Opinion - 21/January/2021

New public finance roadmap comes at a critical moment

In 2020, the UK government’s finance advisor, Mark Carney, set out a roadmap for securing private sector finance for the energy transition ahead of the COP26 climate negotiations later this year. But public sector finance must also remain central to the UNFCCC talks, argue Kate Levick and Sonia Dunlop from E3G

The views expressed are those of the author and do not necessarily reflect the position of FORESIGHT Climate & Energy


More attention from national governments is required to increase the amount of public financing available in both developed and emerging markets

A paper released on January 8th sets out the public climate finance agenda in the run-up to the COP26 negotiations in Glasgow. It includes a new date in the diary for a finance event in March 2021, which will bring together donor and developing countries to talk about the all-important link between development finance and the climate crisis.

The UK’s climate and development event comes at a critical moment. The economic impacts of the covid-19 pandemic have created a crisis for developing economies. These governments need rapid, large-scale financial support from richer nations to be able to continue providing basic services to citizens and to chart a course for Paris-aligned economic growth.

International financial institutions like the World Bank and International Monetary Fund (IMF) will be key to providing this support. But public banks of all shapes and sizes, national and international, have the ability to influence the trajectory of entire economies. Multilateral Development Banks (MDBs), the largest of the public banks, can play a transformational role in getting the world aligned with the Paris agreement. One of the goals set out in the new paper suggests building “in-country capacity for countries to develop and finance low carbon and resilient transition plans”.

In short, the MDBs, through their expert advice—or “technical assistance”, to use the jargon—can help emerging markets put together national plans for climate mitigation and adaptation together with associated financing strategies for how to pay for those plans. E3G analysis of such country-level support has found that the Inter-American Development Bank that operates in Latin America is particularly good at providing such support.

QUALITY AND QUANTITY

The UK wants MDBs to make good on their existing commitments to provide post-2020 climate finance. But delivering the $65 billion a year by 2025 target will not be enough. While this may sound like a big number, for these gigantic institutions it is not much more than business as usual. Their level of ambition needs to be doubled at least. We need the international community to turn up in Glasgow with a big green cheque for developing countries—channelling funds through multilateral institutions is the most efficient way to do this.

Furthermore, ensuring the quality of this climate finance—making sure that unsuitable projects are not counted as green (see Annexes B and C here for the geeky detail)—is just as important as scaling up the quantity.

The UK says climate finance will be prioritised within its aid budget by reaffirming its commitment to doubling it to £11.6 billion (€13 billion) over the next five years despite recent substantial cuts to its overall overseas aid. However, it does not mention—although this is an obvious next step—the idea that donor governments like the UK could offer the World Bank and its peers more cash in tandem with enhanced ambition on climate action.

France has already floated this idea in the context of the European Investment Bank. If a dozen or so developed country governments came together to make such an offer before COP26, developing countries would have a much better range of funding options for sustainable prosperity.

 

TIME FOR ACTION

The UK’s COP26 Presidency is understandably focused on the process of aligning all public banks with the Paris Agreement. It asks for “clear methodologies and implementation plans for … aligning [portfolios] with the goals of the Paris Agreement”. This is a diplomatic way of saying we are five years on from the Paris Agreement and want to see target dates and action plans for real Paris Agreement alignment at your banks. Get a move on.

The reference to “portfolios” is no accident—the current process for MDB Paris alignment is far too focused on individual projects, missing the bigger picture of how these organisations are (or are not) aligning their organisational strategies with Paris. And the national public banks, particularly those in Asia, will be central to financing the climate transition.

Climate finance is not the UK’s only area of public finance leadership. The government committed to “ending taxpayer support for fossil fuel projects overseas” through export finance and development aid. As part of a wider strategy to green public finances around the world before COP26 the UK can now influence other governments to follow their lead by decarbonising export finance.

 

CLIMATE IMPACT

Now more than ever is the time for international solidarity around the growing physical impacts of climate change. In 2020, Hurricane Amphan alone cost more than $13 billion in insured losses in India, Bangladesh and Sri Lanka. Discussions on adaptation, loss and damage increasingly have the potential to make or break the success of international negotiations. Governments need to face up to the substantial amount of financing needed, including residual costs that can never be met by private finance alone.

Finance is critical to meeting the goals of the Paris Agreement. With private finance efforts for COP26 well underway and COP26 Presidency climate finance priorities clear, there is time in the coming months for national governments to rise to the necessary level of ambition in public financing as well. The UK’s event in March will fire the starting pistol for a race to the top. Governments should also look to put their own affairs in order, making sure that public finances are aligned with Paris both at home and internationally.


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