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February 1, 2023

Humanity is losing the climate battle, and existing international institutions are not delivering on climate change. Hence, there is a need for a new international institution that would be a repository for global knowledge on climate change, and would advise governments on climate policies, develop green projects across the Global South, mobilize financing for those projects, and support project implementation. The proposed Green Bank would be different from existing multilateral development banks: (1) it would include private shareholders as well as governments; (2) voting rights would be organized so that countries of the Global South would have the same voice as countries of the Global North and private shareholders; and (3) it would only finance green projects which could be national, regional, or global. The Green Bank would primarily support private green investments through equity contributions, loans, and guarantees. It could also support public investments by using grants to buy-down the interest on other multilateral development bank loans that finance projects that support adaptation to climate change. The Loss and Damage Fund agreed at COP27 could be the source of those grants. This proposal builds on the Bridgetown Initiative, with the aim of mobilizing private funding, in addition to the public trust fund that the initiative proposes. The Green Bank would partner with other institutions and complement the work of existing multilateral development banks, and of specialized funds.

Climate change is an existential threat facing all of humanity, and all of humanity needs to unite to face it. But a major share of humanity, referred to here as the Global South, lacks the necessary resources. There are many international meetings and summits at which resources are pledged, but the pledges are for much less than what is needed to deal with climate change. Moreover, not all pledges materialize as actual commitments and disbursements. The governments of the Global North face tight budget constraints, which limit their ability to finance climate projects in the South. If this cycle of insufficient promises that do not materialize and lead to inaction continues, climate change will quickly turn from threat to nightmare. A new approach is needed. 

Countries of the Global South have been actively seeking solutions. A proposal from those countries, known as the Bridgetown Initiative, could prove significant1. At the heart of this initiative is the creation of a $500 billion trust fund that would be used to finance mitigation projects in the Global South. The fund would lend to private projects so that the costs would not lead to increases in sovereign debt. The Bridgetown Initiative is well thought through and its implementation would have a real impact. However, the $500 billion is yet to materialize, even though it is suggested that this financing could take the form of Special Drawing Rights (SDR) allocations. 

The creation of a Loss and Damage Fund, which would be financed by countries of the North to compensate countries of the South for the impacts of climate change, was approved at the 2022 United Nations Climate meeting, COP272. It is an excellent initiative. But so far it is an empty box with no financing. The idea is to reach agreement on financing and the workings of this fund in time for COP28 at the end of 2023. If history is any guide, the amount of financing will end up being seriously inadequate. 

Countries of the Global North are also looking for solutions. The United States Treasury requested the World Bank to make proposals to increase its financing of global public goods, and especially climate change. The World Bank has prepared a ‘Roadmap’ to respond to this request. This roadmap is unlikely to yield satisfactory results. It requires a significant increase in the World Bank’s capital, which will have to be paid in by governments that are already facing budgetary issues. Moreover, the World Bank’s mission to fight poverty, and its country-focused operating model, are not always compatible with the financing of climate-mitigation projects. 

In this policy brief I propose a new approach to climate financing: the creation of an International Green Bank, which would be a global public-private partnership. This approach would make it easier to raise the $500 billion requested by the Bridgetown Initiative, because in addition to sovereign contributions, the Green Bank’s financing will include contributions to capital by the private sector, and the proceeds of sales of green bonds. Those resources would be used to provide equity, loans, and guarantees to private- sector mitigation projects in the Global South. The Green Bank could also leverage any resources committed to the Loss and Damage Fund by using the grants to buy down the interest on loans to public-sector adaptation projects. 

The remainder of this brief is divided into four sections. Section A describes the need for climate financing, section B explains why the current international financial system has been unable to adequately respond to the climate crisis, section C describes the proposed Green Bank, and section D concludes by highlighting the conditions for the success of this proposal.

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