Hectares of forests catch fire at any time. Trillions of tons of glacial ice is melting. The temperature is rising. In alternating tragedies, drought and flood are killing lives.” This apocalyptic vision of Mother Earth in a state of violent disquiet is from Ajay Banga, who recently fell victim to a misstep on climate change by David Malpass. Was named President of the World Bank. However, after Banga took over the reins, he would soon realize that climate finance was in an even more dire straits.
Despite emitting a tiny fraction of per capita carbon compared to advanced economies, emerging and developing economies (EMDEs) like India are expected by developed countries to make a huge, once-in-a-century transition to clean energy and reach carbon neutrality by 2070. are encouraged to receive. as well as improving the standard of living of the rapidly growing but poor population. Apart from high pitched talk and devious attempts to use ‘moral pressure’, developed economies have done little to encourage EMDE to take the leap. In contrast, the US has consistently refused to commit to tougher emissions targets, torpedoed the Kyoto Protocol and resisted the creation of a carbon market that would enable EMDEs to fund their progress. Indeed, in moments of unflinching candor, leaders such as Boris Johnson have admitted that advanced economies are in no position to finance EMDE’s climate targets.
The result of this gulf between the intention and action of advanced economies is that EMDEs face financial challenges on several dimensions. A report by IEA (Financing the clean energy transition in emerging market and developing economies) outlines 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 EMDE by 2070, climate finance to EMDE by 2026-2030 $500 billion would be needed. Under a net-zero scenario where the world achieves carbon neutrality by 2050, this amount would be $1 trillion. The burden on EMDE is not only heavy, it is also unequal. They are expected to account for 40% of emissions reductions and climate investment, but hold only 10% of global financial assets. EMDE has only been able to access $80 billion in climate investment in 2018. India has punched well above its weight by investing $50 billion in clean energy between 2016 and 2020, but still needs $175 billion between 2026 and 2030. India has also exceeded its potential in clean electricity generation, investing $10 billion between 2016 and 2020 but needing $45 billion more between 2026 and 2030.
Unlike advanced economies, EMDEs have been forced to finance these investments from public sources, putting undue pressure on their already stretched state finances. Foreign and private capital has contributed only a quarter of their investments. In the case of India, this number is even lower at 5%. In contrast, advanced economies have used $310 billion in green loans/bonds, compared to less than $50 billion by EMDE.
EMDEs not only face a disproportionate funding burden with limited access to private capital, but they also face very high capital costs, which render 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 higher than in advanced economies. For India, the cost of equity for green energy projects is about 15% and the cost of debt is about 9%. High capital costs dramatically reduce the number of green projects that EMDEs can feasibly finance and slow their energy transition.
In the context of the structural disparities that advanced economies have imposed on EMDEs, the World Bank’s role has been less than stellar in both scope and scale. According to the IEA, agencies such as the World Bank have been highly risk averse and have limited their support to projects with an expected loan loss of less than 1.5%. The World Bank has dedicated only $32 billion to climate finance out of its total disbursement of $115 billion. This amount is also poorly allocated. Most of that ($26.2 billion) has been given to governments and only $4.4 billion has been invested through the private sector. The International Finance Corporation of the World Bank can certainly do better. Also, the Multilateral Investment Guarantee Agency (MIGA) has been heavily utilised, involving only $1.1 billion. In other words, the World Bank has neither bridged the funding gap for EMDEs, nor reduced private capital for their climate projects, nor reduced capital costs for EMDEs with credit guarantees. made any serious effort. This is the primary challenge Banga must tackle as his incoming president.
In a light-hearted conversation with Stanford MBA students in 2014, Banga said that risk-taking was one of the most important learnings in his career. If he wants to help ameliorate the apocalypse he sees for the planet, he will have to take on far more risks than the World Bank and more aggressively encourage MIGA and the IFC to encourage more private sector participation. This will address structural wealth disparities and reduce the cost of capital for EMDE.
If he succeeds in overcoming the World Bank’s lethargy on climate finance, the next time he is in New Delhi, he will probably receive a red-carpet welcome rather than the red-tapism he complained of receiving once in the country. What was it?
Diva Jain is a director at Arjav who researches and writes on behavioral finance and economics.
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