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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is a visiting assistant professor at Cornell University’s SC Johnson College of Business and Imperial College London’s Imperial Business School

The global transition to net zero has not yet begun. Emissions in emerging and developing market economies are growing rapidly, more than offsetting reductions in the west. Annual emissions are at an all-time high. If we are to limit the increase in temperatures to 1.5C above pre-industrial levels, the remaining carbon budget will be exhausted within five years at the current rate of emissions. 

António Guterres, UN secretary-general, says that 1.5C is “not a goal. It is a physical limit.” Any increase above that significantly increases the risk of crossing irreversible tipping points. Decisions we make in this decade will affect the fate of humanity for centuries. 

The only viable way to make the transition in time is climate finance at scale in favour of emerging and developing economies. While domestic climate packages such as the EU’s Green Deal and the US Inflation Reduction Act have motivated renewable investments in advanced economies, capital flows into renewables in emerging and developing economies have been a trickle. 

This is because the cost of capital is too high and early retirement of fossil fuels generates fierce lobbying by producers of them.

In “The economic case for climate finance at scale,” my colleagues and I argue in favour of offering climate finance at scale to emerging and developing economies. Even if advanced countries had to pay for the fossil-fuel-to-renewable transition in these countries (excluding China), they would deliver a large net economic benefit to themselves.

Whether advanced countries reach net zero in time or not, they will still be headed for climate disaster and high migration if they cannot get emerging economies on board. It is the reining in of global emissions that counts. The economic benefits, in terms of lower climate damages and global instability, far exceed the costs of decarbonising.

Alas, climate finance has not so far reached the necessary scale. Ever since the $100bn-a-year climate finance pledge was made more than 15 years ago, countries in the global north and global south have been haggling over fairness. Advanced countries are said to have a moral obligation to pay for climate finance given their greater wealth and historical emissions. 

With just months to go before the UN COP29 climate summit in November, there is still no agreement on how to bridge the near-trillion-dollar gap between what countries say is needed and the roughly $100bn annual climate finance offered.

Yet this should not be viewed as a moral issue. As economist William Nordhaus has noted, “global warming is a trillion-dollar problem requiring a trillion-dollar solution, and that demands a (far more) robust incentive structure.” Climate finance at scale can provide such a structure, benefiting key stakeholders — countries, fossil fuel communities and investors.

Our research shows that climate finance for emerging and developing economies is not charity, but hard-nosed economic self-interest. Paying the polluter to stop polluting by compensating owners of stranded fossil fuels and the affected communities, while also paying for the investment costs of renewable replacements, rests on sound economic logic.

Compensating owners and workers for the early termination of fossil-fuel production will motivate them to accept the green transition. Blended finance (a mixture of private and public money) would reduce the burden on governments while lowering the risk to private investors can lift risk-adjusted returns above hurdle rates, turning renewable investments into a good business.

Multilateral development banks must work with emerging economies to prepare their investment pipelines. Development banks need to move from their historic project-based finance towards facilitating system-wide finance for countries’ net zero transitions. Investors could then invest in large pools of bankable projects.

Neither market forces nor politically plausible levels of carbon taxation will bring about a sufficiently timely transition. The approach of incentivising decarbonisation with subsidies has already proved effective in western climate policy. Climate finance, subsidising early retirement and crowding in private capital for renewables should now be extended across borders. This is the only workable option the world has left.

Renewables are getting ever cheaper. The optimistic message is that if we offer enough finance to replace fossil fuels in emerging economies before 2030, we can win the climate war. The pessimistic reality is that we have so few years left. Leaders must choose the more optimistic path, now.