Financial Markets Director, Initiative for Policy Dialogue, Columbia University
If the international community lost an important opportunity to show increased ambition in Madrid, important progress was nevertheless made on how to most effectively use institutions like public development banks to fund the necessary and urgent transition to a zero carbon economy by 2050
As United Nations Secretary General Guterres eloquently and clearly put it: “I am disappointed with the results of #COP25. The international community lost an important opportunity to show increased ambition on mitigation, adaptation & finance to tackle the climate crisis. But we must not give up, and I will not give up.”
There was indeed deep disappointment at the results of the COP25 outcome document, particularly given the scale and urgency of the climate emergency challenge, as well as the massive mobilisation of civil society including schoolchildren, for rapid action; however, there were several announcements made during the two-week conference to indicate progress. The European Union, for example, committed to carbon neutrality by 2050, and 73 nations announced that they will submit an enhanced climate action plan (or Nationally Determined Contributions).
The European Union announcement for a Green New Deal was indeed important, as were many of its main features. Given the limitations of private banks, it is important that the Green New Deal for Europe will be funded through green investment bonds issued by Europe’s public investment banks, with a leading role being given to the European Investment Bank, the largest multilateral development bank in the world. The EU proposal calls on Europe’s increasingly important public investment banks to inject a significant part of GDP, reported to be at 5% of GDP each year in the transition to net-zero emissions. Also important is that a significant fund, the Just Transition Mechanism, is being created by the EU, to help member states manage the economic costs of the transition — especially relevant for countries with carbon-intensive economies, like those in Eastern Europe. This will be accompanied by a new sustainable finance strategy for the private sector that will be published next year.
This European discussion is part of a broader emphasis that I saw at the COP25, and in which I was privileged to participate, on specific institutions and mechanisms to help fund the massive investment required to achieve the urgently necessary transformation to a zero-carbon economy world- wide starting now. In particular, there was an important discussion of the key role public development banks, – multilateral, regional and especially national, -need to play in this transition to ecological sustainability, as well as in making it a just transition, which would protect poorer people and countries from carrying an excessive share of the costs of such a transition. Both aims are key for progressives. Large financing by public development banks in Europe, as well as world wide, would help catalyse significant private investment, and thus help shift major financial flows essential to fund the green transformation urgently required.
The scale of development banks is already large, especially of national development banks. World-wide, it is estimated that the total assets of national development banks reach at least US $5 trillion, with regional and multilateral development banks estimated at having an additional US $ 1 trillion dollars of assets. The challenges are twofold, to help catalyse further funds, but also to channel an increasingly larger proportion of their financing to a just and environmentally sustainable transition.
The key role of National development banks
National development banks have a number of features, which imply they can mobilize significant financial resources quickly and fairly easily, as well as channel them to key aims, as defined by their governments in their development plans, including of course increased sustainability. Firstly, they have local knowledge with engineering and scientific expertise of sectors, projects and companies, as well as local financial markets. Furthermore, they can work closely both with their national governments, and with the private sector, both non-financial and financial. They can also work closely with international financiers and funders, such as multilateral development banks and climate finance bodies. Secondly, they can provide long-term finance (also called patient capital), key for funding projects that may become commercially profitable only in the long-term. Thirdly, they can blend grants and concessional resources with commercial finance, and are thus ideal for funding projects that are not yet profitable commercially, but have major environmental externalities, because for example they lead to lower carbon emissions.
Finally, and perhaps most importantly, National development banks can fund not just marginal change, but can also finance a major structural transformation, for example introducing new technologies and new sectors. An example of this was how German KfW and later Chinese CDB (both successful national development banks) played a key role in financing early stages of introducing solar energy in Germany and then in China. This also led to a major reduction of costs in the production of solar panels, which has benefited not only their economies but also the rest of the world, by making this low carbon technology competitive with fossil fuel energy .
Such national development banks need to be well run, and well managed, their scale must be significant (in financing the transition to a green economy, large is beautiful), and they must have clear mandates, including clear alignment with the Paris Agreement.
It is important that development banks collaborate closely with the private financial sector, but that this is done in ways that especially maximize the impact of their joint activities on the green and just transition, as well as catalysing significant financial resources. Therefore, from a progressive perspective, the instruments used by development banks should allow for sufficient influence, (or policy steer) on the direction in which financial resources, including private ones, are channelled, – to ensure they go towards genuinely green projects and activities-, as well as avoiding excessive contingent liabilities, for these development banks themselves, which could lead to them making losses, that would have to be paid for ultimately by tax payers. Therefore risks and rewards should be adequately distributed between private and public institutions. The profits made by public banks are always reinvested into expanding their activities, so can be beneficial for future investment in the green economy.
Important progress was made by key actors, in detailed discussions at the COP in Madrid on how to most effectively use institutions like public development banks to fund the necessary and urgent transition to a zero carbon economy by 2050. The time to act is now! We have nothing to loose but our planet and our future, as well as the future of our children and grandchildren!
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