“Global Financial Architecture” reform must see rich countries pay their fair share for fossil fuel phase out.
As communities face rising debts and rising seas, pressure from people-powered movements has put global financial architecture reform on the multilateral agenda for the first time in decades. This is desperately needed, as our current international monetary, trade, tax, and debt rules are limiting how much funding is available for climate action.
World Bank loans are not how we’ll fund a globally just energy transition
As communities face rising debts and rising seas, pressure from people-powered movements has put global financial architecture reform on the multilateral agenda for the first time in decades. This is desperately needed, as our current international monetary, trade, tax, and debt rules are limiting how much funding is available for climate action. They are systematically skewed towards fossil expansion, private profits, and a few wealthy countries in the Global North. Our current rules and institutions drive a net $2 trillion a year outflow from lower income countries to their high income peers.
This means that as government shareholders head to Marrakech this week for the World Bank Group (WBG) Annual Meetings, the stakes are higher than ever.
Wealthy governments are proposing shallow WBG reforms focused on growing the institution’s lending capacity, while ignoring calls for more substantive changes across the global financial architecture system that are needed. Besides letting the wealthiest governments off the hook for their climate responsibilities, this World-Bank-as-the-solution approach risks just expanding WBG’s current record of driving fossil fuels, unfair debts, and inequality.
Oil Change International data shows WBG has financed at least USD $17 billion in fossil fuels since the Paris Agreement, including 930 million last year. This is only the tip of the iceberg, as it does not include ‘indirect’ support like its heavy-handed development policy finance that has a record of locking recipient countries into expensive and volatile fossil fuel contracts and subsidy regimes.
A more just and equitable financial system that is needed to enable a fossil fuel phase-out is far from a guaranteed outcome of the new push for financial architecture reform, but it’s still possible to win. Here’s what would be needed instead to build real momentum on this agenda at COP28 and beyond.
How did we get here? From Bridgetown to the Paris Summit for a New Global Financial Pact
Last year, civil society organizing for just COVID-19 recovery and climate justice helped secure the pivotal establishment of the loss and damage fund at COP27, as well as widespread attention for the Bridgetown Initiative, a package of financial reforms proposed by Barbadian Prime Minister Mia Mottley.
In further response to this growing pressure, this past June a patchwork of 40 heads of state gathered in Paris for a two-day summit on sovereign debt and climate finance, to supposedly “change the way global finance is done.” As the summit opened there were speeches acknowledging the failure of the current financial system to deliver climate finance on the scale required, and on the need for deep transformation to address the twin challenges of the climate crisis and inequality.
But when it came to concrete action, most of the official concluding statement and other prominent proposals were reforms and small tweaks. There was little mention of measures that would actually increase the public finance available for climate action or inequality.
Instead, the proposals centered on the false assumption that public finance is so scarce that its central role should be incentivizing the private sector to build what is needed. This approach subsidizes private profits while the public shoulders the risks, and it has also failed over decades to leverage the promised private investment to true development and climate goods. Public finance can play many more roles — from directly building key enabling public infrastructure (like public transit and renewable-ready grids!) and environmental justice priorities (like the distributed renewable energy needed to reach universal energy access!) and redirecting profits towards public goods (through under-used mechanisms like cross-subsidization and strict green bonds!). We need it to do all of these to win.
It is worth noting that this tepid and private-sector led approach was not unanimous. There were bolder interventions made by some of the Global South heads of state attending, notably Brazilian President Lula da Silva, Colombian President Gustavo Petro, and Kenyan President William Ruto among others, calling out the inequities and imperialist nature of our global financial system, calling for comprehensive debt cancellation, the creation of a global green bank, and a new Marshall Plan among other solutions.
How governments can build momentum towards fair rules and fair shares
The good news is that as we head into the last four months of 2023, questions of how to reform global financial flows to pay for climate action are still poised to be central in international climate and diplomatic fora.
One key outcome of the Paris Summit was the establishment of an 18-month roadmap for action on global financial architecture reform, which highlights key convenings from the upcoming WBG Annual Meetings to COP28 to the United Nations Financing for Development Forum where these debates will continue to take place.
These are all opportunities to build towards the reforms needed to fund a globally fair fossil fuel phaseout. At its simplest, there are two closely related components of global financial architecture reform that we need to see: changes to financial architecture governance to be democratic and transparent rather than disproportionately controlled by the Global North, and for the wealthy countries to pay their fair share for the crises we face. On the former, civil society organizing and new alliances have helped create promising examples with momentum, including resolutions towards a United Nations Convention on Tax and parallel efforts to wrest debt workout mechanisms from creditor-dominated forums like the OECD. But they risk stalling unless we make progress on the latter: meaningful concessions from wealthy countries that public climate reparations are both needed and viable.
Ahead of the Paris Finance Summit over 150 economists and public policy experts released a public letter pushed back on wealthy governments’ argument that they cannot afford to pay their fair share for fossil fuel phase out, outlining how trillions in public dollars could be redirected to fix crises abroad and at home. Wealthy country leaders could announce first steps in these directions to break the gridlock, while starting to raise some of the public funds needed:
End fossil fuel finance and make polluters pay: Ending fossil fuel handouts and making them pay their fair share in taxes in high-income G20 countries alone would raise about $700 billion a year. This would be a win-win for the climate, both by turning off the taps for new fossil fuel expansion and freeing up public funding to scale up renewable energy and a just transition. If a few key laggard countries including Japan, Germany, Italy, and the United States keep their overdue promise to end their international support for fossil fuels under the Clean Energy Transition Partnership, it will go a long way to cementing fossil free public finance as a global norm.
Cancel illegitimate Global South Debts: While huge sums of money are needed in the Global South to transform economies to be low carbon and climate resilient, Global South governments are drowning under unfair debts. Two first steps for Global North leaders are to unconditionally cancel public external debt for at least the next four years for all lower-income countries (estimated at $300 billion a year), and to support rather than block the development of a new multilateral mechanism for sovereign debt cancellation and workout under the United Nations.
Tax the Rich: Progressive taxes on extreme wealth starting at 2% would raise $2.5 to 3.6 trillion a year, and related proposals to crack down on tax dodging would significantly augment this. Global North leaders can show they are serious by starting with an initial “1.5% for 1.5°C” tax on extreme wealth and dedicating this to the new ‘loss and damage’ fund.
As the open letter highlights, together, these modest proposals add up to at least $3.5 trillion a year — this would be enough to close the universal energy access gap ($34 billion), fill the ‘floor’ of the ‘loss and damage’ fund ($400 billion per year), meet the overdue climate finance target fully with public grants ($100 billion per year), and cover emergency UN humanitarian appeals ($52 billion per year) with plenty to spare.
Starting to get even some of this money flowing will ease the climate and debt crises communities all around the world are facing, and build much-needed trust towards rewriting our financial rules for good.