Will we get a disruptive moment at COP27? Will we get a moment that unlocks trillions of dollars for exponential action?
My money is on Mia Mottley, the prime minister of Barbados. She has come to Sharm el-Sheikh armed with a plan to reform the World Bank and the International Monetary Fund (IMF).
The funny thing is, reform of the so-called Bretton Woods institutions is not even on the agenda at COP27. But that is not stopping Mottley from using this moment to build momentum. And momentum is building. French President Emmanuel Macron and UN Secretary General Antonio Guterres are two serious players getting behind it. But possibly the most surprising heavyweight indicating support is Kristalina Georgieva, the managing director of the IMF.
The plan is called the Bridgetown Initiative after a meeting in the Barbados capital back in July. It’s a work-in-progress.
The architects of the Bridgetown Initiative have found a way to solve a big problem: rich countries, like rich people, can borrow money cheaply, often at interest rates of 1-4%. Poor countries are stung 12-14%. In a global scramble to fight inflation, borrowing costs will soar higher. This kills the trillion-dollar private sector investment desperately needed. There is no profit at this cost of borrowing.
The key element of the Bridgetown Initiative is a financial innovation to unlock trillions.
During the global financial crisis and the pandemic, the United States and other countries used quantitative easing to provide liquidity to flailing economies. They created money out of thin air and injected it into the economy, literally by digitally moving zeros from one side of a screen to another. Low-income countries can’t do this in the same way.
However the IMF can and it has a potential pot of $12.7 trillion (in so-called Special Drawing Rights or SDRs) which can potentially be borrowed at a profitable interest rate of 2.4%. The catch is that at the moment, access to these reserves depends on a quota system based on the size of a country’s economy. The US can get hold of large sums easily but doesn’t need them – it can create its own money. Low-income countries wanting to borrow to build clean energy simply have very limited access. This makes no sense.
Mottley and the other architects of Bridgetown recognise that, for now, not all countries feel comfortable directing their unused SDR quotas into a new IMF trust for climate mitigation. So the Bridgetown idea is to deposit just $500 billion into the new trust and use that as security to borrow a further $500 billion from the private sector at very low rates – the first trillion will be in place. The trust would then lend at low interest rates. But there’s one twist. Instead of lending to governments, the trust would lend to major infrastructure projects. As one of the architects Avinash Persaud says “These loans would become an asset of the trust and a liability of the project, critically taking climate mitigation off government balance sheets.” Eventually, the architects calculate such a scheme could pull in up to $5 trillion in private sector investment for climate mitigation.
As Persaud, a member of the High Level Expert Group on Climate Finance and Special Envoy to the Prime Minister of Barbados, said. “There is no other plan at this scale”.
This financial innovation – the Global Climate Mitigation Trust – creates a mechanism for the energy transformation to be largely funded by the private sector. This is possible because mitigation in energy, transport and agriculture for example, generates reliable revenues. There are other elements to the plan that also include reform of the World Bank and other multilateral development banks but these relate to adaptation and loss and damage (which are more difficult to make profitable by the private sector). For this article we’ll just focus on the IMF
What next? If momentum builds at COP27 then the architects will likely develop a full proposal to present at the spring meeting of the IMF and World Bank in Washington DC. Things could happen very fast.
If the finances fall into place quickly, then the world will need shovel-ready projects – offshore wind, solar, electrified highways for long-haul trucks and regenerative agriculture at scale. Where will these projects come from? How will they be assessed? And how can government red tape be cut to accelerate action?
This is the next part of the puzzle. One idea is to follow the Irish Cities 2070 initiative created by an informal group of architects, planners, engineers and urban designers thinking beyond typical planning horizons at what future societies really need. Perhaps governments could appoint chief “anthropocene engineers”* to coordinate the development of infrastructure at scale.
Financial innovations often precede major political, economic and technological change. The creation of the first limited liability companies (or joint stock companies – think the East India Company and the Dutch East India Company) changed to world forever fuelling both colonisation, slavery and the industrial revolution. The Bretton Woods institutions formed at the end of World War 2 contributed to 70 years of relative peace, stability, innovation and economic development.
Deep reform of the Bretton Woods institutions has the potential to unlock massive transformation.
*Engineers cognisant of planetary-scale emergent behaviour, ecology, culture and human rights.
Written by Owen Gaffney, co-founder of Exponential Roadmap Initiative
