Why investing in intermediary cities should be a priority for a green recovery

By Michael Lindfield, Senior Consultant, former Senior Specialist at the ADB

Although the COVID-19 pandemic will change the context for investment decisions – including for climate investment in intermediary cities in emerging markets and developing countries – little has been done to detail these consequences. In general, consequences for financing institutions and cities may include lower inflows to institutions like pension funds and insurance companies, and increased pressure to buy government bonds and lower revenue base, thus reducing cities’ and other urban institutions’ ability to service debt and/or provide availability payments to concessions. Additional consequences include potentially lower emerging market and developing economy sovereign and sub-sovereign credit ratings (increasing the cost of debt), and curbed economic growth, thus curtailing the potential for cost recovery in relation to green projects.    

These consequences are likely to impact intermediary cities more than capitals or megacities because they have lower credit ratings and less technical capacity. However, there will be opportunities if climate investment is integrated into COVID-19 recovery financing, creating the right incentives for investors. The critical alignment relates to the perceived risk/return profile of investments. If the rate of likely return will be sufficient to compensate for the risks of investing, then private, institutional and commercial entities will invest, provided minimum regulatory hurdles, such as minimum credit ratings, are met.

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Green windows of opportunity for latecomer development in renewable energies

By Xiaolan Fu, University of Oxford, Rasmus Lema, University of Aalborg and Roberta Rabellotti, University of Pavia

There is increasing recognition that policies aimed at meeting environmental targets may open new economic development paths, especially for emerging economies, given the green transformation and related techno-economic paradigm changes across institutional, market and technological domains. Looking at China, a recent article highlights the importance of institutional transformation to create “green windows of opportunity” (GWOs) for economic structural change associated with the green economy. Green windows of opportunity represent a set of favourable, temporary conditions for “latecomers” to catch-up in the long run in sectors central to the green economy. 

To investigate GWOs there needs to be a new framework for two main reasons. First, it is essential to deviate from the environmentally unfriendly development pathways undertaken in the past by advanced economies of North America and Western Europe. Emerging economies should ‘develop differently’ from the outset rather than catch-up along established pathways. Second, the green transformation, as a significant driver of current capitalist development, has features that sets it apart from earlier transformations. It is the first industrial and technological revolution with a deadline and it is steered explicitly by public policy, driven not just by economic motivations, but also by social value. 

Green windows of opportunity

This new analytical framework is summarised in Figure 1, with green windows of opportunity at its core, driven by institution and policy changes rather than technological or market change. Empirical evidence on biomass, hydro, solar photovoltaic, concentrated solar power and wind shows that institutional changes are the central drivers of green windows of opportunity. Examples from China include both cross-cutting changes such as the implementation of the 2006 Renewable Energy Law and sector-focused missions such as the Golden Sun Demonstration Program in the solar photovoltaic sector and the Rind the Wind Program. While the drivers of the emergence of these green windows are essentially institutional and policy-driven in nature, they influence and interact with technological and market transformations.

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Frontloading finance can save lives, tackle climate change and generate real impact

By Sony Kapoor, CEO of the Nordic Institute for Finance, Technology and Sustainability (NIFTYS) and Chair of Re-Define

The humanitarian, moral and economic case for development aid has been made eloquently and does not bear repeating. But the stark, ongoing highly inequitable impact of climate change and the COVID-19 pandemic, both of which hurt poor and developing economies the most, has turbocharged the case for more aid and now. However, present levels of aid languish at 0.32% of GDP, or $161.2 billion, less than half the promised amount of 0.7% of GDP. This commitment needs to be at least doubled, but despite the OECD call for a “massive expansion of aid” countries such as the UK are cutting, rather than increasing aid. 

Meanwhile, in the developing world, COVID-19 may push 150 million to 200 million people into extreme poverty, reversing years of hard-earned progress. Even a dynamic economy such as India has seen an increase of 75 million additional poor, with the middle class also being hollowed out. The IMF has highlighted the uneven nature of the recovery between rich economies that have vaccines and large stimulus programmes, and developing countries that are lagging behind on both, now also facing fresh outbreaks of the virus. Climate change is likely to push an additional 130 million people into extreme poverty absent urgent mitigation and resources for adaptation. As Oxfam has highlighted, developed economies have failed to meet their promise to mobilise $100 billion in climate funding with the true value likely at only a third of the reported volume. 

