Why ministers of finance are critical in the fight against climate change

Recent studies indicate that bold climate action could trigger about $26 trillion in economic benefits by 2030, create over 65 million new jobs and avoid 700,000 premature deaths.

These are staggering statistics that call for ambitious, far-reaching reforms, new governance arrangements, innovative financing and cooperation on sharing technology. While it will take all of us to make this happen, one kind of entity plays a more critical role than any other. Without the active cooperation of ministries of finance, the world will fall short in the battle against climate change.

Experts warn that limiting global warming to 1.5ºC will require “rapid, far-reaching and unprecedented” action coupled with money and the commitment from governments to implement these actions.

Implementing Nationally Determined Contributions (NDCs) – a commitment made by countries to cut carbon emissions by a specific amount – and boosting these targets requires political will and leadership. The single most critical government body, the ministry of finance, has the power to influence national development and economic policies, in the way that determines where public and private finances are spent.

So a deep commitment from ministries of finance across the globe is a must if the ambitions of the Paris Agreement, NDCs and the Sustainable Development Goals (SDGs) are to be achieved. And this type of commitment is unlikely to be secured solely through advocacy.

The ability to gather the right information to assess the impact of climate change locally – in towns and villages – is essential to put climate change at the heart of fiscal decision-making. The economics of climate change is a relatively new and often complicated field, and developing countries face major capacity constraints. But things are evolving, with dynamism and improvisation coming from unlikely corners of the world.

Cambodia adopted a Climate Change Financing Framework in 2014, laying out financial needs for the climate-change response, with support from Sweden, the European Union (EU) and the UN Development Programme (UNDP).

The framework identified potential sources of funding and actions required to improve the effectiveness and efficiency of climate finance. Since 2012, it has led the Ministry of Economy and Finance (MEF) to conduct annual climate public-expenditure reviews.

More recently, Cambodia was the first country to develop and apply a Climate Economic Growth Impact Model (CEGIM), released in April 2018. CEGIM is a simple economic model that aims to distill key features of the most widely used models on the economic impact of climate change. It was developed by a team that included staff from the Ministry of Economy and Finance and the National Council for Sustainable Development and UNDP.

The CEGIM model played a major role in the inclusion of climate change as a key pillar of the government’s new development strategy – Rectangular Strategy 2018-2023 – which lays out Cambodia’s development agenda, including implementation of NDCs and achievement of the SDGs.

The model looks at Loss and Damage (L&D) from climate change, and groups these into three categories: loss of income, mostly from declining natural resource productivity; reduction in labour productivity arising from heat stress; and damage to assets. CEGIM is calibrated by triangulating all these sources and then integrating them into a single analytical framework.

Without climate change, CEGIM projects that real GDP would grow at an average of 6.9% per year from 2017 to 2050. Climate change reduces average GDP growth to 6.6% and absolute GDP by 0.4% in 2020, 2.5% in 2030 and 9.8% in 2050. The CEGIM shows that in Cambodia the most significant impact of climate change is in a reduction in labor productivity due to heat stress.

It responds to a clear demand from the Ministry of Economy and Finance to explore how climate change will impact the Cambodian economy over time.

By using CEGIM, Cambodia has found a way to generate data that is trusted by policymakers and strengthens the commitment from government for ambitious climate action. Analysis like the CEGIM is one step towards providing local evidence to support advocacy for more ambitious climate targets for the next generation of Nationally Determined Contributions.

This experience is highly relevant for developing countries who wish to develop their own capacities to produce evidence on climate change impacts and assess policy options for an optimal mix between development (SDGs) and Climate Action (NDCs). It could be the gamechanger in mobilizing resources at the scale required to address the risks from climate change.