Raising money for green transitions

Multilateral development banks have weak governance structures. Despite its limitations, the Green Climate remains the most credible agency to fund the shift to renewables.

The world is shifting to clean energy. Current geopolitics aside, renewables are becoming competitively cheaper, the threat of climate change is ever-urgent, and the business case is just too good to discount.

But this transition is easier said than done. Aside from the technical and economic challenges of alternative production and distribution, there is a human dimension.

Think of the mines, infrastructure and millions of workers currently working in non-renewable energy. Let’s take the individual level. If you have been a worker at a coal mine your entire life, which suddenly stops production for some external factors, you can be faced with a situation where your skills are no longer relevant, your geographic area has no alternative livelihood, and you don’t have the resources to move elsewhere. Now take the corporate level. There can be political opposition to the shutting down of the mine. Large corporate interests aside, the opposition could also come from trade unions and other local bodies. This can be counter-productive because the transition and the whole climate movement itself can appear tone-deaf at best and insensitive at worst. In fact, one could argue that unplanned transitions would only shift the problem to a new place. In climate circles, there is no denying the logic and need of “just transitions”. The negative impacts on workers and communities should be reduced, and the benefits should be fairly distributed. So, if it makes so much sense, why not just do it?

Answer: Money. Shifting to renewables requires planning and resources, which countries with the financial muscle are investing in. The Inflation Reduction Act of the Biden administration would pump $370 billion into climate and clean energy investments in the US. Several countries in Europe have set ambitious targets for emissions reductions. Even China has claimed that by 2025, a third of its energy needs will come from renewables.

This leaves the public sector and countries with weaker resources. Much like other challenges in emerging economies, here the need is great, access to capital is a challenge, and social safeguards are relatively weak. Finance for climate action and finance for just transitions is a key topic at the ongoing COP27 in Egypt. As the delegates discuss the source and scale of finance, the channel of this finance is also incredibly important to consider.

Take the case of South Africa where the mechanics of finance have some interesting lessons. At COP26 in Glasgow, South Africa famously convened investment worth $ 8.5 billion into its plans for just transitions; five developed countries agreed to channel $8.5 billion. Very little of this materialised. And as time went on, it became clear that almost all of this finance is loans. Worries remain that such plans will add to the country’s debt burden and leave workers behind.

In fact, several multilateral development banks (MDBs) have made clear that they will support projects for just transitions. But the limitations of these MDBs remain. To paraphrase the words of a leading climate finance expert: International finance institutions such as the MDBs continue to have inflexible governance structures (voice and vote, leadership selection, etc) and this undermines the legitimacy of these institutions in the eyes of the emerging market countries. Such dimensions of legitimacy, culture, and tradition are even more important in the case of just transitions. There is a reason why a just transition is called that — it is after all intended to be “just”. And the channel of finance is a crucial part of justice. What, then, is the best way to advance a just transition?

Enter the Green Climate Fund (GCF). The GCF was established to address some of the prevalent challenges of climate finance. Developing countries were pushing for a seat at the decision-making table. Unusually, the Board of the GCF has an equal number of developing country members, with equal voice for all. Besides, the GCF was established so that this new climate finance could promote country ownership, circumventing large multilaterals, and instead go directly through national or local entities. At COP27 in Egypt, developing countries are expected to push to meet the commitment for $100 billion annually. As they make this push, it would be important to continue to identify the channel for this finance. A large part of the public climate finance is still channelled through MDBs and bilateral agencies. Emphasising a channel like the GCF could reduce dependence on the policies and concessionality imposed by MDBs, and avoid fragmentation of finance.

The GCF has its own challenges, no doubt, including the narrative that it is painfully slow and hard to access. Yet the GCF is the only institution which combines a very large scale with legitimacy and ownership. It appears less able to engage directly with countries; in fact some of us are arguing that the GCF should have more strategic clarity rather than try to do it all. Yet, for finance channelled in a “just” way, it would be essential for COP27 and the ongoing GCF replenishment to endorse the narrative that the GCF is the right channel for climate finance.

Disclaimer: This article was first published in The IndianExpress on 12 November 2022. The views expressed in this article are the author's own and do not necessarily reflect the views of the Independent Evaluation Unit of the Green Climate Fund.