Economic Research Forum (ERF)

The World Bank should become the ‘IMF of climate’

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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.

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