Paris Climate Finance Summit Unlocks Funding, Dodges Debt
Climate change 26/06/2023 •
climate finance
The summit unlocked billions in new climate finance but failed to address spiralling the debt levels and high borrowing costs handicapping green transition efforts in developing countries.

An international summit in Paris to debate reforms of the global financial system to meet the threat of climate change was billed by UN Secretary-General Antonio Guterres as a chance for “a new Bretton Woods moment”. It was, he said, an opportunity for “governments to come together, re-examine and re-configure the global financial architecture for the 21st century”.

The Bretton Woods institutions, the World Bank and International Monetary Fund (IMF), will celebrate their eightieth birthday this year. Erected to help countries rebuild after the devastation wrought by World War II, the multilateral development banks are central cogs in a system of international finance that is increasingly viewed as unable or unwilling to address the threat of climate change by global leaders.

“Consider this: over three-quarters of today’s countries were not present at the creation of the Bretton Woods institutions … It essentially reflects, even with some changes, the political and economic power dynamics of that time,” Guterres said in his opening remarks to the delegates in Paris. “Nearly 80 years later, the global financial architecture is outdated, dysfunctional and unjust. There will be no serious solution to this crisis without serious reforms.”

In a letter published ahead of the summit, 13 world leaders, including Joe Biden, Rishi Sunak, Olaf Schulz, and Ursula von der Leyen, described the meeting as a “decisive political moment” to “forge a new consensus” on global development finance.

The Summit for a New Global Financing pact, co-hosted by French President Emmanual Macron and Barbados Prime Minister Mia Mottley in Paris last week, did not reinvent the global financial system. But it did notch several long-awaited wins on the climate finance front, leaving many delegates with a sense of optimism often absent from climate finance negotiations.

The World Bank announced it will allow countries struck by natural disasters to pause debt repayments, but only for new loans. This financial breathing room in the wake of floods, droughts and storms meets a key demand set out by Mottley in the Bridgetown Initiative – a set of development finance reforms first presented at the UN climate summit in Egypt last year that provided the impetus for Macron to host the Paris summit.

On the climate finance front, an additional $100 billion will be made available to climate-vulnerable countries through the IMF’s special drawing rights instrument (SDR), a reserve currency. The SDR funding is separate from the historic loss and damage fund agreed upon at COP27 to finance climate adaptation efforts in low- and middle-income countries, which is expected to be finalized at COP28 in Dubai later this year.

In another first, the outcome statement said the World Bank and IMF would unlock an additional $200 billion in “lending capacity” over the next ten years, subsidized by new investment by rich countries.

The conference statement also mentions the prospect of finding “new avenues for international taxation”, reflecting momentum built on the sidelines of the summit for a tax on international shipping to fund climate efforts. This tax will be debated at the International Martime Organization meetings next month.

Discussions on additional international levies to fund climate adaptation – such as taxes on wealth, aviation, and fossil fuels – remained sharply divisive.

Bringing billions to a trillion-dollar fight

Climate activist Greta Thunberg criticized the summit for failing to address fossil fuels. “If your house is on fire, the first thing you do is to stop pouring oil and gas onto the fire,” she said.

Climate finance, however, is an endeavour requiring trillions, not billions, of dollars.

Ahead of the Paris Summit, the International Energy Agency warned that investments in clean energy in developing countries need to triple from $770 billion in 2022 to nearly $3 trillion by the first half of the 2030s to meet climate targets. A joint report by the United Kingdom and Egypt published ahead of last year’s UN climate summit, meanwhile, found developing countries require an estimated $2.4 billion to cut emissions and build resilience to climate change.

Developed countries said at the Paris summit that they will likely pass the $100 billion climate finance pledge for the first time this year. The pledge, first agreed in 2009, was supposed to be met by 2020, and the accuracy of the figures provided by rich countries are disputed.

Earlier this month, Oxfam’s Climate Finance Shadow Report found that while donor countries claimed to provide $83.3 billion in 2020, “the real value of their spending was – at most – $24.5 billion”.

“The actual support they provide is much less than reported numbers suggest, and is coming mostly as debt that has to be repaid,” said Oxfam. “By providing loans rather than grants, these funds are even potentially harming rather than helping local communities, as they add to the debt burdens of already heavily indebted countries — even more so in this time of rising interest rates.”

The Oxfam findings spotlight the elephant in the conference room of the otherwise successful summit: debt.

The tightening financial conditions resulting from the efforts of central banks to tame inflation amid the array of recent shocks to the global economy – from the pandemic’s disruption of global supply chains to soaring energy and food prices following Russia’s invasion of Ukraine – have hit financially vulnerable countries the hardest.

The cost of debt

Low-income countries face their biggest bills for servicing foreign debts in 25 years, with a group of 91 of the world’s poorest countries paying an average of over 16% of government revenues to repay foreign debts in 2023.

The cost of borrowing for counties with C-rated credit scores has skyrocketed by nearly 15% since February 2022, forcing many to refinance already untenable loans with more expensive ones. The resulting debt spiral has forced 62 countries worldwide to spend more on refinancing foreign debt than on health care, and impeded efforts to invest in meeting development targets and adapt to climate change.

The share of emissions contributed by emerging and developing economies is growing. Their successful transition to a green economy is critical to limiting global warming.

The prohibitive borrowing costs offered to low- and middle-income countries are a major barrier to increased private climate investments, which are critical to countries suffering high debt distress, as is the case for 60% of low-income countries.

“Developing countries do not have the space on their balance sheets for the debt required even if they wished to finance [the green transition] themselves,” Advinash Persaud, a key advisor to Barbados’ Prime Minister Mia Mottley argued in a recent paper. “Recall that developing countries start from high debt levels, worsened by the pandemic, the food and fuel crisis following the Russian–Ukraine conflict, and rising loss and damage from climate change impacts.”

Building a solar field, wind farm or flood barrier in Barbados or Pakistan can incur interest rates two to three times higher than a similar project in Belgium or Germany. Persaud notes that to build a comparable solar farm, annual borrowing costs in the EU sit at an average of 4%, compared to 10.6% in developing countries. As a result of the high cost of capital, only 14% of green investment in developing countries is funded by private finance, compared to 81% in developed countries.

Europe and North America have emitted over 70% of global greenhouses gases over the past 270 years, nearly exhausting the world’s carbon budget.

“The cause of this huge spread is not project-specific risk. A solar farm is no riskier in India than Germany,” Martin Wolf, chief economics editor of the Financial Times wrote in his analysis of Persaud’s report. “More than all of the risk premium represents market estimates of macroeconomic (specifically, currency and default) risks.”

In short, off-base macroeconomic considerations are pricing private capital out of investing in the green transition of the countries most in need of funding.

“Private investors are leaving money on the table,” wrote Persaud. “But even more significant are the far greater social gains from saving the planet and boosting green growth in developing countries that are being left alongside.”

One solution proposed by Mottley is for the IMF and World Bank to provide cheap loans for climate projects. But until the spectre of growing debt and borrowing costs in low- and middle-income countries is tackled, other measures risk being limited to band-aid solutions.

“If we don’t change our institutions, the world will remain the same,” Brazilian president Luiz Inácio Lula da Silva said in his closing remarks amid parting shots at the IMF and World Bank. “The rich will go on being rich, and the poor will go on being poor.”

Image Credits: Markus Spiske/ Unsplash.

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