The need to frontload aid to 1) finance vaccination efforts in developing economies 2) rescue the millions who have just fallen into extreme poverty before permanent scarring sets in 3) support ambitious mitigation efforts in developing economies to reduce greenhouse gases and 4) fund adaptation measures, could not be stronger. Every euro spent on these efforts will deliver several euros of return, for both developing countries and the global economy.

The large benefits of frontloading spending on vaccines is what led some donors to launch the International Financing Facility for Immunization (IFFIm) in 2006. IFFIm borrowed $6.4 billion and used it to fund the delivery of vaccines, which otherwise were unlikely to have been developed and administered, and which contributed to saving 13 million lives until 2019. The vaccine bonds issued by IFFIm will be repaid by pledges from 10 countries over a period of 32 years. Remarkably, IFFm was able to borrow at a lower rate than the weighted average borrowing costs of the pledging countries, because so many environmental, social and governance (ESG) conscious investors wanted to save lives.  

Now is the time for the EU, accounting for nearly 50% of all aid, the US under a Biden administration keen to reengage with the world, Japan and the UK to launch an ambitious IFFIm-like facility with the explicit aim of doubling aid volumes until 2030. Other donors, especially the Norway, Canada, Australia and South Korea, would be natural partners. This is also the Decade of Delivery for the Sustainable Development Goals (SDGs) that are badly lagging behind.

Enter FASTER – Frontloading Aid for the SDGs, The Environment and (COVID) Recovery – a plan to nearly double the volume of aid over the next decade to $250 – $300 billion. This will entail the issuance of around $1 trillion in SDG bonds, social bonds and green bonds to be repaid by ring fencing 25% -30% of current aid (as a % of GDP) for 20 years between 2031 and 2050. 

At prevailing record low interest rates and given the dramatic growth of ESG investors, real interest rates on these bonds will be zero or negative with coupons of around 1%. Far from undermining the total volume of aid between now and 2050, borrowing will actually increase it. ESG investors and impact funds who have been buying green and social bonds will lap these up. Unlike many of the outstanding green, social, and sustainability (GSS) bonds, these bonds will provide additional financing for climate action, SDG investments, social and health interventions that would otherwise not have been funded. 

Even if the frontloaded expenditure from FASTER is only modestly successful in saving lives, reducing extreme poverty and tackling climate change, public support for aid among existing donors is likely to increase, raising aid allocations. Combined with the growing variety of donors, this means that aid volume won´t see a dramatic drop-off in 2031, after FASTER expires. 

The logic of FASTER dovetails neatly with the reasoning behind the €750 billion EU Recovery Fund, as well as the Biden administration´s stimulus and economic recovery and infrastructure plans. All seek to frontload spending and investments to minimise economic scarring, tackle climate change and catalyse economic growth. If anything, FASTER has the most compelling logic of bigger economic multipliers, greater emissions reductions, saving more lives and biggest impact per Euro. 

What better way for an EU keen to project soft power by prioritising the Green Deal and an EU-Africa partnership than to launch a FASTER facility to tackle climate change, save tens of millions of lives, and catalyse growth in the developing world? And for a Biden administration and Japan – keen to rebuild environmental credentials and address China´s influence – to co-sponsor it, demonstrating intent? The UK, a lead sponsor of IFFm, is perfectly placed to co-ordinate the launch of FASTER ahead of the forthcoming COP26 to also help catalyse ambitious climate commitments. 

Comment remettre l’Humain au cœur des préoccupations agricoles et alimentaires ?

Par Pierrick De Ronne, Président de Biocoop

Selon l’OXFAM, 80 % de l’alimentation mondiale dépend de la production de paysannes et paysans. Pourtant, loin d’être récompensés pour leur contribution à la survie de la planète, de plus en plus d’agriculteurs perçoivent des revenus insuffisants pour leur assurer un revenu de vie décent. Dans l’ensemble des pays du monde, les géants de l’agro-industrie et de la distribution dominent les ventes de produits alimentaires. Ces acteurs s’organisent même à l’international afin de définir des prix payés aux producteurs sans cesse plus réduits. Cette guerre destructrice de valeur, maintes fois pointée du doigt par l’ensemble des acteurs, ceux-là mêmes qui s’y sont engouffrés depuis plusieurs années, écrase nos paysans, détruit nos filières et nos marchés locaux, accentue les écarts de revenus et s’accompagne, de surcroît, d’un recours croissant de l’industrie agro-alimentaire aux additifs et aux ingrédients ultra-transformés, lesquels ont un impact désastreux sur la santé des consommateurs.  

