Remaking Multilateralism for a Development-Centered Climate Agenda: Takeaways from COP27 and the G20 Summit

By Lara Merling

This November, the Group of Twenty (G20) Leaders’ Summit in Bali, Indonesia was held in parallel to the 27th United Nations Climate Change Conference (COP27) in the Egyptian resort town of Sharm El-Sheikh. 

World leaders, researchers and activists met amid a charged and challenging global context, from Russia’s war in Ukraine to lackluster progress on meeting Paris Agreement targets and the UN 2030 Sustainable Development Goals (SDGs). At the COP, developing countries stressed their demands for wealthy countries to step up support, stating their concerns around rising borrowing costs that are worsening debt pressures in climate vulnerable countries and holding them back from meeting urgent investment needs. The G20 Summit was a missed opportunity to propose meaningful reform of an outdated international financial architecture not equipped to deal with these challenges.

The major breakthrough of COP27 was the formal establishment of a dedicated “Loss and Damage” fund – a longstanding demand of developing countries that disproportionately suffer from the impacts of climate change. This is a victory for the Group of 77 (G77), a group now representing 134 developing countries who put forth the proposal and stood by it—eventually pressuring European countries and the US to support it. The details on how this fund will operate will be on the agenda for COP28 in 2023. Following the G20 Leaders’ Summit in Bali, the communiqué included a nod to the then ongoing loss and damage negotiations at COP, urging countries to “make progress” on the issue, and reaffirmed their commitment to the Paris Agreement and implementing the Glasgow Pact on revisiting and strengthening their own transition plans. 

On climate finance, the decision document adopted by countries at the COP made demands for wealthy countries to step up financial support and highlighted the failure to meet the 2009 pledge of providing $100 billion per year. The G20 once again reaffirmed the commitment this year but has yet to develop a concrete plan for delivering on it. Public financing pledges to support adaptation efforts made at the COP were in the low millions, far from the hundreds of billions needed to address the problem. 

To increase available climate finance, the COP27 declaration included a call for the shareholders of multilateral development banks (MDBs) and international financial institutions to scale up funding and for MDBs specifically to ensure their operations are “fit for the purpose of adequately addressing the global climate emergency” and contribute to increasing “climate ambition”, while taking into account countries’ debt burdens. The G20 Summit was an opportunity to address to this call. Within international financial institutions, advanced economies are the largest shareholders and dominate decision making processes. At both the International Monetary Fund (IMF) and the World Bank, the G7 and European Union control over half of the voting power, and the members of the G20 over two-thirds. 

Throughout the crisis triggered by the COVID-19 pandemic, the G20 has been a key venue for shaping the multilateral response: it was after the G20 signaled its support that the IMF moved forward with the historic issuance of $650 billion worth of Special Drawing Rights, followed by the proposal to establish the Resilience and Sustainability Trust (RST) to facilitate re-channeling of SDRs to countries who needed them most. It was also at the G20 where the Common Framework for Debt Treatment Beyond the Debt Service Suspension Initiative (DSSI) was established as a venue to deal with debt problems. 

These initiatives from the G20 were important steps taken as part of the crisis response and undoubtedly offered a lifeline to many developing countries. However, it is worth noting that the level of support developing countries received pales in comparison with the domestic stimulus measures undertaken by advanced economies. Furthermore, the G20 continues to overlook the shortcomings of its proposed debt treatment framework or help provide solutions that could prevent a full blown global debt crisis. The uneven ability to provide stimulus and respond to the crisis has further exacerbated global inequalities. 

The composition of the G20, which is mostly made up of advanced economies and a few large emerging market economies, raises legitimate questions on its responsiveness to the needs of developing countries. It is also challenging to have conversations on reforming the international financial architecture for climate and development goals relegated to the G7, which is even less inclusive and composed of advanced economies that are also the largest historical carbon emitters. 

In October, members of the G7, led by Germany, expressed their support on reforming the World Bank to increase its focus on addressing climate issues. This follows a call for reform of from US Treasury Secretary Janet Yellen, who stated the World Bank needed to step up efforts to address global challenges like climate change. Without detailed proposals, and with speeches that hint on a continued emphasis on private capital mobilization, the question is whether their vision for reform can deliver on meeting the needs of developing and climate vulnerable countries. 

Wealthy countries are also increasingly proposing partnerships and side-deals outside of multilateral spaces such as the UNFCCC. The United States pitched a market for carbon credits as the solution to providing climate finance to developing countries, an idea that has since received a fair amount of skepticism. On the sidelines of last year’s COP, members of the G7 and the European Union, in partnership with the Glasgow Alliance for Net Zero (GFANZ) launched a “Just Energy Transit Partnership” (JETP) with South Africa, promising to mobilize $8.5 billion in financing to support the transition. This year, on the sidelines of the G20 Summit in Bali, the same group announced its second JETP with Indonesia with a target  to mobilize $20 billion. 

While these announcements seem promising, a breakdown of the headline numbers reveals a potential overreliance on the private sector finance the transition. In the investment plan for South Africa’s JETP, $230 million – 2.7 percent of the total package – is in the form of grants. Furthermore, only 1 percent of funding is earmarked for social protection and ensuring the transition is “just”, while almost half of the package is a mix of commercial loans and investment guarantees for the private sector. Some of the funding is earmarked for policy loans, to support “reforms” that will make South Africa more attractive to investors. 

This approach is consistent with previous proposals from the G7 around development and climate finance which is founded on the idea that small amounts of public finance should be used to mobilize large amounts of private finance – the “billions to trillions” concept that never materialized. Furthermore, privately-financed projects often end up being more costly, generate hidden liabilities and leave the public sector on the hook for losses, while privatizing profits. Additionally, the private sector is unlikely to invest in adaptation and resilience building, where most investments generate benefits and public goods but not necessarily income streams. 

Relying on market and price signals as well as the private sector to deliver the innovation and structural transformation at the scale and with the urgency needed is a risky proposition. Rather than assuming liberalization and deregulation will attract investments, policy reforms should focus on how to shape those markets to ensure the private sector delivers. As economist Mariana Mazzucato contends, the public sector has historically played a leading role in many of the innovations that underpin most advanced technologies used today. Once the role of the public sector in supporting technical breakthroughs and innovation is recognized, it follows that in addressing climate change, the public sector should take the lead in mobilizing finance and shaping markets. 

In a joint report from the Boston University Global Development Policy Center and the UN Commission on Trade and Development, Kevin Gallagher and Richard Kozul-Wright present a comprehensive proposal on reforming the multilateral system to deliver shared prosperity and support for a “Global Green New Deal”. The report highlights the limitations of a market-led approach to tackling climate change and destabilizing and rent-seeking behavior of unregulated private capital. Instead, the multilateral system needs to be reformed to provide all countries both the policy and fiscal space to pursue green industrial policies and make public investments that can establish low-carbon growth paths. 

A post-pandemic world has also led to a renewed embrace of industrial policy tools in wealthy countries; domestically, the United States is embracing an industrial policy approach to climate action, rather than leaving it up to market forces and private investors. In the current multilateral system, advanced economies benefit not only from ample fiscal space but also policy space. If their commitments to the Paris Agreement and the SDGs go beyond rhetoric, wealthy countries must support reforms of the international financial architecture and multilateral system that would equip the Global South with similar tools in their fight against climate change and pursuit of development objectives. Establishing a Loss and Damage funding mechanism is an important step. It must, however, be paired with structural reform of the international financial architecture to afford all countries the space and flexibility to address the challenges of the 21st century.

*

Never miss an update: Subscribe to the Global Economic Governance Newsletter