The French government is hosting a global summit next week with the ambitious goal of reaching agreement on a “new global financial pact.” While this level of ambition may be overblown, the summit has the potential to build momentum behind some creative mechanisms for generating funds for climate mitigation, adaptation and losses, including taxes on fossil fuels, aviation and shipping. Discussions on the role of private finance should center on the need to stop financing for new fossil fuels, as well as mechanisms for attracting finance for the energy transition.
The Summit for a New Global Financial Pact will be held in Paris on June 22-23. French President Emmanuel Macron has invited world leaders to the summit with the grandiose ambition of agreeing how to restructure the global financial system and resolve global inequality, the climate and biodiversity crises, and growing indebtedness in the Global South (1).
Broken promises, rising debts
This is, to say the least, a lot to cover in a day-and-a-half. The already small chances of the summit succeeding on its own terms have shrunk further given that not many important world leaders have accepted Macron’s invitation. Yet while it is unlikely that any new grand global bargain will emerge, it may be possible at the summit to agree on some on new principles and mechanisms for providing climate finance and create some political momentum behind them.
Northern governments have consistently failed to commit to providing the scale of climate finance to the South that would be adequate given its massive needs, and the North’s responsibility due to its historical emissions and capacity to pay. And even when commitments have been made — notably in the promise made at the Copenhagen COP in 2009 to provide US$100 billion a year by 2020 to low- and middle-income countries — they have been broken. Oxfam estimates that the real value of North-South financial flows specifically aimed at climate action in 2020 was at most just USD24.5 billion (3).
The US$100 billion number was the result of a political negotiation and was not based on a calculation of actual needs for mitigation (i.e. reducing emissions) and adaptation (4). Needs-based calculations produce stunningly high numbers — nearly US$1 trillion a year according to UN climate convention Executive Secretary Simon Stiell, 10 times the number from Copenhagen (5). Add in estimates for properly funding the Loss and Damage Fund agreed at COP27 last year, and the total need for climate finance by 2030 could be $1.7 trillion (6).
These statistics indicate that climate finance in 2020 may have been only 1.4% of what might be needed in 2030. And while this is a stunningly low number, the reality is even worse, as most climate finance is given as loans, worsening the situation for many already highly debt-burdened countries (7).
Tax fossils, don’t subsidize them
This dreary math speaks loudly to the urgent need to develop bold new mechanisms for generating global climate finance. Macron’s summit can play a useful role in building support for such mechanisms. In advance of the summit, the French government has been pushing a global levy on greenhouse gas emissions from shipping (8). A coalition of French climate justice groups is calling on governments at the summit to support a global tax on fossil fuel companies (9). The summit web site proposes both these mechanisms, as well as taxes on flights and financial transactions.
Theoretically such “polluter pays” taxes could raise substantial funds. One study estimates that they could bring in on the order of $600 billion a year (10). Another obvious place to look for funds is the estimated $423 billion currently spent on subsidizing fossil fuels (11).
The private finance blindspot
Except for a brief explosion of interest around COP28 in Glasgow, private finance has mainly flown under the radar at COPs. Glasgow was the exception due to the launch of the Glasgow Financial Alliance for Net Zero (GFANZ) and the rather misleading claims that this had pulled together US$130 trillion of private capital to finance the transition (this number was the total owned and managed assets of the 450 investors, banks and insurers in the alliance, and bore little relation to the amount that would be available for global climate finance) (12).
There are good reasons for private finance playing a faint second fiddle to its public sibling in the climate negotiations, given the limited opportunities for commercial banks and investors to make a profit from funding loss and damage or most adaptation measures. Private finance is on the agenda in Paris, but as only one of six main topics, and with only part of the focus on energy projects.
Private finance does however have an important role helping with the huge unmet needs for finance for sustainable energy and related transition technologies in the South. Clean energy investments have recently been booming but less than 10% of their growth since 2021 has been outside of China and the developed economies (13). A key problem is that because of their perceived high-risks, the cost of capital for renewable developers in developing countries is much higher than in wealthy countries. In Africa, investors typically require twice the rate of return for solar and wind projects as in Europe (14).
It is disappointing that it appears the summit will hardly address the issue of how to make private finance affordable for renewables in developing countries. But an even bigger gap is the failure to address in the conference agenda the huge sums that banks and investors continue to pour into fossil fuels in the South.
Just as it is nonsensical for governments to be subsidizing both fossil fuels and the technologies that are supposed to replace them, it makes no sense to be trying to develop complex financial instruments to attract private investments in renewables in perceived high-risk economies, while at the same time financing the expansion of fossil fuels in these countries. Any new global financial pact should include a climate version of the Hippocratic Oath for private banks and investors – first do no harm by pulling financial services out of fossil fuels.
