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What would the ideal climate change lender look like?

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IMaine Second, to be a guest at the Mount Washington Hotel in Bretton Woods Ski Resort, New Hampshire. I’ve come to enjoy neither the slopes nor 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 there is a green twist. Your task is to give the Bretton Woods twins – L imf and the World Bank – a sister in form of a perfect climate change lender.

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According to Nicholas Stern and Vera Songwe, economists, by 2030 poor countries will need to invest somewhere in the region of $2 trillion to $2.8 trillion annually to combat climate change. The Climate Policy Initiative, a think-tank, estimates that in 2021 climate investments, in both rich and poor countries, will total $650 billion. In the climate change world’s slogan, the financial system needs to “turn billions into trillions”. Getting that money to flow, in a way, is the mission of your new green bank.

The first frustrating question: Who is coughing to pay the moneylender? The struggle to create a framework for climate finance began at the so-called Earth Summit in 1992. The summit divided the world into two groups, the Annex II nations and the rest. Because of their historical emissions, the Annex II countries, most of which are rich, have been given the responsibility to pay.

The problem with partition is not in principle – that polluters should pay – but rather 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 analysis before AudiAnother think tank, Kuwait, the United Arab Emirates, and South Korea, is also a candidate for a revised Annex II-style compilation. The new climate lender must set a clear limit on each person’s historical emissions. Once a country violates this, it will have no choice but to pay.

Next on the agenda: how to get the most out of a green bank’s balance sheet. An initial capital offering, however generous, will never be sufficient for the large scale of climate change. Green Bank will have to switch to leverage. With that said, there is too much borrowing involved, and the lender can find itself in trouble. A group of poor countries has criticized the idea that the World Bank can borrow more to combat climate change. Such a policy risks undermining the development bank’s rationale, by raising its cost of capital to the point where its concessional loans can no longer be extended. the aaThe World Bank’s rating, higher than the US government’s, may be a tad too cautious for the new climate lender. Green Bank can handle the leverage.

This big budget should be put to good use. One option for making the most of its firepower is to offer debt forgiveness, which gives financial space for poor countries to invest themselves. But just like a imf When it offers aid to heavily indebted countries, the new climate lender will have to insist on some degree of reform in return. Rather than taking measures to rectify the financial situation, a green bank might want to ensure that firepower is used for environmental good, not political handouts or nepotism.

One model could be the “debt-for-nature” or “debt-for-climate” trade-offs, which are currently arousing donor interest, and involve offering debt relief in exchange for environmental protection or climate change pledges. The problem with such arrangements is that they are inefficient: they actually support creditors who do not participate in the barter, because those creditors benefit from a borrower who has more resources to pay them off. Instead, the green bank should focus on “liberalizing private finance,” to return to green economists’ paraphrasing. Investing in clean technology is 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 overcast Germany needs a yield of 7% to be viable, compared to 28% for a farm in sunny Egypt. Fluctuating exchange rates and a riskier investment climate offset the gains provided by the better weather.

This is where the World Bank Toolbox can help. Green Bank can provide soft loans. Or perhaps the new lender can take on a little more risk, by participating in the projects. This means accepting the “first loss” if things don’t go well, but also gaining some upside if things go well. Funders are often frustrated that the World Bank has not done more to seize the opportunity of such “hybrid financing,” which combines high-profile philanthropy with a degree of old-fashioned cash rush.

green dreams

However, the most radical option would be to abandon the green bank entirely. When it comes to getting rid of carbon dioxide, the ideal climate lender may not be a climate lender at all. For the benevolent social planner, who doesn’t have to worry about political constraints, the most effective way to get to net zero is some kind of global carbon tax, with the proceeds distributed to countries based on their population. Emissions reductions will not be dictated by a Bretton Woods-like institution but by the logic of the market: go for the lowest-cost opportunities to reduce emissions, whether in Somaliland or Sweden. The tax revenues would flow mostly to the poor, overpopulated world, which could be used to adjust to a warmer planet, if it so desired.

Such a vision would seem more utopian than a new Bretton Woods institution, or a reform of the institutions already in place. However, talks about Article 6 of the Paris Agreement, which would create a version of the international market in carbon offsets under United nationsOngoing care. the European Union, China and India — three of the world’s four largest emitters — already have an emissions trading scheme, or will implement one this year. According to the World Bank, nearly a quarter of global emissions are covered by some form of carbon pricing. Even without a new foundation, dreams of climate change are fast becoming a reality.

Read more from Free Exchange, our column on economics:
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The AI ​​Boom: Lessons from History (February 2)

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