In a collaborative article with Tess Turner and Mike Weilandt, we explore the methods for mobilising clean energy financing through multilateral development banks (MDBs) and the necessity for financial reforms to enhance clean energy investment in the developing world.
China has set an impressive precedent with the Belt and Road initiative, allocating a significant $90 billion in capital to its leading policy banks and supporting investment funds, enabling financing and construction of major infrastructure projects globally.
In contrast, the United States and the G7 countries have often failed to provide actual financial support despite announcing large sums for clean energy investment. In comparison, China’s policy banks and state commercial banks have exceeded the performance of Western multilaterals by lending over $1 trillion, surpassing the World Bank’s lending capacity. This notable contrast serves as a wake-up call for the G7 nations to reassess their commitment to global development financing.
There is an increasing global demand for clean energy investment, yet high market interest rates pose challenges for clean energy projects in advanced and developing economies. The fundamental issue lies in the lack of available capital for clean energy investments. However, the solution to this problem is not entirely new, but rather a rediscovery of existing mechanisms within the MDBs.
Multilateral development banks have the capability to mobilise funds at the cost of funds in advanced economies, but they require increased financial capability to meet the scale of funding required for clean energy investments. To address these challenges, we propose practical financial reforms that leverage existing resources and legislative authority.
One of our proposals involves utilising the callable capital of multilateral institutions, backed by treaty commitments, to enhance lending capacity without affecting their budget cost, strategically taking on more risk using existing capital with appropriate financial safeguards in place.
Additionally, we advocate for the establishment of a Dedicated Clean Energy Window within the World Bank to focus resources on clean energy financing, facilitating long-term, low-cost financing for clean energy investments in developing countries.
Furthermore, we suggest using a fraction of the currently unused pool of Special Drawing Rights (SDRs) to create an SDR-based IDA funding facility, enabling concessional lending without the cost of market borrowing.
Finally, the United States and the Green Climate Fund should establish “challenge funds” to incentivise MDBs and financial institutions to rapidly scale their climate finance based on their climate ambition, potentially mobilising substantial new balance sheet lending for clean energy projects.
Our proposed reforms are both practical and ambitious, and have the potential to expedite the global transition towards clean energy. U.S. leadership in implementing these reforms would align lofty rhetoric with tangible resources and deliver impactful financing to developing countries.
In conclusion, by embracing these financial reforms that leverage existing resources, the MDBs can play a significant role in addressing global climate goals and driving clean energy investments. This approach would not only amplify the impact of clean energy financing but also showcase the United States’ leadership and inspiration in the realm of development banking and clean energy finance.
For a comprehensive understanding of our proposals, we invite you to read the detailed paper published by MIT CEEPR.