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The G-7’s Sustainability Mission

When the G-7's leaders meet next week in Germany, they should use the occasion to take the first steps toward avoiding the most dangerous consequences of global warming. Governments and regulators should adopt several policies that would stimulate private-sector investment in cleaner forms of energy.

FRANKFURT – In six months, representatives from countries around the world will gather in Paris in an effort to reach a global accord to fight climate change. When the G-7’s leaders meet next week in Germany, they should use the occasion to take the first steps toward avoiding the most dangerous consequences of global warming. With the world’s safety and prosperity at stake, the question is not whether or when to begin the transition to a low-carbon economy, but how to manage the effort.

In 2014, investments in clean energy reached a new high of $310 billion, after two years of decline. That is good news, but it is still far short of the $1.1 trillion per year that the International Energy Agency (IEA) estimates is needed in the low-carbon energy sector. In the meantime, some $950 billion was invested in oil, gas, and coal in 2013 – a figure that has doubled in real terms since 2000.

The value of an investment is based largely on the perception of how risky it is. Investment will not shift decisively toward greener sources of energy unless and until portfolio managers begin to account for the risks of dangerous climate change. Investors also need to consider “carbon bubbles,” the overvaluation of fossil-fuel companies based on the assumption that they will be able to continue burning the world’s reserves until depletion.

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