Economic Research Forum (ERF)

The World Bank should become the ‘IMF of climate’

1068
Climate stability, like global macrofinancial stability, is a public good. Yet, while the International Monetary Fund has an operational mandate to preserve global macrofinancial stability, there is no comparable pairing of the internationally agreed operational mandate on climate stability with a global institution. As this Devex column explains, the World Bank could be that very institution.

In a nutshell

Regular IMF monitoring of economies and provision of policy advice allow it to identify weaknesses that could lead to financial and economic instability; the World Bank could play the same monitoring and advisory role for international climate change cooperation.

The World Bank is in a unique position to document individual countries’ environmental policies through its annual consultations with members; it could produce an annual update on ’national climate action’ in consultation with national authorities.

A renewed mission for the World Bank would bridge the gap between the world of development finance and the world of international climate policy to save humanity from the existential threat posed by climate change.

The latest Intergovernmental Panel on Climate Change report raises grave concerns that countries are falling behind their commitments to cut greenhouse gas emissions. The window to make required changes is worrisomely narrowing.

Climate stability, like global macrofinancial stability, is a public good. Yet, while the International Monetary Fund (IMF) has an operational mandate to preserve global macrofinancial stability, the United Nations Framework Convention on Climate Change (UNFCCC) only sets out the basic legal framework and principles for international climate change cooperation. It doesn’t pair the operational mandate on climate stability with a global institution. The World Bank could be that very institution.

The United Nations, through the Conference of the Parties, has nurtured the historical Paris Agreement on climate change adopted in 2015, covering climate change mitigation, adaptation and finance. Rather than imposing top-down targets, the bottom-up structure has allowed countries to choose nationally determined contributions (NDCs). The Paris Agreement also has a provision for a ‘global stocktake’ every five years. The UN now needs to designate a ‘super implementer’ working closely with the secretariat of the UNFCCC.

 

Why the World Bank?

Rather than waiting for another desperate warning from the Intergovernmental Panel on Climate Change (IPCC), the UN should entrust the World Bank Group, an intergovernmental organisation that is part of the UN system, with a clear mandate to monitor countries’ commitment to cut greenhouse gas emissions (GHGs) and accelerate the energy transition of the global economy.

Critics would argue that the bank’s governance structure weights donor countries’ control proportionally, which is fundamentally different from that of the UN. Yet, that move to entrust the bank alongside the UNFCCC secretariat would give further impetus to the bank’s shareholders to boost lending towards climate stability. This move would combine the bottom-up approach of the Paris Agreement towards NDCs championed by the UN with the world of development finance championed by the World Bank.

In addition to its obvious financing capacity, the bank is well equipped to take on a renewed mission to achieve climate stability. First, the bank has a universal membership, which spans globally – its original loan was to France following the devastation of World War II. That universal membership could come in handy to help monitor the NDCs to curb GHGs.

Second, the bank has built vast expertise in policies, knowledge and investments spanning all climate-relevant sectors like energy, transport, water, agriculture, construction, manufacturing, mining… as well as social sectors. It is helping some member countries to design their national plans to combat climate change including by producing new country climate diagnostics.

Third, the bank has also built expertise through private sector investment directly through the International Financial Corporation and indirectly through advising governments on policies to foster and catalyse private sector investments. 

The IMF mandate provides a template for redefining the bank’s mandate. In other words, the bank should become the ‘IMF of climate’. The template provided by article IV of the IMF’s Articles of Agreements is particularly relevant for the bank’s proposed new mission. According to article IV, IMF’s member countries have an obligation ‘to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates.’

Specifically, members should avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members. In practice, IMF’s regular monitoring of economies and provision of policy advice goes much beyond exchange rate issues, allowing it to identify weaknesses that could lead to financial and economic instability.

The World Bank could play the same monitoring and policy advice role for international climate change cooperation. In the context of these consultations, the bank should monitor policies towards achieving climate stability, in turn complementing the regular inventories countries submit to the UNFCCC and the review process under the Paris Agreement for implementation of NDCs.

 

Green funds and finance

Economists have put forth carbon pricing as a solution to address climate change to account for the negative externality associated with the use of fossil fuels – and in turn, shape consumers’ and investors’ behaviour. But navigating the transition is complex and attention has shifted towards distributional issues.

Evidence also suggests that citizens are not ready to pay more for energy during the transition, at least in the short run. The backlash against fuel subsidies reforms in low- and middle-income countries and against ‘carbon taxes’ in advanced countries, including the yellow vests movement in France, is telling.

The bank is well equipped to help support policies for climate stability including carbon pricing with an appropriate design of schemes to address distributional issues. More broadly, the bank’s technical expertise should be mobilised to foster the acceptability of bold climate actions with mechanisms to compensate losers within and between countries.

To do so, the World Bank should coordinate the ever-growing funds aimed at combating climate change but whose actions have become fragmented; and work closely with UN-backed funds, such as the Adaptation Fund, the Global Environment Facility and the Green Climate Fund. The bank should also strengthen its existing partnerships not only with the UN and the IMF, but also with regional development banks, bilateral aid agencies and NGOs that are actively involved in climate and green finance.

The biggest GHG emitters – the United States, China and the European Union – should show the way and commit to undergoing surveillance on their commitments to reduce GHG emissions. That would encourage other World Bank member countries to do the same. Whether or not they borrow from the bank, under that new mandate, member countries would be enjoined to collaborate with the bank on how to amend their policies and limit the effects of their climate policies on countries most directly affected, such as island nations.

