• D.C.
  • BXL
  • Lagos
  • Dubai
  • Beijing
  • SG
rotating globe
  • D.C.
  • BXL
  • Lagos
Semafor Logo
  • Dubai
  • Beijing
  • SG


In today’s issue, we look at how the fund imposes a one-size-fits-all model and isn’t doing enough t͏‌  ͏‌  ͏‌  ͏‌  ͏‌  ͏‌ 
 
sunny Luxor
sunny Washington, D.C.
cloudy New Delhi
rotating globe
March 29, 2023
semafor

Net Zero

Climate
Sign up for our free newsletters
 
Tim McDonnell
Tim McDonnell

Hi everyone, welcome back to Net Zero.

I’m in Luxor listening in on the negotiations to establish a new fund to compensate low-income countries for “loss and damage,” the costs of climate impacts that could reach $2 trillion by 2050. Diplomats took time during the weekend to visit Pharaonic sites like the Karnak temple and Valley of the Kings, and had an early scuffle over whether NGO observers could sit at the negotiating table (they were ultimately relegated to an overflow room with a livestream). It’s still early to say what the final shape of the fund will be, but it’s already one of the year’s biggest storylines in climate diplomacy.

In related news, Prashant looks at how to fix the International Monetary Fund’s much-criticized approach to climate finance, ahead of its annual meetings in a couple weeks. And we hear from the founder of a small climate-focused bank on a possible silver lining of SVB’s collapse.

If you like what you’re reading, spread the word.

Warmups

The European Union approved a law requiring all cars sold by 2035 to have zero emissions. Legislators relented to a push from Germany to allow the sale of cars that use synthetic liquid fuels made from captured CO2 and hydrogen, rather than limit sales exclusively to electric vehicles. Environmental groups say so-called “e-fuels,” which are a pet project of Porsche and Ferrari, are untested at scale and could be an expensive distraction from electrification.

Republicans in the U.S. House of Representatives say they will agree to raise the debt ceiling if legislation to do so is tied to a bill to speed permitting of energy infrastructure. Permitting reform is popular in both parties, although to different ends: Most Republicans are focused on expediting oil and gas pipelines, while Democrats are more concerned with renewable energy projects and electricity transmission infrastructure.

China plans to build a $1 billion floating solar farm on a lake in Zimbabwe. The project is an early example of China’s aim to expand its soft power influence in Africa — already well entrenched with airports, highways, and other major infrastructure projects — through renewable energy. In the last decade, only 2% of total global investment in renewables was made in Africa.

Nigeria is the latest backdrop for the unintended side effects of a tactic by oil majors that helps them meet their climate targets but could worsen the environmental impacts of drilling. Since 2021, Shell has been selling off oil production assets in the Niger Delta, with a view to cutting the company’s carbon footprint. But the companies snapping those assets up — mostly small local drillers with little oversight and short budgets — are ignoring spills and allowing operational emissions to increase.

TweetEmail
Evidence

In a report this week, the think tank Resources for the Future compared midcentury energy market scenarios published recently by energy companies and the International Energy Agency. Some of the widest disagreement was on the outlook for oil demand. The gaps show where some of the biggest oil producers — OPEC and ExxonMobil — are betting the economy will go, and how far that is from a net-zero world.

TweetEmail
Prashant Rao

How the IMF is ‘falling short’ on fighting climate change

REUTERS/Yuri Gripas/File Photo

THE NEWS

The International Monetary Fund’s climate change policies are making it harder for countries in need to tackle and adapt to climate change, a new report by a developing-country task force said.

The Task Force on Climate, Development and the International Monetary Fund — a highly regarded group of experts and NGOs representing finance ministers from poorer and climate-vulnerable nations — wants the fund to give countries in need more flexibility to spend to combat climate change, rather than pursuing debt and deficit reduction, the IMF’s core mission. In essence, the report makes the case that these countries’ fiscal problems will be far greater if climate change destroys their economies.

The task force’s report lists an array of areas where the IMF is “falling short,” including what the report’s authors characterize as the fund’s reliance on carbon pricing as a policy solution, narrow focus on fiscal tightening, and lack of appreciation of differing national economic and environmental circumstances.

“There is a very clear need for the IMF to show much greater ambition in a number of areas,” Rishikesh Ram Bhandary, a climate-finance expert and a member of the task force, said in an interview.

The criticism will bolster arguments for IMF reform at the annual meetings of the IMF and World Bank in Washington, D.C., in two weeks. (Register for Semafor’s World Economy Summit, held against the backdrop of the spring meetings.)

The IMF said in response that it was open to different policy approaches, and acknowledged that climate change required huge financial investment, but insisted that even when it called for fiscal tightening, it urged countries to prioritize long-term growth prospects.

PRASHANT’S VIEW

The critique of the IMF — that it has made some progress, but not enough, and needs to move faster — hews close to the long-held belief in the developing world and among progressive economists that the IMF’s doctrinaire prescriptions end up hitting the poorest and most vulnerable hardest by advocating spending cuts in an effort to rein in debt.

Yet the fund has also begun to find creative solutions for countries hit by natural disasters. It now supports the use of “disaster clauses” that allow governments to suspend debt payments in the event of hurricanes or other catastrophes, programs used by countries such as Grenada and Barbados. That, coupled with more aggressive climate rhetoric from the IMF’s leadership, suggests it is open to change.

