AIQ: Cleaning up capitalism

A fair COP

Why social justice is vital to climate action

Policymakers, companies and investors are slowly beginning to acknowledge the social dimensions of climate action.

The concept of a just transition – a more equitable, inclusive route to a net-zero future – is gaining ground among policymakers, workers and businesses across the world.

Low-income economies in Africa, Asia, Latin America and Oceania have historically contributed little carbon to the atmosphere (see Figure 1). In many cases, they are also still suffering the legacy of the colonial period, when Western powers plundered poorer countries’ resources to further their own development.

In a cruel irony, developing economies are unlikely to be able to make full use of their remaining hydrocarbon wealth, due to the imperative to rapidly decarbonise the global economy. Their governments face the tricky task of diversifying away from oil and gas, while simultaneously lifting citizens out of poverty and channelling capital towards costly climate resilience and adaptation projects.

Within richer nations, too, the physical and economic impacts of climate change tend to fall on those without the means to protect themselves. In the US and Europe, poorly managed deindustrialisation has created impoverished rustbelts and extreme weather is already hurting working class and minority communities, worsening existing inequalities.

Figure 1: Historic carbon emissions by region (billions of tonnes)1
Historic carbon emissions by region
Note: This measures CO₂ emissions from fossil fuels and cement production only – land use change is not included.
Source: Carbon Project

Rights and capabilities

It doesn’t have to be this way. A well-designed energy transition can bring a range of benefits in rich and poor countries, mitigating social problems and creating employment opportunities. A study from the International Labour Organisation, a UN agency, finds the energy transition is likely to create 24 million jobs in clean industries worldwide, with six million lost – a net gain of 18 million.2

A well-designed energy transition can bring a range of benefits in rich and poor countries

The challenge is to ensure those benefits are evenly spread. Action on the just transition needs to happen at several levels: from multilateral agreements to establish countries’ relative responsibilities and mobilise private investment; to national policies such as carbon taxes; to regional and place-based initiatives promoting communities’ capabilities through the transition.

At the global level, the importance of a just transition was nominally recognised in the 2015 Paris Agreement; COP26 in Glasgow represents an opportunity to put concrete plans in place.

Adaptation and resilience

Over the longer term, developing economies will need to fully diversify away from fossil fuels, to meet their own NDCs and avoid the risk their natural resources become uneconomic – so-called ‘stranded assets’.

Nations currently reliant on fossil-fuel exports are likely to have to delay their transitions relative to developed economies

Given these challenges, nations currently reliant on fossil-fuel exports are likely to have to delay their transitions relative to developed economies, giving them time to implement sustainable economic plans. It may make sense for them to maximise revenues from fossil fuels while such a strategy remains economically viable, by investing in value-add facilities such as oil refineries and putting in place follow-up low-carbon energy infrastructure. Natural gas, a less carbon-intensive alternative to oil and coal, could serve as a transition fuel.3

The establishment of international carbon markets, meanwhile, could equip countries with the financial tools they need to decouple development from environmental degradation over the longer term, rewarding conservation.

In the meantime, poorer countries are looking to make use of sustainable energy sources to both decarbonise and boost living standards. Rolled out at scale, these kinds of initiatives could allow low-income economies to achieve their social priorities without following the path of carbon-intensive development trodden elsewhere.

The role of finance

Until now, finance has been slow to recognise the importance of social issues and reluctant to connect the ‘E’ and the ‘S’ in ESG. But this is changing as the just transition provides a strategic lens through which to assess and manage risk. A disorderly transition will increase the vulnerability of certain economies, bringing hazards for those seeking to allocate capital.

One way to attract private financing is through new instruments

One way to attract private financing is through new instruments. Public-private partnerships or guarantees from governments and multilateral organisations, such as the World Bank, could help unlock more capital for socially valuable projects in developing economies that have modest or fair credit ratings, and making the costs more affordable.

Investors can also play a role in engaging with policymakers and multilateral institutions to ensure capital is directed to where it is needed most. Engagement can lead to results at a corporate level. By encouraging companies to take the social and political implications of the transition into account, investors can help drive positive change through the private sector.

A just transition will only be possible with the involvement of younger generations

As momentum builds behind the just transition, the current social and environmental trade-offs could disappear. But this will only be possible with the involvement of younger generations – the policymakers, scientists and entrepreneurs of the future. If we are to properly address climate change, we can no longer leave them out of the picture.

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