Friederike Roder
Author’s bio: Friederike Roder is the Vice President of Global Advocacy + Policy at Global Witness.
Last month, leaders at the annual meetings of the World Bank and the International Monetary Fund in Washington, DC faced growing pressure to implement urgent reforms to the international financial system—including reforms to help fight climate change. Climate finance is once again high on the agenda as leaders come together in Azerbaijan this week for COP29.
In 2022, wealthy countries agreed to mobilise more than $100 billion in climate finance for developing nations. It’s a historic amount — but it’s not nearly enough to meet the current moment. Current projections indicate that annual international investments in climate action need to increase by at least $1 trillion each year until the end of the decade to help developing countries meet their energy transition needs.
At first glance, this may seem like an insurmountable jump from 2022’s pledge. But it’s all a matter of perspective. In fact, there’s more than enough money available in the global economy to be unlocked and redistributed to those countries feeling the greatest climate impacts.
The math is, frankly, uncomplicated. Research indicates that for each $1 spent on climate action today, we can save between $4 and $7 in the future. Redistributing wealth to finance a secure future for all will benefit both people and the planet. Here’s how we can do it.
The importance of multilateral development banks
The World Bank and other multilateral development banks have a unique role in allocating finance, particularly in developing countries. Banks like the World Bank are well-positioned to reach markets in these countries that may pose too risky for the private sector. Their high credit ratings boost their positioning in the international financial system; this in turn enables them to provide concessional funding to developing countries.
In 2022, the G20 commissioned an independent review of multilateral development banks, finding that these banks could unlock hundreds of billions of dollars more in lending to help lower-income countries recover from the impacts of the climate crisis. Since the report came out, multilateral development banks have released an additional $357 billion by implementing some reforms. However, research shows that they can do even more to help developing countries achieve their climate targets. Fitch Ratings suggests a dozen of the world’s biggest of these banks could lend up to $480 billion more without risking downgrades.
It’s crucial for the World Bank and other multilateral development banks to take the recommendations set out in the 2022 review seriously. They can unleash trillions of dollars of low-cost finance for developing countries by fully utilising their existing resources, including by taking on more risk, including callable capital in the balance sheets, promoting financial innovation, improving credit rating agency assessments, and increasing access to data and analysis.
Calling on a new allocation from the IMF
In 2021, the International Monetary Fund allocated $650 billion to countries in crisis — the largest such allocation in history. Despite being unevenly distributed, it provided crisis relief without creating debt to many emerging markets and low-income economies. A new issuance of a similar allocation would be a fair, rapid way to boost reserves and create fiscal space for climate-vulnerable nations to invest in resilience.
In 2023, developing country leaders put forward a demand for a new allocation. This new allocation has the potential to generate additional financing and could create a much more successful environment for countries to drive climate action. What’s more, rechanneling these assets through multilateral development banks could help leverage up to $0bn in additional financing, a portion of which can be used on resilience projects in developing countries.
Tax polluters—including the oil companies
Over the past few years, experts have presented various proposals to find new and innovative models to increase climate and development finance. Some of these proposals—like taxing billionaires, which, one analysis found, could help generate an additional $250 each year—are now backed by the G20 countries. Other taxes and levies—including a shipping levy (a possible $80 billion each year), an air passenger tax (another $121 billion each year), and a financial transaction tax (which adds between $169 and $281billion a year)—are being explored by a group of countries.
Fossil fuel companies, the drivers of the climate crisis, present a real opportunity. Taxing these companies’ windfall profits could help generate an additional $382 billion to boost climate finance. And fossil fuel subsidies—which reached a record $7 trillion in 2022, according to IMF data—both line the pockets of polluters and keep the world hooked on dirty fuel. Reallocating some of the $1.3 trillion in direct government subsidies for fossil fuels towards climate action has the added bonus of slowing down emissions.
Private finance mobilisation
The private sector holds the majority of the world’s wealth, managing more than $210 trillion in assets. Yet its role in generating climate finance has thus far been marginal. Current estimates indicate that a five-fold increase in private sector mobilisation can help generate $500 to $600 billion for climate action. Governments and public institutions need to focus on creating the right conditions for private finance to mobilise on this issue. A green transition will not be possible with public money alone.
The time to act is now
We have a range of financing options available that can contribute to the global finance pot. Investments in developing countries would not only help those nations recover from disasters, safeguard against the increasing impacts of climate change, and prepare their own energy transitions—they would also create a wealth of jobs and opportunities globally. World leaders have the pathway before them to mobilise money for the climate. We have no time to waste.
Photo by Towfiqu barbhuiya on Pexels
