The climate leaders and laggards as we race to net zero

There are risks and opportunities for investors as an important audit of climate pledges looms and pressure for change intensifies.

Climate change leaders and laggards


Irene Lauro

The race towards net zero greenhouse gas (GHG) emissions by 2050 is likely to gather momentum as countries are set to face increasing damages and economic costs from higher temperatures.

To mitigate global warming, many governments are implementing policies which are dramatically reshaping their economies, notably in relation to the energy transition.

The energy transition is creating a large number of risks and opportunities for investors and this paper sheds a light on the leaders and laggards in terms of fiscal policy action to make it happen. The objective here is to better understand where the largest risks lie, and aide investors as they navigate the energy transition theme.

An important pillar in climate action is a country’s Nationally Determined Contributions (NDCs). Governments were invited to present their NDCs and actions to reduce GHG emissions in the run-up to the adoption in 2015 of the Paris Agreement on climate change. Ambitious NDCs are required to meet the target of net zero emissions by 2050 – indeed, even under the most optimistic of assumptions, reductions of GHG carbon dioxide (CO2) agreed to date fall short of those required for the world to have even a 50:50 chance of hitting net zero by 2050. Remember, net zero by 2050 is necessary to limit temperature rises to 1.5°C above pre-industrial levels, and give the best chance of preventing devastating climate change.

Forthcoming audit of climate pledges to underline need for more action

This year, NDCs and climate policies supporting them will be under scrutiny with the first “Global Stocktake” of the Paris Agreement. The outcome of this audit will be discussed at COP28, the UN’s climate summit in the United Arab Emirates in November. This process will be the first official check-up on the Paris Agreement and is set to evaluate if every country is making sufficient progress towards its net zero pledges. It is also likely to underline the need for stronger climate ambition and enhancing policy actions and international cooperation to reduce global emissions.

The UN has started assessing current pledges and published some initial results in April from its first synthesis report for the technical assessment on the state of GHG emissions. This highlighted that the pace and scale of current climate plans are insufficient to limit global warming. The analysis found that global GHG emissions in 2030, implied by the latest NDCs, make it likely that global warming will exceed 1.5°C during the 21st century.

Indeed, current NDCs will lead to warming of 2.5–2.9°C, projects the report, with dramatic consequences for the climate, including more frequent extreme weather events, and inevitable negative knock-on impacts for the global economy. While total emission levels are projected to peak before 2030, cumulative CO2 emissions in the period 2020–2030 are still estimated to be around 430 gigatons (Gt) CO2, under current climate pledges.

That would consume 86% of the entire carbon budget of 500 Gt CO2, being the level of emissions also consistent with that aforementioned 50% probability of limiting global warming to 1.5°C (Chart 1). This leaves the equivalent of approximately two years of emissions (70 Gt CO2)  for the following two decades in order to achieve net zero by 2050.

Carbon budget for a 50% probabiity

Significant gap between current policies and those required for net zero

It is worth highlighting that not all NDCs are supported by credible policies and our analysis shows there are significant gaps between net zero pledges and actions.

Discussions at COP28 are therefore likely to lead to more ambitious climate action from governments. The key question is who has to do more? For investors, the answer is critical as the laggards in climate mitigation are likely to see stricter regulation and therefore higher transition risks, such as higher inflation. Transition risks are set to be reflected even more in financial markets as the move to net zero accelerates. So, it is important to define the scale of adjustment necessary in different economies given current policies.

Climate Action Tracker (CAT), an independent scientific analysis produced by two research organisations tracking climate action since 2009, shows that no government’s climate plans are compatible with limiting global warming to 1.5°C. The CAT assesses countries’ mitigation commitments and policies against what is technically and economically feasible to meet 1.5°C.

In order to analyse leaders and laggards in emissions reductions over the next decade, we calculate the amount of total emissions a country would achieve under its current policies. We then compare the amount of emissions that country should produce according to its 1.5 modelled domestic pathway. The larger the gap the stronger the rise in regulation should be over the medium term. Our analysis highlights the importance of being selective and moving beyond the simple distinction between developed and emerging markets (EMs).

EMs tend to be more carbon intensive than developed countries, as rich countries have shifted their manufacturing production to these developing countries in order to take advantage of cheaper labour costs. However, the service-based developed markets (DMs) still have their fair bit to do to contribute to net zero.

For example, in 2030 Canada would still need to reduce emissions by more than 250 megatons (Mt), which is equivalent to almost 40% of the emissions produced in 2021. Not surprisingly, given their rapidly rising population and economic growth and lack of policy implementation, China and India also need to achieve substantial reductions in emissions. Current policies lead to an overproduction of 2 Gt of emissions in 2030 for India, more than 60% of its 2021 emissions. Among EMs, Brazil looks best-positioned in terms of the emissions gap thanks to a steady increase in wind and solar capacity and a high share of biomass and hydropower in its energy production.

Emissions gap

There are different factors that determine the amount of emissions produced, such as population growth, standards of living, energy intensity, share of renewables in electricity production. Meanwhile, stricter climate regulation can increase the share of renewables and limit carbon intensity.

Risks from stricter regulation as countries seek to close emissions gap

Governments have two main policy levers available. They can introduce green subsidies to encourage certain behaviours, or carbon pricing to compel them. Some countries, like the US, have avoided carbon taxes due to political reasons, choosing green subsidies as the preferred approach to incentivise the move towards net zero (see Regime shift: the accelerating response to climate change). In contrast, European countries have encouraged the decarbonisation of their economies through the implementation of carbon pricing since the early 2000s. From our analysis on emissions-weighted average price, we found that the EU has been leading on climate regulation, having implemented one of the highest carbon prices at a global level. In the analysis presented below we go one step further as we evaluate current actions against policies that are compatible with net zero.

