Climate Policy and the Role of Nationally Determined Contributions in Shaping Global Climate Action

For those less familiar with climate policy, can you explain what Nationally Determined Contributions (NDCs) are, how do they shape global climate action and why should we care about them right now? 

In 2015, nearly all governments came together to sign the Paris Agreement, a breakthrough deal to limit global warming and collectively address the impacts of climate change. At the core of this agreement are the Nationally Determined Contributions (NDCs). 

NDCs are the climate plans that each country has committed to, outlining how they intend to reduce greenhouse gas (GHG) emissions and translate global goals into national actions. These plans are shaped by each country’s capabilities, economic resources and priorities, and they serve as essential tools for coordinating efforts and tracking progress of the Paris Agreement goals. 

Over the past ten years, NDCs have played an important role in pushing climate progress and narrowing global warming by 2100 to a range of 2.1-2.8°C. If every country meets its current NDC, global GHG emissions would drop by around 14 per cent by 2030. However, current efforts are not yet enough, as there are still gaps in how these plans are going to be carried out, and the 43 per cent cut in emissions needed to keep warming to 1.5°C compared to pre-industrial levels is still far from being reached. Furthermore, as geopolitical tensions, trade conflicts, economic uncertainty and fiscal challenges grow, the momentum for climate action is slowing, worsening the long-term impacts of climate-related disasters. 

Every five years, countries are required to update their NDCs to the United Nations Framework Convention on Climate Change (UNFCCC) secretariat, each time with higher ambition and stronger commitments. These updates are expected to reflect technological developments and the growing sense of urgency, but in line with what each country can realistically achieve1. 

For example, the United Kingdom’s updated 2035 NDC, submitted on January, commits to reducing all GHG emissions, excluding international aviation and shipping, by at least 81 per cent below 1990 levels. While the United States has pledged to a nation-wide target of 61–66 per cent below 2005 levels by 2035, covering all sectors and gases. The European Union’s current goal is a minimum 40 per cent reduction by 2030, relative to 1990 levels, although its formal updated NDC is still pending submission. 

All three commitments represent significant steps, showing that the new round of NDCs due in 2025 creates a critical opportunity to raise ambition and close current gaps in the global action to reach net zero emissions.  

In this context, the Organisation for Economic Co-operation and Development (OECD) and the United Nations Development Programme (UNDP) published a report, Investing in Climate for Growth and Development: The Case for Enhanced NDCs, in which we at NIESR collaborated to develop economic scenarios using our global econometric model NiGEM. The analysis shows that accelerating climate action through more Enhanced NDCs and well-designed policies is not only achievable but can also lead to stronger economic growth.  

What can governments do to support compliance with their Enhanced NDCs?  

The report recommends building cross-functional stakeholder support, across both government and the private sector, to create a stable investment environment with clear, aligned goals to foster long-run growth and to drive investment, efficiency and structural transformation.  

In terms of providing alignment across government, the report highlights that Environmental Departments often develop strategies in isolation of the wider government. To achieve real success, strategic targets should be integrated across all governmental departments. The focus should be on government functions that have cross-department mandates, such as Ministries of Finance. An important part of this involves selling the Enhanced NDCs, demonstrating the value that climate action can bring. The report suggests, for example, that climate policy is intrinsically connected to macro-stability, growth and responsible fiscal management, all of which are key priorities for a Ministry of Finance. By making these links explicit, climate policy becomes a key, embedded focus for the Ministry of Finance.  

The report also highlights the importance of subnational bodies. For instance, 50 per cent of the world’s population live in cities and they are responsible for 70 per cent of the global GHG emissions. This shows the vital importance of bringing in subnational authorities to enact climate policy at a local level.  

The report further highlights three ways that governments can integrate the Enhanced NDCs into their operational procedures: 

• Integrate NDC targets into fiscal planning and expenditures, 

• Exploit revenue raising mechanisms that align with these targets (such as sovereign climate bonds or carbon pricing), and 

• Use public procurement as a strategic tool to achieve climate goals, embedding Enhanced NDC goals inside the contract evaluation.  

