In a new policy Note, Hafez Ghanem, FDL distinguished fellow, makes the case for establishing a new "Green bank", which would have the legitimacy, the size and the financial instruments to meet those challenges.
The world has reached a climate crossroads and revolution in climate finance is long overdue. The latest Intergovernmental Panel on Climate Change (IPCC) report made it crystal clear: “The choices and actions implemented in this decade [ie by 2030] will have impacts now and for thousands of years”.
Countries of the Global South (outside of China) will need to spend more than one trillion dollars a year by 2025, and more than two trillion dollars a year by 2030 on adaptation and mitigation., according to the Songwe-Stern report.
How can the Green Bank go beyond "business as usual"?
This notes provides eight reasons to support the green the proposed Green Bank.
Urgency
- There needs to be a true revolution in climate finance. A new institution would send a strong signal that the international community is ready to tackle the huge and urgent needs for climate action.
Institution and politics
- Bretton Woods Institutions simply to not have the mandate, nor the credibility to undertake such a drastic effort.
- The Green Bank would provide a platform for governments, private sector and civil society to dialogue and work together, hence it would mobilize strong political support across the North and South to advance the climate agenda;
- Commitments by international organizations on climate change matters may be prone to shift to reflect political changes in their host country, the Green Bank’s governance structure would protect it from such changes;
- By providing a strong voice for countries of the South in its governance, and by separating funding for climate--and thus protecting general development funding by MDBs--it will ensure the South’s buy-in and full implementation of needed reforms, programs and projects.
The financial case for a green bank
- The essential challenge which faces recent proposals, including for instance the proposed “Mitigation Trust”, is the ability to mobilize the private capital needed to reach sufficient scale. Private sector participation in Green Bank’s capital means that less will be required from governments, and the presence of private sector representatives in governance structure should help inform decisions to attract private investments in countries of the Global South;
- The Green Bank could be the instrument for the international community to respond to the Bridgetown Initiative and the promise made at COP27 by making use of innovative financing like green bonds, interest rate buy-downs, carbon credits, and green taxes;
- Unlike most MDBs, Green Bank lending would not require a sovereign guarantee and thus would not add to sovereign debt.
The geopolitical rationale:
In the present geopolitical climate of superpower competition, an institution focused on a single issue that is important for all humanity could be a useful platform for international cooperation. Climate change is a challenge for all of humanity East and West, North and South. It is a possible area where all countries can put their rivalries aside and focus on cooperating to save human civilization. Green Bank could be a platform for cooperation between rival powers, and thus make a small contribution to better understanding and a reduction of tensions.
Questions and objections:
There are many natural objections and questions to this proposal:
- "There are too many climate funds": the Green Bank would be a drastically different institution than all existing climate funds, sometime subsuming their function (and thus recommending to close some of them).
- "It would take too long to set up a new institution": this is not necessarily true: starting with a coalition of the willing and not waiting for global consensus could be feasible rapidly.
- "It separates development from climate": no, as the idea behind Green Bank is to protect development finance while mobilizing additional resources for climate. It is not to separate climate and development work.
- "The World Bank should take this role." the Green Bank would work closely with Bretton Woods Institutions and regional MDBs, but its functions would remain different, with a primary, and indeed single focus on mobilising finance for climate. The World Bank would continue taking the lead on development work and coordinating the work of other institutions— including Green Bank—through its support to country platforms. There is a possible option to create the Green Bank within the World Bank, which would allow to rely on its staff and expertise. In this case, the Green Bank would still need to be institutionally protected from poltiical meddling, and to have the private sector and CSOs in its board.
Hafez Ghanem is a distinguished fellow at the Finance for Development Lab.
He is a development expert with more than forty years’ experience (including 31 years at the World Bank) in policy analysis, project formulation and supervision, and management of multinational institutions. He has worked in over 40 countries in Africa, Europe and Central Asia, Middle East and North Africa, and South East Asia. He is currently a senior fellow at the Policy Center for the New South in Morocco, and a non-Resident Senior Fellow at the Brookings Institution in Washington DC.