Our benchmark is the 2030 carbon price that is consistent with the net zero path. This is determined by the Network for Greening the Financial System (NFGS), a group of 116 central banks and supervisors. These organisations are working together to enhance the role of the financial system to manage risks and to mobilise capital for green and low-carbon investments. The NGFS scenarios provide a common starting point for analysing climate risks to the economy and financial system and its analysis takes into account each country’s current level of technology but also how rich/poor the country is.

When incorporating this equitable distribution of climate efforts in climate modelling, it should not come as a surprise that the optimal net zero price for a developing country is lower than what is required in developed countries. This means that, while current carbon pricing is generally higher in DMs, governments in rich countries still need to increase significantly their domestic price on emissions in order to meet their fair share in the net zero move. For example, while the European Union has one of the highest carbon prices in the world, with an emissions-weighted average price of more than 40$/tCO2, the bloc still has to raise its carbon price by 300$/tCO2 by 2030 in order to be on a path consistent with net zero. On the contrary, in India, a country that has yet to implement a carbon pricing scheme, a relatively much smaller rise in carbon pricing is needed to meet the net zero goal, as the price on pollution should increase by 70$ (Chart 3).

Carbon pricing gap

This increase in carbon prices is set to have important implications for countries’ economic outlook. In particular, an increase in the price of pollution will put upward pressures on inflation, while dragging on economic growth and the scale of this adjustment is strictly dependant on the current carbon pricing gap. The larger the gap, the higher the pressures on inflation and the hit on GDP growth. In order to better understand what the impact on the economy will be, it is important to consider the carbon pricing gap relative to the size of the economy. When normalising this gap by per capita GDP, we find that among EMs, India is likely to see the largest impact on the economy, while Europe appears to be the most exposed among developed countries (Chart 4).

Relative carbon pricing gap

Finally, it is important to highlight that the price gap used in this analysis assumes that carbon pricing is the only policy tool implemented by governments to incentivise the move to net zero. Carbon pricing is not the only way to stimulate the green energy transition. Subsidies are also part of the policy mix and tax incentives for investment in green energy technologies can help achieve net zero with lower carbon prices. 

Fiscal support for consumption of fossil fuels also requires addressing…

Phasing out fossil fuel subsidies is also an important element for a successful transition. As described by the IEA, fossil fuel subsidies are a critical ‘roadblock’ on the pathway to clean energy. Fossil fuel subsidies shield consumers from high energy bills, but they come at a high cost, including notable costs for governments and encouraging pollution. This is why in 2021 at COP26, governments agreed to phase out inefficient fossil fuel subsidies as they signed the Glasgow Climate Pact.

However, the energy crisis triggered by the Russian invasion of Ukraine has pushed up fossil fuel prices and governments have responded by subsidising energy consumption to protect households and companies. Latest estimates from the IEA show that global fossil fuel consumption subsidies increased dramatically in 2022, rising above $1 trillion for the first time.

Subsidies have been critical to help consumers with the cost of living crisis in the short run, highlighting why carbon pricing solutions are politically so difficult. But this can also have some significant drawbacks, indirectly incentivising the use of fossil fuel energy and making the required switch from dirty to cleaner technologies even more expensive in the long run.

Our analysis highlights that some EM economies, including China and India, will be subject to higher transition risks given their large exposure to fossil fuel subsidies, particularly to coal but also oil. Since the Paris Agreement was signed in 2015, China has spent 14% of its GDP in dirty subsidies every year, followed by India, with an average spending of 10% of GDP (Chart 4). Brazil instead tends to be less exposed to the economic disruptions that come with the subsidy phase-out, as the country has only spent 2% of its GDP in supporting fossil fuel energy. It is also worth highlighting that among DMs, North American countries are more exposed than economies in the European continent.

Fossil fuel subsidies

…while public finance for renewable energy investment has key role to play too

Finally, there is also the other side of the coin, represented by public finance for clean energy technologies. This is also critical for countries’ growth outlook as investment in innovation brings significant improvements in terms of productivity and efficiency. We analyse the amount of support towards clean energy provided by public finance institutions, including multilateral development banks bilateral development finance institutions, and export credit agencies.

We find that Brazil has been a key leader in renewable energy investment. Since the Paris Agreement, cumulative investment in clean technologies has accounted for more than $23 billion, representing more than 1% of the country’s GDP, higher than other EMs such as India and China. This probably explains why Brazilian current policies are relatively closer to the net zero target in terms of emission reductions. Among DMs, Europe again is taking the lead, having financed clean energy projects for more than $3 trillion (European country average), as shown in chart 5.   

Clean energy public finance


While climate action in on the rise, our analysis shows that transition risks are still elevated as current policies are still not compatible with a net zero path.

The road ahead still presents some big challenges for both EMs and DMs and our analysis highlights the importance of being selective as risks and opportunities for investors are present in both types of economies. In particular, among EMs, we find that transition risks could be more modest in Brazil, as the country has not heavily subsidised its fossil fuel industry, while being an important investor in clean energy technologies.

In the DM space, Europe is also well positioned but inflationary risks remain elevated as carbon prices still need to rise significantly in order to provide the right incentives for the move to net zero.


Irene Lauro


Energy transition
Regime shift
Economic views
Global economy
Emerging Markets
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