In terms of engaging the private sector, the report states that governments must collaborate with both civil society and the private sector to build broad-based support, identify policy targets and work with businesses to build a healthy investment environment. This is to ensure that there are adequate and effective compensation mechanisms for affected communities, such as reskilling programmes and diversification strategies to minimise disruption. Close cooperation can also help target investment, identifying gaps and exploring how the government can create new markets and incentivise low-carbon innovation. Finally, by setting clear long-term priorities, governments can create a predictable, stable environment for business investment. Through these efforts, the Enhanced NDCs can stop being a negative factor that dampens investment but a dynamic, positive boost that stimulates growth in new areas.  

This further entails understanding the structural transformations that will take place over the next century and how governments can positively support them. For example, the Enhanced NDCs can push for a shift toward renewable energy alongside an increase in energy efficiency, combination of which will reduce our reliance on fossil fuels. These policies will impact sectors differently depending on production techniques employed. For example, transportation and service sectors are more open to electrification efforts and renewable energy systems are more easily substitutable in their operational frameworks. On the other hand, heavier industries, like steel and cement, rely more on processes that cannot easily switch to renewable energy sources. However, socio-economic transformations, such as  digitalisation or urbanisation, will naturally change the sectoral decomposition of the economy. Governments must plan with an awareness of these broader structural trends to anticipate adjustment needs. 

What are the main economic and environmental implications of Enhanced NDCs?   

Using NiGEM, the OECD report examines how the implementation of such accelerated climate policies and investments, compared to current policies, have the potential to bring sustainable and resilient growth.  

Under an Enhanced NDCs scenario, accelerated climate action is projected to be compatible with continued economic growth, while building more efficient and sustainable systems.  The primary objective of NDCs is a significant reduction in global GHG emissions of 34 per cent by 2040. Our NiGEM simulations show that global gross domestic product (GDP) grows by about 60 per cent by 2040, compared to 2022. That would represent a small but positive improvement compared to the baseline: global GDP in 2040 would be 0.2 per cent higher than under the Current Policies scenario. 

Although most regions are projected to benefit from increased commitment, regional disparities exist, linked to the differences in economic structure of countries and their starting point. Across different country groups, GDP is projected to grow by 37 per cent in high-income countries, 69 per cent in middle-income countries, 104 per cent in low-income countries and 42 per cent in oil producing countries in the same period. The benefits of increased investments are projected to be the greatest in developing countries, where such investments might not have materialised without climate policies. 

The overall global increase in GDP can be explained, in the short to medium term, by multiple factors: a change in production and consumption patterns, the deployment of energy-efficiency technologies, increased investment in the productive capacity of economies and the recycling of carbon revenues.  

The limited effect of policies on aggregate economic growth hides stronger sectoral changes. For example, the most substantial shifts in sectoral production occur within the energy system, marked by a sharp decline in fossil fuel production and a significant growth in renewable energy. Other sectors such as agriculture, forestry and other land uses are critical in supporting the meeting of the Paris Agreement.  

This transition requires significant financing efforts on behalf of governments and will require careful fiscal planning. Moreover, monetary policy will have to integrate the inflationary risks posed by an accelerated transition under Enhanced NDCs. Co-ordination with central banks to ensure a flexible monetary response to the potential inflationary effects of climate policies will be key to maintain private investment levels and to allow the growth benefits of climate action to be captured. 

In the longer term, the role of reduced climate damages is significant, since the bulk of environmental and economic benefits from accelerated climate action will be realised in the second half of the century. Emission reductions would limit global average temperature rise to 1.7°C above pre-industrial levels by 2100, compared to 2.4°C under the current policies. This lower global temperature rise will lessen the expected economic and physical impacts of climate change, such as ecosystem degradation, more frequent extreme weather events and rising sea levels.  Reducing physical damages and risks from climate change will likely generate significant economic and welfare benefits, e.g. enhancing food security, minimising productivity losses and health impacts due to heat stress, lowering risks to the financial system and decreasing expenditures on disaster recovery and infrastructure repairs. That means that committing to Enhanced NDCs contributes to ensure a safer, more viable and resilient environment, supporting society and means of production.