And by ensuring that its finance moves beyond only the “do no harm principle” to one that also maximizes the climate benefit from every dollar it invests, the WBG could unleash additional transformational climate action in developing countries. That means investing in renewable energy, not fossil fuels. For example, those increased and targeted investments could help unleash the 1.5 terawatts (TW) per year of new installed wind and solar capacity that the world needs through 2030 to meet our climate goals and deliver energy access for all.
At the same time, some of the most climate-vulnerable countries aren’t eligible for MDB concessional financing; meaning they are dependent on more expensive financing to fund adaptation and address losses and damages from climate impacts. As today’s letter laments: “This is unfair and unjust – these countries have contributed little to the emissions fueling climate impacts that are causing rising adaptation needs and loss and damage costs.”
The MDBs also could reform some of their criteria so that all climate-vulnerable countries can access temporary WBG concessional financing for “external shocks” such as extreme weather events. And supporting an “adaptation carve out” at the MDBs would allow all vulnerable countries to access more concessional finance for adaptation investments.
Supporting Broader and Additional Use of Special Drawing Rights
In August 2021, the International Monetary Fund (IMF) approved a general allocation of 456.5 billion in Special Drawing Rights (SDRs) – approximately $650 billion USD – to its 190 government members, apportioned according to each country’s shareholding. This was only the fourth time the IMF has made a general allocation of SDRs. As an international reserve asset, SDRs can provide much-needed financial liquidity for countries facing economic challenges due to the compounding climate, debt, energy, food, and public health crises and other acute challenges. While many rich countries do not need their SDRs and they would go unused without action, allocations of SDRs help developing countries provide low-cost finance to meet urgent needs, including those caused by climate-fueled fueled disasters. In the latest round of SDRs issuance, over 99 developing countries used their SDR allocation. In addition, several developed countries committed to re-channel their unused SDR allocation to two IMF trust funds – the Poverty Reduction and Growth Trust and the Resilience and Sustainability Trust – that will use these SDRs to provide low-cost financing to poorer countries that need it.
While the U.S. continues to support efforts to re-channel a portion of the U.S. allocation of SDRs issued in 2021, they should also:
Mobilizing these actions around SDRs could help provide developing countries with relatively low-cost financing that they could use for greater climate action.
Using innovative tools such as SDR-denominated bonds would help countries – like the United States and several European countries – better utilize their SDR allocations as they argue they currently face legal hurdles to re-channeling their SDRs to MDBs. Such an approach would help the World Bank expand its lending capacity by a significant amount, without needing additional resources from the U.S. Congress.
The United States could also help developing countries tap into much lower cost finance than they can secure on the global market by supporting a new issuance of SDRs. Another issuance of SDRs would create liquidity support of $212 billion for emerging market and developing countries, with $21 billion of this going to the lowest income countries.
Championing Debt Reforms for Climate Action
A growing number of developing countries are struggling with unsustainable sovereign debt which is a result of long-standing inequities in the global financial and economic system, now exacerbated by climate disasters. This challenge is very real as the V20 – a group of 58 of the most climate vulnerable countries in the world – will be required to make almost $435.8 billion in debt payments to various creditors between 2022-2028 (see figure).