Governance of a Climate Dedicated Capital Increase at the World Bank

Over the past three years, I have been pushing an idea developed with Scott Morris of a climate-dedicated capital increase at the World Bank Group as likely the most plausible and efficient route to generate the levels of global financing required to speed climate mitigation efforts in developing countries. 

Affordable debt is a better instrument than grants for scaled mitigation efforts, where the aim is to help zero-carbon approaches that are close to lowest cost over the line to being the most cost-effective solution. Affordable debt is also, of course, considerably cheaper for donors to support than grants. A back-of-the-envelope calculation finds that multilateral development banks (MDBs) could sustain an additional $175 billion a year in mitigation-related lending in perpetuity with about $25 billion a year over twenty years in additional capital. (For comparison, the MDBs provided about $61 billion in climate finance in 2022).  

New capital could be put into a new institution such as a World Climate Bank instead of the MDB system. Partisans of a new institution argue this would allow it to respond to the fact that climate change is disproportionately a problem created by richer countries and suffered by poorer countries so that a climate bank should have a far more equitable voting structure than is traditional for MDBs; that it could focus exclusively on climate projects; that it could attract private capital and support private projects (or not do that, but engage more with civil society).  

As Masood Ahmed and Homi Kharas have pointed out, using existing MDBs to deliver climate finance will save time and the transaction costs of creating a new institution. It will also considerably ease the integration of financing for activities that combine components of mitigation and broader development (which is to say: most of them). In addition, MDBs already embrace the best model of harnessing the private sector to the mitigation challenge in that they attract private capital—borrowing on markets to fund their loans—while providing funding primarily to governments. Given most mitigation expenditure will be for infrastructure which remains overwhelmingly in public hands, that’s precisely the model of private sector engagement that is desirable.  

All that said, additional finance for both capital and development at the MDBs does need to come with reforms to lending practices to make borrowing more attractive. And any capital at the MDBs used specifically for climate mitigation should have a different governance structure to reflect climate justice. Luckily, altered voting, contribution and allocation mechanisms are quite possible within the Bank Group or other MDBs—think of an association structure like IDA (or indeed the existing Green Climate Fund housed at the World Bank that has equal representation from South and North). It might even be possible to be part of the same balance sheet as the IBRD and its sister institutions even while funding use is governed by different rules set using a different voting structure. 

For the sake of simplicity, imagine all of the capital goes to the World Bank–what would a climate-dedicated capital increase look like?   

Required capital contributions could be set based on an overshoot of a country share of a global per capita carbon budget as agreed by shareholders. Those countries where the cumulative emissions per person are already over the global cumulative emissions per person figure that is compatible with keeping global warming limited to 1.5 degrees centigrade, as it might be, would contribute to the $25 billion of annual capital increase in proportion to their share of total overshoot emissions. (In other words, countries are obliged to pay more to the fund the more they have emitted over their fair share of the global emissions budget that would limit warming to 1.5 degrees). Other financing apportionment mechanisms are certainly possible: see Jonathan Beynon and Edward Wickstead’s Fair Shares model, for example.  

Vote shares for the climate fund might be based on a formula that combined population, capital contributions, and proportional share of global undershoot emissions for countries where cumulative emissions remained below the per capita carbon budget. (In other words, countries are rewarded with more votes if they: have a larger share of the global population, if they are contributing more to the fund, and/or if they are disproportionately not responsible for climate change because of low cumulative emissions per capita). 

An illustrative example for select countries is provided below. It assumes greenhouse gas emissions over 1990–2020 alone are counted, that the global carbon budget is set equal to 110 percent of total global emissions over 1990–2020, that there is universal compliance amongst deficit countries in providing finance, and that votes will be weighted equally on population, contribution, and undershoot shares. Note that all of these assumptions would be subject to negotiation, and also to recalculation as underlying data changes—China, for example, is rapidly moving from undershoot to deficit status, at least under this set of assumptions, and should rapidly become a contributor. Existing contributors including the US would see their annual contributions decline over time as new contributors were added. The fund should limit lending to low- and middle-income countries, and it might limit or at least prioritize lending to countries still undershooting their share of the global carbon budget.  

Table. 1 Illustrative Voting and Contribution Shares for a World Bank Climate Dedicated Capital Increase 

If a capital increase within the existing MDB system is likely the most plausible way to get considerably more finance for effective climate mitigation in developing countries, the past couple of years suggest it still isn’t very likely, with donors showing a preference for rebadging existing finance rather than making any real effort to provide additional resources. But should that change, governance models within the MDBs are flexible enough to be adapted to support the management of that finance in a way that reflects climate justice.