The amounts of money needed to reach the goal of globally are nothing short of astronomical net zero (on balance no more greenhouse gas emissions) in 2050. Just for the global replacement of coal by renewable energy sources, USD 29,000 billion is needed, calculated by the International Monetary Fund. According to research for the UN, a total of USD 125,000 billion must be invested for ‘net zero’. By comparison, the GDP of the United States is $26 trillion.
No wonder that many governments, which have to pay extra attention to spending in times of rising interest rates, have pinned their hopes on other parties.
Primarily on the private sector, which, according to the IMF, will have to account for 90 percent of investment. Only: many climate projects are expensive and risky. Think of the construction of solar parks or the construction of better electricity grids in politically unstable countries.
It is now widely heard that international public institutions with a (relatively) large grant should also do more to get private parties on board. The World Bank in particular, which financed more than 100 billion dollars in projects in developing and emerging countries last year, is under pressure to invest more in the climate.
Last week, the US Biden administration nominated Ajay Banga, the former CEO of Mastercard, as the new chairman of the World Bank. Traditionally, the US, as the bank’s largest shareholder, provides its chairman. Banga (63), who was born in India, sees climate change as a serious threat to the development of poor countries. The departing chief of the World Bank David Malpass, still elected by the American former president Donald Trump, is considered a climate skeptic.
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Malpass is partly blamed for the World Bank’s slow response to the climate problem. The US and other major shareholders, such as Germany, France and the UK, want to accelerate the greening of the bank, as do India, the current chair of the group of G20 countries, and some countries that are vulnerable to rising sea levels, such as Barbados.
World Bank lags behind
In 2019, the World Bank stopped financing most new oil and gas projects, and previously coal financing. But environmental groups accuse the bank of still indirectly investing billions in natural gas production, particularly through its private-sector arm, the International Finance Corporation (IFC).
Meanwhile, the bank’s climate financing (renewable energy, energy conservation, climate adaptation) lags behind that of other major public banks, such as the European Investment Bank (EIB) and the Asian Infrastructure Investment Bank (AIIB). The latter two have set themselves the goal of spending half of the credits on climate goals by 2025. At the World Bank that is only 35 percent in the same year.
The call for more climate financing by the World Bank is not without risk: it could be at the expense of credit for poverty alleviation, education and care – the traditional policy areas of the bank, which was founded in 1944.
Janet Yellen, the US Treasury Secretary, said early this month after a trip to Africa that Zambian farmers had told her about “the disruptions” to their work “caused by climate change”. Politicians in African countries had also said that climate change is hampering development. But they had also made it clear to her that more funding for “global challenges” (climate, but also fighting pandemics) should not “be at the expense” of poverty reduction, she said at a think tank meeting in Washington.
At the end of last year, the World Bank board itself suggested an extra capital injection from the donor countries in order to be able to provide more loans. But, the Reuters news agency wrote this week, in the US, the Republican-dominated House of Representatives does not seem to be willing to invest more money in international climate policy. In other countries, too, extra financing for climate policy in poor and emerging countries is not self-evident.
More flexible capital requirements?
That is why we are also looking for ways to do more with the existing resources of the World Bank. In a report commissioned by the G20 countries, experts argued last year that the World Bank should take more financial risk. The capital rules for the bank should be relaxed by the shareholders, which would allow the bank to provide more money. But this method is not without its drawbacks. The World Bank currently benefits from a solid credit status (AAA), which allows it to borrow at low interest rates on the capital markets. As a result, the World Bank can subsequently lend money to emerging and developing countries at low interest rates. Credit rating agency S&P Global stated last year that the AAA status could come under pressure if the World Bank adopts a more “aggressive” lending policy. The top of the World Bank is not waiting for a lower credit rating, nor are countries that still benefit from cheap World Bank credit. These countries are concerned “that their borrowing costs will rise because of the West’s refusal to provide more money,” Mark Malloch Brown of the NGO Open Society Foundations recently told Reuters news agency.
According to the authors of the G20 report, technical adjustments can also increase borrowing capacity without jeopardizing the AAA status of the World Bank. The American think tank Brookings comes up with another idea: enlist the help of the IMF to strengthen the capital of the World Bank. In any case, if he is appointed, Banga will have to have difficult conversations with governments to meet everyone’s expectations.
A version of this article also appeared in the newspaper of February 28, 2023