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Dean Noha with Vera

Finance for Climate Action

November 24, 2022

Noha El-Mikawy, dean of the School of Global Affairs and Public Policy, chats with Vera Songwe, a nonresident senior fellow at Global Economy and Development, Africa Growth Initiative, and former under-secretary general at the United Nations (UN) and executive secretary of the UN Economic Commission for Africa on the Finance for Climate Action report how emerging market economies can fill the fiscal constraints and the impact of Climate Change.

"Unlocking substantial climate finance is the key to solving today’s development challenges. This means countries must have access to affordable, sustainable, low-cost financing from the multilateral development banks to help crowd in investments from the private sector and philanthropy. Financing alone is not enough. It must be coupled with the right policies to accelerate and scale up impact," said Songwe.

Emerging market economies are grappling with fiscal space constraints while continuing to invest in education, health, job creation and gender empowerment. The impact of climate change has complicated this picture further. Countries must develop mitigation and adaptation strategies and respond to lose and damage while implementing a just energy transition. How has COP 27 brought us closer to assisting African and other developing countries and emerging markets to tackle all of that?

These are challenging times for the global economy. No one is spared. In COP 27, we launched a report on Finance for Climate Action, commissioned by the UK and Egyptian COP presidencies. The Independent High-level Expert Group on Climate Finance prepared the report, and I was honored to co-chair Lord Nicholas Stern. The report focuses on what we need to invest in to address the challenge before us but also the scale of the finance. A big emphasis of the report is also the call for development agenda to be seen as synonymous with a climate agenda. Its messages revolve around scaling up investment for climate and development. The report estimates that annual investments in emerging markets and developing countries other than China to cut emissions, boost resilience, deal with the loss and damage caused by climate change impacts, and restore nature and land, should exceed $2 trillion by 2030 globally. Specifically, it is estimated that over one trillion in external finance is needed by 2030 to address the challenges. The report also calls for grants and low-interest loans from developed countries to double from $30 billion annually to $60 billion by 2025 and for multilateral finance to triple from $60 billion to $180 billion. Private finance should also triple.

In COP 27, the implementation of pledges was high on the agenda. How far do you believe the international community has achieved progress in that respect during COP 27? And is progress on implementing pledges even possible without changing the power asymmetry that currently favors the global north in international financing modalities?

As we all saw, there was a positive breakthrough in the closing hours of the COP27 meeting with an agreement on Loss and damage. This was a hard-fought battle. But as we have often seen in these meetings, pledges are not enough. Egypt has rightly put COP27 under the banner of the implementation COP. We need more than pledges; we need delivery. This means, among other things, additional capital for the multilateral development banks. We also call for quick action on the Special Drawing Rights. The current global financial architecture does not provide immediate triggers for global emergencies and is even less responsive to challenges emerging markets and developing economies face. We have just come out of a period where the asymmetry in responses to global challenges has been displayed like never before. System reform is needed to equip the world better for the challenges ahead. The threat to our environment and livelihood is not waiting; we are facing an emergency situation, and we need to act quickly. Countries must have access to affordable, sustainable, low-cost financing from the multilateral development banks to help crowd in investments from the private sector and philanthropy to support the energy transformation, build resilience, address loss and damage and protect natural capital. The report identified several key requirements to unlock investments for climate change. One can see the important role of multilateral development banks in those requirements: Stepped up engagement and tripling of the annual flows from the multilateral development banks and other development finance institutions in the next five years; doubling of concessional finance from developed countries by 2025 from the 2019 levels; strong expansion of the envelope of low-cost finance through innovative ways including the Special Drawing Rights, voluntary carbon markets, and the International Financing Facility for Education; and resolving the debt and liquidity issues facing many countries.

What role of public policy do you see in this conversation?

A good predictable policy environment is the fastest way to attract financing. Financing alone is not enough and must be coupled with the right instruments and good policies to accelerate and scale up impact. The report notes that around half of the required financing can be reasonably expected to come from local sources, from strengthening domestic public finances and domestic capital markets, including national development banks’ tools. Strengthening tax collection and reforming subsidy regimes will also help free fiscal space and provide the right incentives for the private sector. All of the above is about public policy. While the report focuses on external finance, the report acknowledges the importance of domestic tools and instruments, pension funds, sovereign wealth funds and others that can help leverage market or concessional capital to accelerate investments. The policy will help countries improve access to markets and reduce the cost of capital. The country's policy environment and or regional platforms can be a powerful tool for demonstrating country engagement and crowding in more finance.

Finally, the agenda is complex and will require more effort in the future. What would you want to see happen in preparation for COP 28 in the UAE?

We are racing against the clock. We need to begin implementation as we continue the negotiation track. For COP28, we need to have effective functioning market-based carbon credit markets that benefit emerging market economies. We need to accelerate the energy transformation act on fossil fuel subsidies in developed economies to accelerate transition while allowing emerging market economies to justly transition. On loss and damage, we must deliver on the breakthrough in Sharm el Sheikh. But most of all, the financing requirements must be met. Finally, it is time for a more inclusive and balanced process where the private sector and the youth are at the negotiating tables and fully involved in the conversations. We must broaden the coalition to be victorious.

About Vera Songwe

She is a nonresident senior fellow of Global Economy and Development, Africa Growth Initiative, and former under-secretary general at the UN and executive secretary of the UN Economic Commission for Africa. Songwe was the regional director of Africa for the International Finance Corporation and country director at the World Bank. At the World Bank, she managed other functions, such as Lead Economist and advisor to the managing director of World Bank Operations in Africa, Europe, and Central and South Asia. Songwe holds a PhD in mathematical economics from the Catholic University of Louvain-la-Neuve in Belgium and a BA in Economics and Political Science from the University of Michigan Ann Arbor.