KNOW MORE

The IMF’s focus on carbon pricing, in particular, illustrates the extent of its challenge, Bhandary said.

For one, the task force’s research indicates carbon pricing alone will not raise sufficient revenues to pay for the huge economic shifts required as a result of climate change. The very nature of carbon pricing — whereby companies and individuals are incentivized to cut their emissions because they pay for each unit of carbon they are responsible for — also means those already-insufficient revenues will decline over time. And from a purely political point of view, the carbon pricing policy “lacks widespread buy-in … among advanced and developing countries,” the report noted.

STEP BACK

Among the major issues facing developing countries — which was noted in the task force report — is how fast-increasing interest rates in the West have made borrowing much more expensive for poorer nations, a particular problem when it comes to climate change because renewable-energy projects are capital-intensive. At the same time, many of these countries are grappling with high levels of public debt, exacerbated by heavy borrowing during the worst of the pandemic.

THE VIEW FROM KENYA

One-size-fits-all climate models have “fundamental inadequacies” when it comes to addressing pressing issues for the Global South, and in particular Africa, according to Murefu Barasa, Nairobi-based managing partner at EED Advisory, a Pan-African consultancy. They tend to over index on emissions from sectors like manufacturing and transport, and gloss over categories that result in high levels of local pollutants, such as food preparation.

“It doesn’t mean that there are no lessons from the West that can be adopted here,” Barasa said in an interview, “but you can’t just copy and paste these things.”

THE VIEW FROM INDONESIA

IMF guidance to Indonesia illustrates the disconnect between the fund’s advice and its demands. Last year, it issued guidance to Jakarta that “emphasises green financing, promotes climate change mitigation, and supports climate-friendly tax policies,” a study published in November noted. Yet it also pressed for significant austerity measures. “The IMF needs to change its approach … especially by promoting investments in renewable and sustainable energy,” one of the study’s authors noted.

ROOM FOR DISAGREEMENT

Despite its shortcomings, the IMF does not need a radical overhaul: As Dileimy Orozco, an international climate-finance expert at the London-based think tank E3G noted, the fund’s official mandate is to promote “global macroeconomic and financial stability,” and climate change presents a major threat to that. “There is a lot that the IMF could do within its current mandate,” Orozco said in an interview.

The IMF also disputed that it is overly committed to carbon pricing, that it underestimates the extent of financing required, or that it imposes a one-size-fits-all solution on countries that come to it for help. “We have stressed repeatedly that the climate transition comes with large financing needs,” a fund spokesperson said, adding that “in cases where the IMF recommends consolidation, the IMF typically advises countries to consolidate in ways that don’t undermine long-term growth prospects,” and which “protect the vulnerable, and protect the environment.”

NOTABLE

  • The World Bank wants to significantly expand its lending capacity to help it deal with climate change, as well as other global crises, Reuters reported in January, citing a roadmap document set to be discussed at the spring meetings.
TweetEmail
One Good Text

Ravi Mikkelsen, co-founder of Atmos Financial, a banking startup that finances solar and other sustainability projects.

TweetEmail
Semafor Stat

Exchange-traded funds in Europe that are set to lose their triple-A ESG rating as ratings firm MSCI tightens its criteria and cracks down on greenwashing. That will leave the number of top-rated European ESG funds at just 54.

TweetEmail
Watchdogs
REUTERS/Esa Alexander

Early divisions are emerging between developed and developing countries in the first round of U.N. talks to set up a fund to compensate vulnerable countries for the costs of climate damages. At a meeting in Luxor, Egypt this week, two dozen diplomats met to hash out rules for the fund, with an aim to present them by COP28 in November. The main point of divergence is over the fund’s scope, with wealthier countries pushing to relabel existing sources of funding from development banks, humanitarian organizations, the private sector, and other sources, and limit what types of projects the new fund will cover. There’s wide agreement that an “all of the above” approach is needed, diplomats and NGO observers said, but it’s not clear what that balance will ultimately be.

“Creative accounting tricks are not going to work,” said Harjeet Singh, head of global political strategy for the advocacy group Climate Action Network, who attended the meeting. “We have to create a system that’s fit-for-purpose and not depend on ad-hoc funding from the humanitarian sector.”

One reason developed countries want to push for a broad pool of non-U.N. funding is that many members of the loss and damage fund committee previously worked on the U.N.’s Green Climate Fund, which took nearly a decade after its inception to become fully operational, and is still impeded by budget shortfalls and grinding bureaucracy. “That’s a bad precedent, and we don’t want to follow that example,” said Jean-Christophe Donnellier, a French diplomat on the committee.

TweetEmail
Glossary

Heat waves that are forecast to hit India over the next few weeks could approach a wet bulb temperature of 35 degrees Celsius, which physiologists see as the limit of human survivability. Globally, the frequency of dangerously high wet bulb events has doubled since the 1970s.

TweetEmail
How are we doing?

If you’re enjoying Net Zero, please share with your family, friends and colleagues. I’d love to have them read it, too.

You can reach me either by replying to this email, or on netzero@semafor.com.

To ensure this email doesn’t go to your junk folder, add netzero@semafor.com to your contacts. In Gmail you should drag this newsletter over to your ‘Primary’ tab.

Thanks for reading and see you on Friday!

Want more Semafor? Explore all our newsletters at semafor.com/newsletters

— Tim (with Prashant Rao and Jeronimo Gonzalez)

TweetEmail