JAKARTA (THE JAKARTA POST/ASIA NEWS NETWORK) - The Covid-19 pandemic has changed human behaviour. People are afraid to make decisions because they worry too much about the future.
However, not making a decision could worsen business and the economy. Global gross domestic product (GDP) growth shrank 4.9 per cent in 2020, and the International Monetary Fund estimates the GDP to grow 3.2 per cent below pre-pandemic projections.
But can we imagine what could be worse than the pandemic to the economy? Climate change and nature degradation. Under the current trajectory, the Organisation for Economic Cooperation and Development (OECD) projected that the global economy could be 11-14 per cent lower by mid-century than in a world without climate change.
Like the pandemic, climate change is not an issue of a single jurisdiction or a group of countries. Whether advanced, emerging or low-income, all countries have to deal with this challenge.
The good news is that global commitments to overcoming the issue have been made through the Paris Agreement and the United Nations Framework Convention on Climate Change's (UNFCCC) ultimate objective. These two have shown ambitious targets to achieve low-greenhouse gas (GHG) emissions in an orderly timeline.
We know the problem and we have ambition. The elephant in the room is how the world, especially developing countries like Indonesia, can achieve their ambitious targets amid the pandemic. Also, compared to advanced countries, developing economies tend to have a more limited fiscal capacity, less advanced technology for renewable energy and lower human capital capacity in green projects.
At this point, global collaboration and the mobilisation of capital are essential elements for achieving the targets. For that reason, with the spirit of "Recover Stronger, Recover Together", the Indonesia Group of 20 (G-20) Presidency-Finance Track encourages G-20 to strengthen global cooperation by focusing on orderly, just and affordable climate transition and monitoring climate risk on financial and macroeconomic stability.
In general, the "orderly, just and affordable climate transition" implies that both developed markets and developing countries can afford new green technologies and transition finance. Therefore, all groups of countries more potentially achieve the targets of the Paris Agreement and UNFCCC objective in an orderly but fair manner.
Under the Sustainable Finance Working Group (SFWG), the Indonesia G-20 presidency embodies this spirit through three agendas, namely developing a transition finance framework and improving the credibility of financial institution commitments; scaling up sustainable finance instruments, which focuses on improving accessibility and affordability; and discussed policy levers related to incentivising financing and investment that support the transition.
At the first SFWG meeting on Jan 25, all member countries broadly welcomed the discussion of these agendas throughout 2022. In other words, the Indonesian presidency has succeeded in inviting the G-20 to jointly promote an orderly, just and affordable global climate transition.
An effective climate transition requires monitoring activities of the transition risks, which may disrupt financial stability. Transition risks arise when the transition toward a low-carbon economy is disorderly, potentially destabilising the financial system. Therefore, the Indonesia G-20 presidency engaged the Financial Stability Board (FSB) to deliver progress on the FSB Roadmap for Addressing Climate-related Financial Risk (FSB Roadmap) to G-20 members.
The roadmap focuses on the impact of physical and transition risk that raises climate-related exposures that may be amplified by the financial system, across borders and across sectors.
The climate change issue has a potential impact on not only financial stability but also macroeconomic circumstances. The Indonesia G-20 presidency captures this urgency by proposing monitoring the climate-related macroeconomic risks agenda under the Framework Working Group. This agenda will explore the macroeconomic impacts and risks linked to climate change's physical and transition risks, including transition strategies that may affect the global macroeconomic constellation.
Updating progress on the implementation of the FSB road map and monitoring climate-related macroeconomic risks is a good combination that has the potential to contribute to supporting resilient macroeconomic and financial stability amid climate transition efforts.
This spirit will benefit countries that want to make progress but still rely on fossil fuels, including Indonesia, without biting the bullet to compel a climate transition too quickly and too massively, potentially destabilising the financial system and macroeconomic conditions.
For that reason, the Finance Ministry and Bank Indonesia (BI), which leads the G-20 Finance Track this year, have to work hand in hand to succeed in this plan. The next step is to convince policy leaders in the financial sector of G-20 members to endorse this agenda at the first finance ministers and central bank governors' meeting on Feb 17-18. The endorsement will potentially elevate this attempt to get support from country leaders and be included in the Leaders' Declaration on the G-20 summit in October.
At that point, the presidency of the G-20 Indonesia Finance Track may significantly contribute to the climate transition to sustain our planet. Eventually, with the spirit of orderly, just and affordable transition, Indonesia could lead the global society through G-20 members to move toward the climate targets and achieve future sustainable economic growth while maintaining fiscal sustainability and promoting recovery from the pandemic.
- The writer is an international economist at Bank Indonesia. The Jakarta Post is a member of The Straits Times media partner Asia News Network, an alliance of 23 news media organisations.