World Bank and other MDBs need to tackle rich country GHG emissions to support development

The World Bank and other multilateral development banks recently have begun reconsidering their self-imposed restrictions on financing fossil fuel projects. This change is being prompted in part by the new U.S. administration and is also supported by developing country experts. Yet, the reality remains that greenhouse gas emissions (GHG) from fossil fuels, and specifically the climate change they induce, can severely undermine multilateral development bank projects and overall developing country growth prospects.

Most of these emissions, however, come from richer big economies, not poorer developing ones. Given the negative effects of these emissions, multilateral development banks need to push richer economies away from fossil fuel-produced GHG emissions, even as they consider softening restrictions on lending for fossil fuel projects in poorer countries.

Last decade, multilateral development banks began restricting funding for fossil fuel projects due to concerns about the negative impact of emissions-induced climate change on development, but also under pressure from the U.S., European, and other key stakeholders.

For example, the World Bank announced in 2017 that it would largely stop funding gas drilling and extracting projects. Other multilateral development banks followed suit.

Multilateral development banks are caught in a tricky dynamic: responding to pressures from key shareholders — notably the U.S. — to loosen restrictions on financing for fossil fuels while working to limit greenhouse gas emissions that negatively affect development. Credit: IPS

Many have noted the economic benefits being denied to poor countries by these restrictions, such as export revenues and power plants fueled by domestic gas reserves. In contrast, Sub-Saharan Africa and South America have contributed little to historical global emissions — 2 percent and 3 percent, respectively, a trend projected to continue.

As the International Energy Agency consistently highlights in its climate scenarios, the emissions reduction needed to avoid dangerous levels of climate change must come, unsurprisingly, from the world’s biggest economies. This includes China, with 33 percent of carbon dioxide emissions in 2022, followed by the U.S. with 13 percent, the European Union taken as a block, Russia, and then Japan. Together, these countries generate 60 percent of the global total. India is also a large emitter, but its level is driven more by a massive population than wealth.

These emissions, and specifically the climate change they drive, present two significant risks for multilateral development banks. First, they undermine the development benefits sought by multilateral development bank projects. Second, they create financial risks for these banks by potentially weakening the capacity of developing country borrowers to repay their loans.

The massive 2022 flooding in Pakistan illustrates the potentially devastating economic impact of climate change, as the country suffered over $30 billion in losses — nearly 10 percent of its GDP. This degree of devastation is not feasible to plan for or adapt to. It needs to be avoided.

Unfortunately, various factors stunt a proper appreciation of climate change’s potential destructive impact. First, there is the ‘past is not prologue’ phenomenon, namely, the inevitable uncertainties regarding the future. Looking back or even to the present does not provide a full sense of the future potential destructive impact of climate change.

Second, climate change’s impact grows over time, producing more destruction in a more distant future. Its small impact on today’s stock market, where short-term horizons drive valuation, contrasts significantly with its potentially large-scale economic damage 15 to 20 years from now as climate change predictably worsens over time. That longer period is particularly relevant to multilateral development banks, whose projects often take years to mature, and whose corresponding loans extend beyond 15 years.

Third, the uncertainty inherent in predicting the future is being exploited by climate minimizers to play down the long-term perils of emissions relative to the shorter-term benefits of fossil fuel projects.

As a result, multilateral development banks are caught in a tricky dynamic: responding to pressures from key shareholders — notably the U.S. — to loosen restrictions on financing for fossil fuels while working to limit greenhouse gas emissions that negatively affect development.

Earlier this year, the World Bank’s president proposed an “all of the above” shift in approach, with more natural gas development projects, as well as nuclear power and other alternatives. Although this proposal was welcomed by some, the World Bank’s board in June deferred a decision on natural gas, even as it approved nuclear power.

This debate will continue, including at the World Bank Annual Meetings this October. But the writing is on the wall as the U.S. pushes multilateral development banks to fund more fossil fuel projects.

This discussion, however, hides a thornier and more important development issue: the pressing and inescapable need in supporting the long-term development of poorer countries to address the fossil fuel emissions of the world’s biggest and richest emitting countries. The prospective destructive impact of climate change on the economies of developing countries is too large to ignore.

In order to reduce this risk to multilateral development banks and their poorer developing country borrowers, these banks should launch an initiative to encourage the largest greenhouse gas emitting countries to reduce their emissions [the “Undertaking to Reduce Global Emissions to support Development” (URGED)].

Although these richer countries aren’t susceptible to being influenced through multilateral development bank lending policies (China’s loan levels have dropped significantly, while the US, most EU countries, and Japan aren’t even borrowers), they are all leading shareholders of these banks, active on the executive boards and at shareholder meetings and other convenings. This involvement provides an avenue for multilateral development banks to engage with these countries on this emissions topic that affects development.

For example, the “URGED” initiative — built around analytic work, convenings, and outreach regarding the negative development impact of wealthy country emissions — could even be launched at the World Bank’s October annual meetings.

Is that likely in today’s political environment? No, but that doesn’t mean it doesn’t make sense.

This article is also published on IPS News. illuminem Voices is a democratic space presenting the thoughts and opinions of leading Sustainability & Energy writers, their opinions do not necessarily represent those of illuminem.

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