The World Bank is in a unique position to document individual countries’ environmental policies through its consultations with member countries on an annual basis, just like the IMF article IV consultations. The bank could produce an annual update on ’national climate action’ in consultation with individual countries’ authorities, to share with all member countries.

 

The private sector

The World Bank could integrate its financing capacity and efforts to foster the private sector directly and indirectly in the context of these consultations. Besides carbon pricing, appropriate regulations and standards could help promote private sector solutions as well as encourage technological innovation and transfer to combat climate change.

The bank has championed the agenda to mobilise development finance to maximise finance for development. It should now focus its policy recommendations and development interventions more squarely on climate-related investments. For example, it should scale up the use of guarantees towards projects that will allow countries to ignite the necessary private sector investments needed to accelerate their transition towards renewable energies.

The bank played a key role in launching and building the world’s green bond market. Going forward, the bank should use its expertise to further green, nature and blue bond markets, as well as impact investing tailored to the investment needs of different countries to combat climate change.

 

Standards

Last and not least, to avoid ‘greenwashing’, the bank should be at the centre of introducing international standards and data disclosure to facilitate its function of climate surveillance and to help promote transparency, which has been a point of contention in the UNFCCC negotiations. The World Bank should curate climate standards under the UNFCCC, in turn providing an anchorage to monitor progress towards reducing emissions.

All in all, the proposal for a renewed mission for the World Bank that we are putting forward today should help rekindle much-needed multilateralism by bridging the gap between the world of development finance with that of international climate policy to save humanity from the existential threat posed by climate change.

This article was originally published on Devex. Read the original article.

Most read

EU climate policy: potential effects on the exports of Arab countries

The carbon border adjustment mechanism aims to ensure that Europe’s green objectives are not undermined by the relocation of production to parts of the world with less ambitious climate policies – but it could impose substantial costs on developing countries that export to the European Union. This column examines the potential impact on exporters in the Arab world – and outlines possible policy responses that could mitigate the economic damage.

Green hydrogen production and exports: could MENA countries lead the way?

The Arab region stands at the threshold of a transformative opportunity to become a global leader in green hydrogen production and exports. But as this column explains, achieving this potential will require substantial investments, robust policy frameworks and a commitment to technological innovation.

Financial development, corruption and informality in MENA

Reducing the extent of informality in the Middle East and North Africa would help to promote economic growth. This column reports evidence on how corruption and financial development influence the size of the informal economy in countries across the region. The efficiency of the financial sector in MENA economies reduces the corruption incentive for firms to seek to join and stay in the formal sector.

Freedom: the missing piece in analysis of multidimensional wellbeing

Political philosophy has long emphasised the importance of freedom in shaping a meaningful life, yet it is consistently overlooked in assessments of human wellbeing across multiple dimensions. This column focuses on the freedom to express opinions, noting that it is shaped by both formal laws and informal social dynamics, fluctuating with the changing cultural context, particularly in the age of social media. Data on public opinion in Arab countries over the past decade are revealing about how this key freedom is perceived.

Climate change threats and how the Arab countries should respond

The Arab region is highly vulnerable to extreme events caused by climate change. This column outlines the threats and explores what can be done to ward off disaster, not least moving away from the extraction of fossil fuels and taking advantage of the opportunities in renewable energy generation. This would both mitigate the potential for further environmental damage and act as a catalyst for more and better jobs, higher incomes and improved social outcomes.

Child stunting in Tunisia: an alarming rise

Child stunting in Tunisia seemed to have fallen significantly over the past two decades. But as this column reports, new analysis indicates that the positive trend has now gone dramatically into reverse. Indeed, the evidence is unequivocal: the nutritional health of the country’s youngest citizens is rapidly deteriorating and requires immediate and decisive action.

Exchange rate undervaluation: the impact on participation in world trade

Can currency undervaluation influence participation in world trade through global value chains (GVC)? This column reports new evidence on the positive impact of an undervalued real exchange rate on the involvement of a country’s firms in GVCs. Undervaluation acts as an economy-wide industrial policy, supporting the competitiveness of national exports in foreign markets vis-à-vis those of other countries.

New horizons for economic transformation in the GCC countries

The countries of the Gulf Cooperation Council (GCC) have historically relied on hydrocarbons for economic growth. As this column explains ahead of a high-level ERF policy seminar in Dubai, emerging technologies like artificial intelligence, blockchain and robotics – what some call the fourth industrial revolution – present a unique opportunity for the region to reduce its dependence on oil and make the transition to a knowledge-based economy.

Shifting public trust in governments across the Arab world

The Arab Spring, which began over a decade ago, was driven by popular distrust in governments of the region. The column reports on how public trust has shifted since then, drawing on survey data collected soon after the uprising and ten years later. The findings reveal a dynamic and often fragile landscape of trust in Arab governments from the early 2010s to the early 2020s. Growing distrust across many countries should raise concerns about future political and social instability.

Corruption in Iran: the role of oil rents

How do fluctuations in oil rents influence levels of corruption in Iran? This column reports the findings of new research, which examines the impact of increases in the country’s oil revenues on corruption, including the mechanisms through which the effects occur – higher inflation, greater public spending on the military and the weakness of democratic institutions.




LinkedIn