Green Finance | The Road from Billions to Trillions

Published on: 30/06/22

By: Ishac Diwan, 

This paper is coauthored with Homi Kharas (Brookings Institution). It is a longer version of a chapter in a collective book edited by Lili Yan Ing and Dani Rodrik for the Indonesian G20 Presidency.

Photo by <a href="">Hu Chen</a> on <a href="">Unsplash</a>

Costs of green finance

The numbers associated with green finance are often strikingly large, but the incremental costs, net of associated co-benefits, are far smaller and could even be negative. Green finance is not costly, in the traditional sense, but shifts costs from the future to the present. In this report, we propose ways for the G20 to make this cost both more certain and supportable for developing countries.

options for the G20

The G20 should enhance green finance along two parallel tracks: a short-term track that underlines the urgency of the situation and the need to accelerate now, and a medium-term track that recognises that green finance must be sustained over decades and therefore requires reform in the international financial architecture.

There are many promising evolving innovations in green finance, some of which are highlighted in this note. At this stage, we recommend that the G20 develop a process for advancing green finance that is credible and consistent with the scale and urgency of the challenge.

On the short-term track, the G20 could:

  • Establish a digital database of all cross-border activities, supported by its members, initially with a focus on public finance but with the potential to expand to capture private finance later.
  • Monitor progress towards the $100 billion climate finance pledge in the G20 Sustainable Finance Working Group annual report and bring to leaders’ attention any gaps, including in disaggregated areas such as adaptation.
  • Encourage dialogue amongst advanced economy (AE) members on a sub-target for additional concessional finance for climate by 2025.
  • Motivate expanded multilateral finance to permit more ambitious implementation of the nationally determined contributions (NDCs) by low- and middle-income countries.
  • Reallocate, on a voluntary basis, surplus special drawing rights (SDRs) in a way that permits countries to expand fiscal space for NDC implementation in a leveraged way.
  • Encourage a review of climate-related official development assistance allocations, in their own agencies and in multilateral agencies, to take into account the needs established in NDCs and the ability to prepare and execute quality green public activities.

On the medium-term track of reforming the international financial architecture, the G20 could:

  • Encourage multilateral development banks (MDBs) to scale up their contribution to NDCs, including by helping to scale up country-owned, country-led green country platforms.
  • Establish a long-term, forward-looking strategy of MDB capital adequacy, and encourage innovations to free up capital, such as backstop credit facilities, guarantees to reduce single borrower risks, and asset sales, along with a process for considering paid-in capital increments.
  • Review principles for debt restructurings such that official and mobilised private green finance are not bound by the same comparable treatment rules as other forms of debt.
  • Assess ways of de-risking privately mobilised green finance, including through the use of guarantees.
  • Review regular issuance of SDRs to expand the fiscal space for NDC implementation.
  • Review the potential for expanding and integrating carbon offset markets.