…sort of. Or rather, the promise of one?
Source: Impact Investor
A couple weeks ago, there was a major summit for the world of climate finance. In homage to the Paris Agreement of 2016—when we finally got our act together and signed some soft pledges to collectively lower GHG emissions to halt climate change—the Summit for a New Global Financing Pact took place in Paris as well.
The Summit took place on June 22-23 and convened over 40 heads of state and multinational institutions. The event was informally co-hosted by France’s President, Emmanuel Macron, and Barbados’s climate champion, Prime Minister Mia Mottley, to brainstorm ideas on how to redesign current financial systems. The goal is to unlock additional climate finance for developing nations who are both currently receiving comparatively low amounts of capital and will likely need additional adaptation finance as they find themselves at higher risk than average. Allow me to give you the breakdown on what this summit was all about and what came out of it.
Motivation
The event was inspired and guided by the UN’s Independent High-Level Expert Group on Climate Finance’s November 2022 report: “Finance for climate action: scaling up investment for climate action and development.” The report was co-written by three stars in the world of development economics: Lord Nicholas Stern, Amar Bhattacharya, and Vera Songwe; and was commissioned by the presidencies of both the British COP26 and the Egyptian COP27. A groundbreaking report with a number of key takeaways, with arguably the most important being:
"Altogether, spending on climate-related development goals will need to increase four-fold from the pre-pandemic levels by 2030—to $2.4 trillion per year by 2030 for emerging markets and developing countries other than China. This investment has three key purposes: the transformation of energy systems; responding to the growing vulnerability of developing countries to climate change; and investing in natural capital and sustainable agriculture. Overall development spending to reach the SDGs will need to more than double from pre-pandemic level to around $5.3 trillion per year by 2030 (which includes the $2.4 trillion).”
Separate from climate finance flows that tend to refer more directly to finance aimed at decarbonization, clean tech, and generally transitioning to a net-zero economy; climate-related development finance tracks additional spending towards targets like biodiversity protection, and clean water—some of the climate-related UN Sustainable Development Goals. But just like transition climate finance, the world is still collectively falling short on spending for nations that are most at risk and without all the means to handle the incoming risks.
Investment / Spending Requirements for Climate and Sustainable Development to 2030 $ Billion Per Annum by 2030 (increment from current in parentheses).
Source: Bhattacharya, Stern, Songwe (2023). “The Paris Agenda…”
Agenda
The agenda was broad but was again inspired by the aforementioned Finance for Climate Action Report, the authors of which were asked to craft an Agenda for the summit. They outlined the need to increase finance by a certain amount, and set out some priorities that the summit should incorporate.
As an overarching theme the summit was to aim to: Set out a new architecture for complimentary finance (“Internal and external. And within external, private, from multilateral development banks (MDBs) and concessional.”) This complimentary finance architecture refers to a structure for all sources of financing that reduces the overall cost of capital and increases the overall amount. Additionally, this complimentary finance architecture should be set up such that it tackles festering debt difficulties for poor and developing economies.
With this goal in mind, the agenda laid out six priorities for action:
Platforms for concerted and cooperative action between countries - for country-led purposeful frameworks.
Tackling the vicious cycle of climate change and debt vulnerability - by immediately addressing debt difficulties.
Domestic resource mobilization in developing economies
Unleashing the full potential of MDBs to de-risk other forms of finance and to work collaboratively.
Create new avenues for private finance - through things like removing offtake risk for renewables, foreign exchange de-risking, and others.
and finally, to greatly expand the amount of debt-free and concessional financing available to emerging and developing economies.
Evidently, they were aiming for the stars and hoping to land on the moon with these goals to fully redesign the entire architecture of climate-related development finance. Let’s turn to what was actually achieved.
Outcomes
It’s impossible to summarize the entirety of the promises that were made, the discussions that led to new ideas, along with the hard commitments that resulted. So we will focus on the latter: things that we can now take to the bank (pun intended). Of these, the following four are the most significant:
Quick cash at the IMF through SDRs: This is probably the most significant outcome, as the head of the International Monetary Fund (IMF) announced that rich countries have fully collectively reallocated over US$100 billion of their special drawing rights (SDRs)—quickly accessible disaster-related funds with the IMF, which do not affect debt burdens; to poor countries. France led this final push promising to reallocate 40% of their SDRs with the IMF. This was part of a previous commitment to mobilize US$100 billion of SDRs to poor and developing economies undertaken at the Summit for Financing African Economies in May of 2021.
A new forum solely focused on sustainable development finance: The Paris Dialogue on Financing for Sustainable Development was launched on the first day of the summit and aims to work collaboratively with other Paris-based institutions such as the OECD, the AFD, and UNESCO on advisory work.
A call to action for carbon prices that actually work: This initiative was signed by 31 countries and was motivated by the finding that there are only about 39 national carbon pricing schemes in the world right now; of which only 4% are in alignment with the 2030 1.5°C goal. The initiative aims to: 1) deepen Paris-aligned national carbon pricing adoption, 2) roll out implementation for international compliance carbon markets, and 3) strengthen and ensure the integrity of voluntary carbon markets.
A temporary pause to debt from the World Bank: Although previously announced, this development from the World Bank is also one of the most substantial to come out in alignment with the goals of the summit. Ajay Banga, the World Bank’s new president, announced on June 23 that the bank would put a pause on debt repayment from poor countries following climate disasters. This will only apply to new loans, and the full terms are yet to be unveiled, but it definitely offers a way out of a climate disaster-debt spiral that a lot of at-risk countries can quickly fall into.
Some honorary mentions
While the following developments are not as substantial as those in the previous section, they are worth a mention and further attention:
Maybe we will reach $100 billion this year? In previous Decarb Digest articles, we have discussed the $100 billion in climate financing promise from developed to developing countries which, according to the OECD, currently stands at $83 billion per year. There were only more talks and hopes that we reach the target this year…
From Carbon Credits to Bio Credits? France and the UK announced the intention to create a roadmap towards the creation of international standards for bio-positive carbon credits and biodiversity certificates that will be aimed at mobilizing private capital to protect biodiversity.
A worldwide pollution tax? Macron floated the idea to raise an international tax on emitting activities like aviation, shipping, and potential international financial transactions to widen the sources for climate finance. This proposal got the support of 22 nations but not enough to enact change within the International Maritime Organization.
So the entire architecture of global climate finance was not changed over the course of two days in the city of light. Are you surprised? However, some important and encouraging goals and priorities were discussed and achieved. I hope that the hottest 3-day period on record in the history of meteorology that followed this summit (July 3-5) will make world and industry leaders feel the heat to move faster on climate action and climate finance. Because even though a good amount was accomplished, the story remains that the speed we need is unlike anything we have ever achieved before.