Ajay Banga had better walk the talk on climate finance
4 min read . Updated: 16 Mar 2023, 11:28 PM IST
PremiumThe developed world has done little to fill the financing gap or ease the other challenges that developing countries face in achieving the outsized targets they are expected to meet.
Hectares of forests are on fire at any given time. Trillions of tonnes of glacial ice are melting. Temperatures are rising. In alternating tragedies, droughts and flooding are taking lives." This apocalyptic vision of mother earth in a state of violent disquiet is of Ajay Banga, recently named the World Bank’s president designate after David Malpass succumbed to a faux pas on climate change. However, once Banga takes over the reins, he will soon realize that climate finance is in an even more portentous state.
Despite emitting a tiny fraction of carbon per capita compared to advanced economies, emerging and developing economies (EMDEs) like India are being exhorted by developed countries to make a gigantic, once-in-centuries transition to clean energy and achieve carbon neutrality by 2070 while simultaneously improving the living standards of a rapidly growing but poor populace. Besides high-minded platitudes and devious attempts to use ‘moral suasion’, developed economies have done little to incentivize EMDEs to make the leap. To the contrary, the US has consistently refused to commit to hard emission targets, torpedoed the Kyoto Protocol and resisted the creation of a carbon market that would enable EMDEs fund their progress. In fact, in moments of unguarded candour, leaders like Boris Johnson have admitted that advanced economies are in no position to fund the climate goals of EMDEs.
The result of this abyss between intent and action of advanced economies is that EMDEs face a financing challenges on multiple dimensions. A report by the IEA (Financing Clean Energy Transitions in Emerging Market and Developing Economies) highlights them in great detail. One, under the Sustainable Development Scenario (SDS) where all countries have universal energy access by 2030 and advanced economies achieve net-zero by 2050, China by 2060 and EMDEs by 2070, EMDEs will need $500 billion in climate funding over 2026-2030. Under a net-zero scenario where the world achieves carbon neutrality by 2050, this amount will be $1 trillion. Not only is the burden on EMDEs onerous, it is also inequitable. They are expected to account for 40% of emission reductions and climate investment, but possess only 10% of global financial assets. EMDEs have been able to rustle up only $80 billion in climate investments in 2018. India has punched much above its weight, investing $50 billion in clean energy between 2016 and 2020, but still needs $175 billion between 2026 and 2030. India has also gone beyond its abilities in clean power generation, investing $10 billion between 2016 and 2020 but requires $45 billion more between 2026 and 2030.
Unlike advanced economies, EMDEs have been forced to fund these investments from public sources, putting undue pressure on their already stretched state finances. Foreign and private capital has contributed to only a fourth of their investments. In India’s case, this number is even lower at 5%. In contrast, advanced economies have harnessed $310 billion in green loans/bonds compared to less than $50 billion by EMDEs.
Not only do EMDEs face an inequitable funding burden with limited access to private capital, they also face much higher capital costs, which make most energy transition projects unviable. According to the IEA, the cost of capital for energy-transition projects in EMDEs is 700-1,500 basis points more than in advanced economies. For India, the cost of equity is around 15% and cost of debt around 9% for green energy projects. High capital costs dramatically reduce the number of green projects that EMDEs can fund viably and slows down their energy transition.
In the context of structural inequalities that advanced economies have imposed on EMDEs, the role of the World Bank has been less than stellar both in scope and scale. According to the IEA, agencies like the World Bank have been extremely risk averse and have limited their support to projects with expected loan losses of less than 1.5%. Of its total disbursements of $115 billion, the World Bank has devoted a measly $32 billion to climate finance. These funds have also been poorly allocated. The bulk of them ($26.2 billion) have been given to governments and only $4.4 billion has been deployed via the private sector. The World Bank’s International Finance Corporation can surely do better. Also, the Multilateral Investment Guarantee Agency (MIGA) has been heavily underused, with only $1.1 billion covered. In other words, the World Bank has neither mitigated funding gaps for EMDEs, nor nudged private capital towards their climate projects, nor even made any serious effort to reduce capital costs for EMDEs with credit guarantees. This is the primary challenge that Banga as its incoming president should tackle.
In a light-hearted conversation with Stanford MBA students in 2014, Banga had said that one of his most important career learnings was to take risks. If he wants to help ameliorate the apocalypse he foresees for the planet, he will have to take much more risk than the World Bank has been taking and remove structural funding inequities by using the MIGA and IFC more aggressively to encourage more private-sector participation and reduce the cost of capital for EMDEs.
If he succeeds in shaking up the lethargy of the World Bank on climate finance, he will probably receive a red-carpet welcome the next time he is in New Delhi, instead of the red-tape welcome he once complained about receiving in the country.
Diva Jain is a director at Arrjavv who researches and writes on behavioural finance and economics.
