Do we build houses for the poorest or a wall to withstand the sea? Do we invest millions in wind turbines for green energy or in programs to guarantee the food supply?
Do we help the residents of a flooded province recover or do we need our money to pay the interest to the World Bank?
Yes and yes, says Emmanuel Macron. The French president held an international conference on climate finance in Paris on Thursday and Friday. Forty heads of government came to the French capital, including many African leaders, plus the top of the United Nations, European Commission and global financial institutions, and many more stakeholders. Minister Sigrid Kaag (Finance, D66) was in Paris for the Netherlands. She spoke there with, among others, UN Secretary-General Antonio Guterres and philanthropist Melinda Gates.
“No country,” Macron said at the opening of the Summit for a New Global Financial Pact on Thursday, “should have to choose between fighting poverty and tackling climate change.”
Yes and yes is beautiful. But who is going to pay for all this? How will developing countries and countries with so-called emerging markets raise the $ 1,000 billion that economists say they need to be somewhat ready for the climate crisis around 2030?
Even rich countries are already struggling with the transition to a more sustainable society now that interest rates are rising, corona debts are weighing on budgets and the war in Ukraine continues.
And above all: are the World Bank and the International Monetary Fund (IMF), which were set up almost eighty years ago to provide financial assistance to countries in need, still the appropriate institutions in the current climate crisis?
World leaders, politicians, NGOs and other stakeholders discussed these questions during two days in and around the Palais Brongniart. A symbolic location, because the Paris stock exchange was once located here, on the Place de la Bourse.
Nice bright spot
Even though the summit – an idea of Macron after the disappointing climate summit COP27 in Egypt at the end of 2022 – had no official status and participating countries could not enforce formal decisions, the French president had formulated a number of ambitions in advance.
His goals: to boost crisis financing for low-income countries. Alleviate their debt burden. Reshaping post-war financial systems. Free up funds to tackle climate change.
(And somewhat personally for President Macron: giving France’s geopolitical position some shine again, by showing understanding for the difficult financial position of African countries in particular)
Did that work? A little.
A throbbing closing statement was missing, Friday afternoon. But we will fulfill a fourteen-year-old promise, host Macron said. Rich countries are now really going to support the climate policy of poor countries with USD 100 billion per year.
The rich countries had already agreed on this in 2009 – as a scant bright spot of the climate summit in Copenhagen. But the promise to pay from 2020 had not yet been fulfilled. There will also be a fund for biodiversity and the protection of forests.
Debt restructuring poor countries
Furthermore, the IMF announced that the fund has invested USD 100 billion in so-called special drawing rights (special drawing rights, SDRs) available to poor countries. IMF director Kristalina Georgieva reported this in Paris on Thursday. The US, the largest shareholder of the IMF, still has to agree.
SDRs are the ‘currency’ used by the IMF for payments with its member countries. Rich countries agreed in 2021 to transfer their unused rights to poorer countries via the IMF. The fund can lend developing countries money at a low interest rate.
World leaders also agreed that multilateral development banks such as the World Bank would release USD 200 billion for poor countries. The World Bank has been under political pressure for some time to significantly increase the financing of climate policy.
The World Bank also reported on Thursday that it will be more lenient for countries hit by natural disasters. They then do not have to pay interest on new financing for a while. But old agreements will not be changed.
An agreement was also reached in Paris on the debt restructuring of some poor countries. Zambia, which has a USD 6.3 billion overdraft, will have nothing to repay for the next three years, but will only have to pay interest. Subsequently, a twenty-year remediation program was outlined.
At the summit in Paris, an agreement on Zambia was eagerly awaited. This is important for other countries with large debts such as Ethiopia, Ghana and Sri Lanka. Zambia’s largest creditor is China; the Export-Import Bank of China alone has $4.1 billion outstanding with the Zambian state, according to Reuters news agency.
China was never keen on canceling or deferring debt. The country wanted the World Bank and the IMF to also take care of part of the debt restructuring of poor countries, but the rich Western countries did not feel that way.
Old financial architecture
The discussion about the debt restructuring of poor countries touches the heart of the global financial architecture that was agreed in 1944 in the American Bretton Woods. In addition to the peg of the dollar to other national currencies and the gold price, which was abandoned in the early 1970s, the largest Western countries agreed at the end of the Second World War that two institutions would be set up to help countries in need of money.
The IMF is for acute aid, for rapid intervention in the event of a financial crisis. And the World Bank – and later other development banks – provide financing to emerging countries.
However, there is increasing criticism of the decision-making at both institutes. Developing countries and emerging markets – also referred to as the ‘Global South’ – feel that they cannot participate sufficiently in decision-making within the IMF and the World Bank.
For example, important decisions within the IMF must be taken with at least 85 percent of the vote. Consider that the US has more than 15 percent of the vote and then it becomes clear that without US approval you cannot set up major funding for climate plans.
For private parties, the IMF and World Bank are currently still the most important ‘hallmark’ for legitimate, reliable (climate) projects. Put very bluntly: if the World Bank or IMF support a wind farm, there is less chance that development aid will disappear into the pockets of a corrupt official. In Paris, alternative ways of assessing the reliability of climate projects were discussed.
Pollutant tax
Outside the convention center, climate activists called for a key point they make at every environmental summit: make the polluter pay.
Macron and his guests have not made such agreements. The rich with their private jets, the frequent fliers, the shipowners with their fuel oil container ships – there will be no global tax on fossil fuels, wealth, financial transactions, aviation or shipping, among other things.
Macron was long thought to be a CO2levy for international shipping, but it is not (yet) coming. Climate activists believe that shipowners are doing too little to reduce their emissions. Shipping accounts for approximately 3 percent of global greenhouse gas emissions. Many ships still run on fossil fuels.
In July, the CO2levy on the agenda of the International Maritime Organization, the UN agency that regulates shipping. Some experts estimate that a tax on shipping alone could raise $100 billion a year. That should be paid into a climate fund for countries like the Marshall Islands that are in danger of being flooded by rising sea levels.
For example, Macron’s summit was mainly a preparation for the International Maritime Organization congress, and for other international summits that will take place after the summer. To be continued – including at the G20 in New Delhi in September and COP28 in Dubai in December.
A version of this article also appeared in the newspaper of June 24, 2023.