Because the magnitude of required climate finance scaling should be common knowledge
The World Bank and the International Monetary Fund (IMF) recently wrapped up their annual spring meeting for 2023 in Washington, DC. To tell you the truth, I tried to find out what these are all about but was met with a classic buzz-word-filled vague description, which just left me more confused. Here is an excerpt to show you what I mean:
”One of the ways the organization works towards achieving these goals is by calling on citizens from around the globe to collaborate on a range of issues related to poverty reduction, international economic development and finance, building human capital, and strengthening resilience. The primary opportunity to bolster awareness and participation on these topics and advance the agenda on key issues is through the Spring and Annual Meetings.”
I would describe them as thought leadership forums where the World Bank Group (WBG) showcases what they've been working on and hosts panels of subject-matter experts to further engage in the discussion.
At the end of the World Bank’s 2023 April Spring Meeting, the WBG set a goal to increase their climate loans to low- and middle-income developing countries by an additional US$50 billion over the next 10 years (See Panel III - Mr. Guimbert’s comments). This averages to roughly $5 billion in additional loans available per year. But what does this actually mean in terms of current finance flows and where they need to be in order to avoid the worst impacts of climate change?
But what does the additional $5 billion per year the bank is committing mean in terms of current finance flows?
Let’s start with what this means in terms of the current financial flows from the Bank. In a press release last September, the bank noted that they were able to provide US$31.7 billion in climate finance in FY2022; this is an all-time high and a 19% increase from the previous financial year. They don’t really specify whether this went to low- and middle-income developing countries, but since one of the organization’s goals is to “eradicate extreme poverty,” it is probably a safe bet that most of it went to the Global South. The additional $5 billion per year would then mean a 15% increase from the Bank's current climate finance scheme.
What about how this measures up to what is needed to achieve our climate action goals? And where does it stand when it comes to previous promises regarding the flow of climate finance from the developed world to developing countries?
Let’s start with the former; there are various estimates on how much climate finance is needed to achieve our goal of limiting global warming to 1.5°C - 2°C, and they all fall in the range of US$4 trillion - US$8 trillion per year between now and 2030. To demonstrate this range, the Climate Policy Initiate estimates that we need US$4.3 trillion per year, while the OECD estimates a number closer to US$6.9 trillion. What they both agree on is that following 2030, the investments required will significantly increase.
This is due to the fact that the technologies we invest in over the near-term will be the ones that are economical and that achieve positive returns in a short, to medium time frame. To truly hit net-zero though, we will have to invest in new innovations that might not be immediately economical. These technologies will therefore require a higher dollar cost per ton of CO2 e emitted that they aim to reduce.
Annual climate financing needed vs. current flows. Source: Climate Policy Initiative.
You’ll notice in the above graph a US$850 billion amount. That represents the estimate of 2021 annual climate financing flows according to growth trends up until 2020. The latest tracked figure was US$653 billion per year at the end of 2020. Interestingly, of this $653 billion, 75% was directed to North America, Europe, and East Asia and the Pacific; and 76% of it was raised domestically. As you likely guessed, this indicates that developing economies with the greatest need for climate finance are still not seeing an adequate level of financing.
Now let’s talk about the infamous $100 billion commitment. I’m referring to the commitment made at the 2009 COP15 in Copenhagen, of reaching US$100 billion in annual climate finance flows from developed economies to developing economies (which by the way would also only represent around 1.25-2.5% of the $4-8 trillion we now know we need!). Of this $100 billion in flows that was promised, the OECD estimated that in 2019, we had only reached about $80 billion—this represented roughly 12% of the total global financing reached at the end of 2020.
"Ok, but surely we can't expect the World Bank to provide all the climate money the world needs, right?" We definitely can't, and should not.
The last point of comparison that needs to be addressed is the amount of global climate finance that comes from Multilateral Development Finance Institutions (MDFIs), such as the World Bank Group. In 2021, the total financing attributed to these sources was about $68 billion of the total $653 billion, meaning about 10% of the total flows. The additional $5 billion that the WBG has committed would therefore be a 7.3% increase in the financing from these sources. Not too shabby.
That said, this increase is still insufficient in the broader scheme of required total annual growth, which would be about 20% (CAGR) to reach the lowest threshold of climate finance required to “stave off the worst effects of climate change.” Put differently, to reach $4.3 trillion per year from the currently estimated $850 billion per year, we would need to increase the financing by 5x overnight. This doesn’t seem to register with the financial sector. In the meantime, the clock is ticking and the world is inching closer and closer to locking in a 1.5 °C warming scenario as we approach 2030.
The announcement from the WBG is encouraging, especially since financing from public and multilateral institutions can be structured to de-risk private investment into clean tech, and have a multiplying effect on private finance flows. It is less encouraging that the nations that will likely suffer the worst effects of climate change, and that will require substantial amounts of adaptation finance, continue to be deprioritized in the climate finance recipient lineup.
I’ll leave you with the fact that the $100 billion commitment from developed countries to developing nations (which we failed to hit) only represents 1.25-2.5% of the total amount that we will need to reach.
We can do better.
Regional climate finance needs to decarbonize economies. Source: Climate Policy Initiative.
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