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Tuesday, September 26, 2023

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What would the perfect climate change lender look like?

Iimagine for Second, you are a guest of the Mount Washington Hotel in Bretton Woods Ski Resort, New Hampshire. You didn’t come here to enjoy the slopes or the hotel’s 18-hole golf course. Instead, you are here for the kind of conference that reimagined the international financial system at the end of World War II. This time with a green twist. Your job is to make the Bretton Woods twin — International Monetary Fund And the World Bank – a perfect climate change lender.

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According to two economists, Nicholas Stern and Vera Songwe, poor countries will need investments of around $2 trillion to $2.8 trillion a year by 2030 to tackle climate change. The climate policy initiative, a think-tank, estimates that by 2021 climate investments by rich and poor countries will total $650 billion. In the catchphrase of the climate change world, the financial system needs to “turn billions into trillions”. It is the mission of your new green bank to somehow get those funds flowing.

The first question is a vexing one: who wants to pay the lender? The fight to create a framework for climate finance began in 1992 with the so-called Earth Summit. The summit divided the world into two groups, Annex II countries and others. Because of their historical emissions, most of the richer Annex II countries have been given the responsibility to pay.

The problem with partitioning is not that the polluter should pay principle, but that it’s stuck in the past. Israel, Singapore and Qatar are now rich and more responsible for emissions than many of the original Annex II gangs.According to the agency’s analysis audi, another think tank, Kuwait, the United Arab Emirates and South Korea are also candidates for the revised Annex II-style grouping. New climate lenders should set a clear threshold for each individual’s historical emissions. Once a country violates this, it has no choice but to pay the price.

Next on the agenda: how to get the most out of green bank balance sheets. No matter how generous the initial capital subscription, it will never be enough to tackle large-scale climate change. Green banks will have to turn to leverage. However, lenders may find themselves in trouble if they borrow too much. Some poor countries object to the idea that the World Bank could borrow more money to fight climate change. Such a policy could undermine the rationale for a development bank by raising its own cost of capital to the point where it can no longer lend on favorable terms.this ah ah– The World Bank is rated higher than the U.S. government and may be a bit too cautious for our new climate lender. Green banks have the ability to increase leverage.

This large balance sheet must be put to good use. One option to fully use its firepower is to provide debt relief, giving poor countries the fiscal space to invest in themselves.but as International Monetary Fund The new climate lender will have to insist on some level of reform in exchange for its aid to heavily indebted countries. Green banks want to ensure that the firepower is directed toward environmental interests, not giveaways or political patronage, and not steps to correct fiscal problems.

One model could be “debt-for-nature” or “debt-for-climate,” which currently excites donors and involves offering debt relief in exchange for environmental protection or climate change commitments. The problem with such arrangements is that they are inefficient: they effectively subsidize creditors who did not participate in the swap, because these creditors benefit from the borrower having more resources to pay them back. Instead, green banks should focus on “unlocking private finance”, to return to the phrase of green experts. Clean technology investments are capital intensive; the problem is that poor countries face a much higher cost of capital. The Climate Policy Initiative calculates that a solar farm in cloudy Germany would need a 7 percent return to be viable, while in sunny Egypt it would need a return of 28 percent. Currency volatility and a riskier investment climate offset gains from the good weather.

This is where the World Bank’s toolbox may help. Green banks can provide preferential loans. Or the new lender could even take on more risk by taking a stake in the project. This means accepting a “first loss” if things don’t work out, but also gaining something if things go well. Financiers are often frustrated that the World Bank is not doing more to seize the opportunity of this “hybrid finance” that combines high-minded philanthropy with a degree of old-fashioned greed.

green dream

The most radical option, though, is to forego green banking altogether. When it comes to reducing CO2 emissions, the perfect climate lender may very well not be a climate lender at all. For benevolent social planners who don’t have to worry about political constraints, the most effective way to achieve net zero is some kind of global carbon tax, with the proceeds distributed among countries based on their population. Emission reduction will not be determined by the institutions of the Bretton Woods system, but by market logic: look for the lowest-cost opportunities to reduce emissions, whether in Somaliland or Sweden. Tax revenues would go mostly to the poor, densely populated world, which countries could use to adapt to a warmer planet if need be.

Such a vision might sound more utopian than a new Bretton Woods institution or reforming existing institutions.However, with regard to the negotiation of Article 6 of the Paris Agreement, which will be United NationsHosting of , in progress.this European UnionChina, India and three of the world’s four largest emitters have already established emissions trading schemes or will implement them this year. According to the World Bank, nearly a quarter of the world’s emissions are covered by some form of carbon pricing. Even without new institutions, climate change dreams are rapidly becoming reality.

Read more from our economics column Free Exchange:
The Case for Global Optimism (February 16)
Google, Microsoft, and the Threat from Powerful Antitrust Authorities (February 9)
AI boom: Lessons from history (February 2)

For more analysis of breaking economic, financial and market news, subscribe to Money Talks, our weekly newsletter for subscribers. For more coverage on climate change, subscribe to our bi-weekly newsletter, Climate Matters, or visit our Climate Change Hub.

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