April 12, 2023

As the window closes for dealing with the climate crisis, it is worth remembering that the roots of the crisis lie in decades of rising greenhouse gas (GHG) emissions, justified by rich and poor countries alike and their financiers as the by-product of boosting GDP growth at all costs. Agreements to cut emissions, which should tackle runaway climate change, are fragile as shown by the recent return to fossil fuels, especially coal, when energy shortages threaten GDP growth targets. The solution is a meeting of the minds among countries on switching to a cleaner, low-carbon path. As the largest global financier of economic growth, and with a track record in mobilizing resources, the World Bank under a new leadership, with other multilateral development banks (MDBs), is well-positioned to lead the way.

As world development confronts rising global risks, from pandemics to global warming, the MDBs’ function should be in enabling countries to build resilience. This task calls for an expansion of areas with positive spillovers like health services, and brakes on those signifying negative spillovers like environmental damages. GDP as a measure of progress does not deduct losses caused by economic activities, and can wrongly signal a better business environment even when ecological destruction rises, as in the World Bank’s Doing Business Indicators for China, India, and the US. Measured GDP growth can be propped up by destruction, as with Russia’s GDP following its invasion of Ukraine. It celebrates even carbon-intensive growth, as in the East Asian growth miracle since the 1960s.

When economies are ranked by GDP growth, policy emphasis is on the volume of physical capital like roads and bridges, and rightly, its productivity. The World Bank and other MDBs have been instrumental in recognizing the essential part of human capital (education and health) in growth. But natural capital, like clean air and forests, continues to be ignored: its disinvestment must be reversed. A measure capturing the contribution of all three forms of capital—physical, human, and natural—is the United Nations Development Programme’s (UNDP) recent planetary pressures-adjusted Human Development Index (HDI). It adds a per person ecological impact to HDI, resulting in eye-catching changes in country rankings. Norway falls 34 positions from second place among 191 countries and Australia 87 positions from fifth in the same grouping.

To lead climate mitigation, however, the World Bank and the MDBs need to clear the haziness in climate attribution. The blame for climate change must be assigned squarely to the perpetrators of the use of fossil fuels, the principal emitters of GHGs. Equally, it is vital to communicate this link to the public, especially when climate disasters strike, and people’s attention is focused on them. The public increasingly identifies climate change as the top global risk. But it does not flag it among the highest priorities for investments because the causal link between emissions and disasters is indirect—unlike the direct connection between a virus and disease.

The economics of spillover harm should signal the merits of decarbonizing economies. All projects should pass a social cost-benefit test inclusive of climate impacts. They should be accompanied by legal covenants on climate mitigation and adaptation. Development programs must avoid the use of fossil fuels, in addition to removing their subsidies. Economic analysis also motivates carbon pricing via either a carbon tax at the source of the pollution, as in South Korea and Singapore, or carbon trading, as in the European Union and China. The World Bank and IMF should call on countries to adopt carbon pricing.

Finally, high-income countries ought to provide vast climate financing to low-income countries, following the minimal progress achieved on this at COP 27. The MDBs need to double the financing for resilience building, while strengthening the evaluation of results. It pays to strike an unprecedented climate alliance—among the World Bank, IMF, Asian Development Bank, African Development Bank, Inter-American Development Bank, European Investment Bank, the New Development Bank, and UNDP, as well as bilateral agencies. Countries are more receptive to making investments in climate adaptation as they can directly reap its benefits, but less so for mitigation whose gains accrue to others too. The MDBs can help launch fit-for-purpose financial products and leverage cost effective financing from the private sector.

Poverty reduction has long been the organizing principle of the World Bank and some of the other MDBs, which has served the countries and the global economy well. The game-ending blind spot has been environmental harm, which is derailing growth, the very foundation of poverty reduction. So, it is imperative that global financiers press for a transformative change in the way growth is generated. If it can move swiftly and smartly on climate action under its new leadership, the World Bank, together with its partners, would earn its place as a just-in-time, global problem solver.

Vinod Thomas is the author of the new book Risk and Resilience in the Era of Climate Change, Palgrave Macmillan, April 4, 2023, and former senior vice president for independent evaluation at the World Bank.