When it comes to tackling the climate crisis, the world has reached a perilous juncture. But as global finance and development leaders gather for the World Bank/IMF spring meetings in Washington D.C. this week, it may have also arrived at a new moment of opportunity.
Today, poorer nations pay the highest human cost of climate change. They also pay the highest price for capital to shield themselves from it and prosper from the solutions. Take solar power: in Ghana the rate of borrowing can be up to five times that in Germany, rendering the cheapest form of electricity out of reach to those that need it most.
To decarbonise by 2050 and limit global warming to 1.5 degrees Celsius above pre-industrial times, poorer states responsible for much of the future growth in emissions urgently need financial innovation and support. Developing countries excluding China require approximately $2 trillion annually by 2030, as per the Finance for Climate Action report. Yet developed states have struggled to stick to a long-held pledge to supply $100 billion a year.
Multilateral Development Banks (MDBs) like the World Bank can help. But current arrangements to get climate finance from developed to developing states are inefficient, insufficient and unfair. There is a need for a new and radical approach. The best way to do so is via a new scheme launched at November’s COP27 event called “1% for 1.5C”.
The idea is for MDBs to extend concessional finance terms to middle-income, as well as low-income countries. To pay for renewable energy and essential infrastructure that can help them deal with the increasing risks of climate change, countries like Pakistan, Nigeria and Barbados would be able to borrow at a 1% interest rate, with a 10-year grace period during which they wouldn’t have to pay anything back, and then a 20-year repayment phase.
This kind of soft loan would obviously incur a cost between the artificially low 1% rate the countries pay and their market cost of finance, which can exceed 10%. The difference could be subsidized in part through the as-yet unpaid portion of the promised $100 billion climate finance pledge, estimated conservatively at $20 billion annually.
That may not sound much. But the power of concessional finance lies in its potential to leverage a smaller amount of public cash with a much larger level of private sector finance via the multitrillion-dollar balance sheets of the banks and other groups that constitute the Glasgow Financial Alliance for Net Zero (GFANZ). Harnessing $20 billion of MDB cash to reduce the cost of loans to poorer states from 10% to 1% could theoretically enable private financial institutions to support $200 billion of lending. The 1% fee would still cover operational costs of the banks such as administrative and essential technical assistance expenses, while the scheme’s structure offers banks a long-term partnership via the multi-decade repayment period.
This 1% for 1.5C plan would reduce the cost of capital at a time when the global economy faces powerful economic headwinds. And it helps minimize developing countries’ indebtedness, in comparison to the current practice. Without those debt loads in check, countries cannot invest in their resilience.
It is essential to extend the 1% for 1.5C proposal to get affordable capital to the millions living in poverty within middle-income countries. Collectively these countries are home to 75% of the world’s population, and more than 60% of its poor. Many of these countries represent a “missing middle”: not considered “poor” under current international development definitions, but still lacking adequate market access at preferable rates.
The scheme would also unlock concessional funds for adaptation and resilience projects, which relative to the mitigation of emissions remains the Cinderella of climate finance, attracting less than 10% of global climate finance. Annual adaptation needs are estimated at $160 billion to $340 billion by 2030, and $315 billion to $565 billion by 2050 – compared to current international adaptation finance flows to developing countries five to 10 times below that.
1% for 1.5C would dovetail well with the wider imperative to overhaul the way MDBs operate, exemplified by the Bridgetown Initiative. It also complements the U.N. secretary-general’s “SDG Stimulus to Deliver Agenda 2030”.
Meanwhile, it’s time to address the myth that there is not a pipeline of bankable, investable projects to attract this finance effectively. Last year, through regional forums convened across the five continents, the Race to Zero initiative helped to identify a pipeline of projects worth $120 billion with investment potential. Among these are an $800 million crop adaptation project in Egypt’s Nile Valley and Delta, and an $11 billion to $17 billion ecological restoration project in the Indus basin of Pakistan.
These are exactly the types of projects that would benefit from low interest rates on a long-term basis, would generate co-benefits for the broader economies in which they are deployed, and encourage private-sector investment in climate action. Through the 1% for 1.5C approach, the world can harness this moment to unlock climate finance in the right way to enable all developing countries to pursue low-carbon avenues to prosperity and better protect themselves against the growing impacts of climate change.
