrop is head of the climate policy unit within that directorate. The authors would like to thank all EIB Group staff who have been involved in stimulating discussions on climate policy over the last year, with particular appreciation to colleagues from the Environment, Climate and Social Office.
  2. Christian Aid has recently published a report highlighting the ten most financially devastating events for 2021, from hurricanes in the US, China and India to floods in Australia, Europe and Canada. In addition, it highlights five events with enormous human impacts such as drought in Africa and Latin America.
  3. Emissions in 2021 are likely to be higher than this forecast given the surge in use of coal for power generation in key global markets over the last two quarters, reflecting in part the very substantial increase in the price of natural gas. The surge reflects in particular emissions in the US and China – see Coal-Fired Power – Analysis - IEA.
  4. In their sixth assessment report, the IPCC estimates that we have a remaining global budget from the beginning of 2020 of 500 GtCO2 to have a 50% chance to limit global warming to 1.5 degrees. (Table SPM.2)
  5. See Climate Action Tracker.
  6. In the beginning of 2018, ETS prices lingered below 10 euros per tonne. Due to a number of reforms, by early January 2021, prices had broken the 30 euros per tonne mark. However, during 2021, prices rose sharply, breaking the 80 euros per tonne mark by early December. Current prices reflect both long-term fundamentals – it is proposed to reduce the number of allowances by 4.2% per year - as well as shorter-term dynamics, such as recent switch in the power sector from gas to coal.
  7. ETS prices alone will not drive investment in highly capital-intensive new technologies. Dedicated policy support – such as the EU Innovation Fund – are required to help to incentivize corporates make final investment decisions in capital intensive technologies. The results of the first call for large-scale projects was published on 16 November 2021. Seven projects aim to bring breakthrough technologies to the market in energy-intensive industries (hydrogen, CCUS) as well as renewable energy production.
  8. For instance, recent analysis by the IEA suggests a carbon price of USD 40-120/t CO2 is required to cover the costs of carbon capture in industrial processes with diluted emissions streams, such as cement production.  The price range is significantly lower – in the USD 15-25/t CO2 range - for industrial processes with highly concentrated CO2 streams (such as ethanol production or natural gas processing). The costs of transport and storage need to be added – though these are likely to vary enormously on a case-by-case basis.
  9. The production of hydrogen from renewables begins to be competitive with fossil fuels (i.e. steam methane reforming) at around 100 euros per tonne of carbon according to one recent analysis.
  10. Some caution is required here. It is unclear how much of the USD 130 trillion will be shifted to green activities. The headline double counts assets under management and owned. The timeline is unclear. Nevertheless, it provides evidence of increased focus on alignment by a significant part of the global financial sector.