March 14, 2023

The World Bank’s Evolution Roadmap suggests the institution could provide more grants and subsidies to activities that support the provision of global public goods (GPGs), particularly in richer developing countries. Provision of those public goods is surely a priority: avoiding future pandemics and limiting climate change benefits everyone. At the same time, and especially in an environment where finance for international subsidies and grants is extremely limited, it is important that the mechanisms are efficient. That isn’t at all true of existing funding, and there is no agreed pathway to fix that problem. Donors have already spent $48 billion on climate and environment funds housed at the World Bank alone.  Before ramping up that spending, it is a financial and moral imperative to find an investment model that is fit for purpose.

The World Bank Group’s largest existing grant and subsidy mechanism has a simple but highly effective strategy for maximizing the potential impact of cheap or free money: deliver it to countries that don’t have very much money of their own. The World Bank’s IDA arm provides financing almost exclusively to countries with a GNI per capita of below $1,255. Giving aid to poorer countries maximizes the impact of each dollar spent in terms of impact on potential economic growth, lifting people out of poverty or improving health outcomes. World Bank oversight helps reassure donors that the resources are used relatively effectively towards those ends.

We lack a similar simple but effective filtering mechanism to ensure GPG financing is spent well.  In theory, there is a straightforward approach with climate mitigation, at least: use a carbon market. Indeed, if there was a global carbon trading scheme, we wouldn’t need the World Bank to be involved in climate mitigation financing at all. Sadly, however, we’re some way from trading carbon credits like we trade copper or iPhones.

In the absence of a global carbon market, the World Bank has supported ersatz equivalents.  The results have not been reassuring.  The (incomplete) failure of the Clean Development Mechanism as a carbon credit trading system came alongside considerable doubts about its certification mechanism when it comes to demonstrating additionality (that carbon credits were really associated with reduced greenhouse gas output). Perhaps the World Bank could agree to purchase carbon credits from one of the increasing number of national and regional carbon credit markets, if they passed certain standards. But, as with global carbon markets, it is questionable why donors would need the World Bank at all to support such purchases.

Meanwhile, the Green Climate Fund and Clean Technology Fund both apparently back projects that (potentially) reduce greenhouse gas (GHG) emissions at a cost per tonne that varies over two orders of magnitude, and that leaves aside many additionality concerns. Bespoke project-level mechanisms that try to provide the minimum subsidy to generate maximum GHG reduction are not only bureaucratically immensely complex, it isn’t clear they work (something we’ve seen with efforts to subsidize private sector projects in low income countries, as well).  The proliferation of climate funds is itself a further measure of the lack of consensus over how to efficiently allocate grants to reduce emissions. Before expanding such funds, the Bank should at least try to develop the knowledge base and methods that ensure grantmaking is cost effective (low-dollar investment cost per ton of greenhouse gasses averted, which is comparatively straightforward) and additional (evidence that the investment would not have taken place without the financing, which is considerably less straightforward).

Perhaps there is a role for the World Bank to support the interventions identified through its Country Climate and Development Reports, providing more generous terms as part of policy-based lending in support of the priority actions identified in those studies. While that wouldn’t maximize global GHG reductions per dollar spent, at least it would provide some level of reassurance that projects would be beneficial for both climate and development.  But simply providing a lower rate of interest to any World Bank loan that looks to be in support of a lower carbon development path raises considerable issues: available subsidy finance will be a drop in the bucket compared to the total investments required in client countries, and this approach will be poorly targeted to support the investments that actually need a subsidy to go ahead.  It will provide cheap money to some emissions reduction investments that don’t need it and zero cash to a huge amount more that might. A similar set of problems applies to limiting funding to particular technologies, given efficiency and subsidy requirements will differ by country and investment. (There might, however, be a role for the Bank to help develop and pilot new low-carbon technologies and approaches specific to the challenges of developing countries).

An alternate, and considerably more scalable, approach would be to use the greater lending power of an IBRD capital increase combined with more aggressive use of existing equity to support projects broadly in line with country Nationally Determined Contributions agreed at United Nations Framework Convention on Climate Change (UNFCCC) Conferences. If these loans were predominantly low-transaction-cost policy-based lending, they would be more attractive to clients. While such an approach would not be able to demonstrate additionality, and might back some comparatively cost-ineffective mitigation projects, it would provide considerably more resources toward the $100 billion global climate financing target without the challenge of efficient subsidy allocation. And my colleague Nancy Lee suggests that donor guarantees could help expand financing further by taking the additional exposure off multilateral development bank balance sheets.

The World Bank’s new pandemic fund appears to be facing some of the same issues regarding targeting, with the additional challenge that there is not a measure akin to tons of CO2 equivalent around which even a theoretical market could be delivered. On the plus side, however, the amounts required to simply provide subsidized funds to all lower-income countries to help meet country-level capacities in health security is far more manageable than the investment costs of climate mitigation. Furthermore, the World Bank client countries where the global public good of pandemic preparedness is least supplied are the poorest countries (as opposed to upper-middle-income economies in the case of low CO2 emissions). Most of the grants from the pandemic fund should therefore flow to countries where grants will have their greatest impact, all else equal.  

Still, the lack of progress around efficient subsidy financing of global public goods as a whole is a concern: the idea of global public goods has been around for a half century or more, financing their provision in developing countries has been a concern since at least the 1980s and with climate in particular since the 1990s. And yet we don’t appear to have figured out a replicable model or a robust second-best approach to using subsidies efficiently.

In a world of infinite international grant finance, inefficiency of allocation would be irrelevant. In a world where international grant finance for global public goods was truly additional to existing finance, it would be of lesser concern. But we’re not in those worlds. Figuring how to spend this money well, especially given the high risk that it will be financing that would otherwise flow to IDA (currently providing grants and credits worth about $20 per capita per year to its client countries, with plenty of space to do more), should come before the money starts flowing, not after. If relatively efficient development finance is replaced by considerably inefficient finance supposedly helping achieve global public goods, it is a loss for the planet.

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