Creative green finance can go a long way in 2023
Rich democracies are increasingly keen to help the Global South fight climate change. Though they will struggle to write big cheques, there are ways to make a little cash go a long way.
One of the things about the Ukraine conflict that shocked America and its allies was how few developing economies joined them in sanctioning Russia. They are worried about the read-across if there is a conflict with China over Taiwan. It is one thing for the rich democracies to stand up to Russia without allies in the Global South but quite another thing to do so to China, an economy 10 times the size.
This is the main reason, along with mounting fears about climate change, that the Group of Seven (G7) large industrial countries is pushing a green alternative to China’s Belt and Road Initiative which aims to help poor countries develop. It has already inked three “Just Energy Transition Partnerships” with South Africa, Indonesia and Vietnam.
Discussions on how to help India fast-track its green transition are underway. There is also talk about doing something similar with Brazil now it has a climate-friendly president.
The snag is that it will cost about $1 trillion a year to fund green development across the Global South – and there is no way rich countries will find even a fraction of this money from their budgets. They have not yet kept their old promise to channel $100 billion a year to developing countries. Meeting this should be a priority, says Charles Ogilvie, former director of strategy for the United Nations climate conference in Glasgow in 2021.
The good news is rich countries have ways to get money flowing without dipping much into their own pockets. This is also a good year to ramp up climate finance diplomacy. The topic will be central at the International Monetary Fund and World Bank meetings, a development finance summit being organised by Barbados and France, India’s presidency of the Group of 20 large economies, and the next U.N. climate conference in Dubai.
Private financial institutions, which have theoretically pledged $150 trillion for the global transition to net zero, will have to provide the lion’s share of the funding. Increasing amounts are flowing to the Global South. But the sums are still small because the risks are high and many projects are not viable if investors have to pay a fat risk premium.
The most promising solution is to use relatively small amounts of public money to suck in private capital using instruments such as political risk guarantees. Given the constraints on national budgets, governments need to mobilise the World Bank, IMF and other international financial institutions.
One plan is for multilateral development banks (MDBs) to use their balance sheets more aggressively to fight climate change. The World Bank has finally produced a roadmap about how to do this, after much pressure from G7 countries, its largest shareholders.
But it won’t be enough for MDBs to sweat their assets more. They will also need more money. Rich countries should therefore put more capital into those MDBs that show the most enthusiasm for the task. If the World Bank drags its heels, they can invest in more ambitious organisations such as the Asian Development Bank and the African Development Bank.
Rich countries can also redeploy Special Drawing Rights to fund decarbonisation plans. The IMF issues SDRs to its shareholders to bolster their reserves, but countries with hard currencies don’t need them.
Barbados is proposing rich countries put their $500 billion of spare SDRs into a trust, which would convert them into hard currencies. The trust would pull in extra private capital and lend the money at a low cost of capital to private-sector projects in developing countries.
This proposed trust would have more impact on stopping climate change than the IMF’s existing Resilience and Sustainability Trust because the money would mitigate climate change rather than just support balance of payment needs of countries hit by climate disasters.
The money would also flow to the private sector, and so not increase the borrowings of governments already drowning in debt. Because SDRs are based on a basket of currencies, borrowers would not see their debts rising if the dollar appreciates, says Michael Jacobs, a political economy professor at the University of Sheffield.
TAX METHANE, SHIPS AND PLANES
Rich countries will also have to find new sources of money – and that means taxes.
Many green activists are calling for taxes on oil and gas companies. But this is not politically viable. Oil producers such as Russia, America and Middle Eastern countries would say no. Implementing such a tax in a piecemeal way would just drive production elsewhere, often to jurisdictions with low environmental standards.
There are better ideas. One is to ramp up taxes on carbon emissions. Another is to tax methane emissions, something the United States is planning as part of its Inflation Reduction Act.
Yet another is to impose bigger taxes on ships and planes, which have mostly slipped through the net of carbon taxation, despite the growing impact they have on climate change.
The European Union already requires planes operating within its territory to buy carbon emission permits and is planning something similar for ships. Japan has proposed a global carbon tax for shipping to raise $56 billion a year.
Global consensus on these ideas may prove elusive. But Nick Mabey, co-chief executive of climate consultancy E3G, says there’s scope to create a big coalition around shipping and airline taxes, on the lines of the one that agreed minimum taxes for multinational companies in 2021. Rich countries could channel the money they raised to developing countries – both to help them stop climate change and to fund the new “loss and damage” facility they promised last year.
2023 is a key year for green finance. Next year’s U.S. elections could result in a president who is not climate-friendly. World leaders must grab the current opportunity.
Source: Reuters (Editing by George Hay and Oliver Taslic)