Request Free Trial
October 18, 2022

‘Debt distressed’ emerging markets will struggle with green transition, says ex-World Bank official

Poorer countries struggling with debt may not have access to electricity, let alone be in a position to decarbonise. Renewed efforts on climate finance are therefore crucial to the clean energy transition, says a leading academic.

Western countries must help their poorer peers to get out of debt if they are serious about climate action and the clean energy transition, urged Rachel Kyte, dean of the Fletcher School at Tufts University and a former World Bank special envoy for climate change, as the World Bank and the IMF held their annual meetings last week.

“It is very difficult to talk about climate finance or financing a green transition if you are debt distressed,” Kyte said on Wednesday, during an online event organised by the New Statesman Media Group. Sixty per cent of low-income countries and 30 per cent of emerging markets are in debt distress, she told attendees.

With this in mind – and a war in Europe – western countries ahead of COP27 need to ask how they can be “coherent and commensurate with the size of the [climate] emergency”, said Kyte. “We need to be doing guarantees, credit enhancement, stuff in local currencies.” 

Ways to help

Kyte highlighted the Bridgetown Initiative being championed by Barbados prime minister Mia Mottley, which sets out a three-step approach for “stopping the debt crisis in its tracks” and for increasing climate finance for poorer countries.

The approach entails: calling on the IMF and other financial institutions to provide emergency liquidity; asking multilateral development banks to expand lending for sustainable development and climate resilience by $1tn; and for the creation of a global mechanism to raise private sector reconstruction grants for countries imperilled by climate disaster. Re-channelling at least $100bn of unused IMF special drawing rights would be one way of providing greater liquidity, according to the initiative. 

While richer countries and financial institutions argue over the finer points of such proposals, “we are subsidising fossil fuels today more than we were two years ago”, Kyte said. Government support for fossil fuels worldwide almost doubled last year to $697.2bn, compared to $362.4bn in 2020, according to data published in August by the OECD and the International Energy Agency.

Despite “all that platitudinal stuff we hear every year at COP, at the UN general assembly, at World Bank meetings, the G7, the G20 [and] EU members have not cut their subsidies,” she added. “At a time when everything is constrained, those $700bn reapplied could make a difference.”

Ensuring countries have enough finance to decarbonise their energy systems and deal with the impacts of climate change is vital, but in the poorest countries – particularly in sub-Saharan Africa – the challenge of simply giving people access to electricity also remains. Without stepped-up action, 650 million people will still be without access to electric power in 2030, a Sustainable Development Goals progress report warned in May.

It is well understood that access to energy for these people will come from distributed renewable energies, not centralised power systems, said Kyte. Yet as the business models and technologies needed to make this reality are understood and clean energy innovation is starting across Africa, “the credit markets have withdrawn in this extraordinary economic moment we are experiencing”.

Economic sense

Financing needs to return, she added: “We need credit enhancement, we need risk bearing, we need public finance to attract private finance.” Without investment into off-grid renewable energy in Africa, we will leave the poorest people behind and, given climate impacts, they will fall back into poverty. 

“Weather patterns are severe, crops are failing, we are going to have four famines across the horn of Africa probably declared by the end of the year. We have to understand that this is an investment that makes economic sense: you can’t grow an economy without energy. It is also a cheaper way of managing the future than humanitarian assistance, and it is a security issue,” said Kyte.

The World Bank’s role in speeding up climate action and the energy transition was thrust into the limelight last month at New York Climate Week when the institution’s president, David Malpass, declined to say whether he accepted the scientific consensus on climate change. He later confirmed that he believes human activity contributes to global heating.

While “there are lots of extraordinary people working at the coalface in the World Bank and in the other multilateral development banks”, Kyte said these institutions are not using the significant amounts of capital at their disposal to maximum effect.

Leverage ratios of 1:1 or 1:1.4 are not good enough, she said. “The international finance corporation and the private sector lending arm of the World Bank needs to be leveraging 1:4, 1: 7, 1:10 on a regular basis. They need to use their balance sheets to crowd in more private investment and to take more risk.” 

As for the increasing amounts of philanthropic cash being poured into climate action, Kyte insisted this should not “mimic conservative multilateralism”. Instead, these funds should “prime the pump so that development finance and private finance can [follow]”.

Photo credit: Getty Images

A service from the Financial Times