Les acteurs de la distribution ont une responsabilité sur les inégalités du système alimentaire mondial. L’engagement des enseignes, petites et grandes, pour transformer leur modèle d’approvisionnement, de production et de consommation est donc une condition indispensable. Aussi, comment passer d’une politique agricole productiviste, destructrice de valeur, à une politique de l’alimentation reconnue pour ses externalités positives (terroir, rayonnement culturel, emploi) ? Comment réussir à démocratiser l’accès à une alimentation de qualité rémunératrice pour les paysans tout en considérant l’agriculture comme partie intégrante de notre santé et de nos écosystèmes sociétaux ?

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“Green” transition and innovation in public institutions: an urgent research and policy agenda

By João Carlos Ferraz, Associate Professor, Institute of Economics, Federal University of Rio de Janeiro

New economic activities may be required for the sustainable, competitive and inclusive development trajectory of a nation. But in their early stages, the economic attractiveness of many of these new activities is unknown. Uncertainty prevails as investment projects have no track record of costs and returns, demand is not guaranteed, and the institutional framework may not be consolidated. In short, infant industry challenges may apply, which is when new policy and public institution practices should come into play. And increasingly, emerging societal development challenges like climate change, are creating a pressing need for innovative policy solutions.

But what is innovation in public institutions? Policy innovations may come in diverse shapes and forms; they can be new solutions to address a pre-existing challenge or alternative approaches to tackling an emerging one. Some may result in short-lived experiences (pilot projects that are never scaled up); others can be both immediately relevant and long lasting. Drawing from Schumpeterian literature, policy innovation can be defined as changes in processes – including organisational procedures – and products that a public agency offers to society. For policy beneficiaries, these are product innovations, but, when taken up, they imply process changes in the recipient organisation. Moreover, policy innovations can be of radical or incremental nature depending on the extent of the changes they imply for policy benefactors and beneficiaries. Nonetheless, a necessary pre-condition for the emergence and application of any type of innovation is the mobilisation of dynamic policy capabilities.  

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Strengthening climate resilience in developing countries: what are the priorities?

By Takayoshi Kato, OECD Development Co-operation Directorate and Nicolina Lamhauge, OECD Environment Directorate

Over the last 12 months, the Philippines has had to fight two rising tides threatening the population of its archipelago: the health and economic impacts of the COVID-19 pandemic, and the consequences of devastating weather events including several typhoons and tropical storms. Not only did Typhoon Goni lead to the evacuation of almost 1 million people from their homes last October, the country has also had to grapple with a string of less extreme, slow-onset changes, such as rising sea-levels, putting houses, schools, shops and infrastructure at risk. The Philippines is not an isolated case: all over the world, the COVID-19 pandemic has all but exposed the fragility of societies to systemic shocks, reminding us of the imperative of investing more resolutely in resilience building mechanisms and enablers.

The impact of climate change on developing countries is a case in point: by altering and intensifying risk patterns, it has been compounding other stressors such as poverty, inequality and discrimination, and threatening the ability of those countries to achieve their sustainable development objectives. Responding to this increasingly pressing need for climate action is a difficult task for administrations already struggling with other environmental challenges, on top of social and economic ones. International co-operation partners can provide critical support to partner countries. However, for finance and technical co-operation to be effective, and not complicate the task of the policymakers they mean to help, those partners must target and manage their support in a smart way, drawing from experience around the globe. As the OECD releases its updated guidance to making development pathways more climate resilient, three priorities emerge from our research and consultation process.

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The IMF’s turn on climate change

By Kevin P. Gallagher, Professor and Director of the Global Development Policy Centre at Boston University’s Pardee School of Global Studies, and Co-Chair of the ‘Think 20’ Task Force on International Finance to the G20

The International Monetary Fund (IMF) has recently pledged to put climate change at the heart of its work. A laggard to date, the IMF has to catch up fast to ensure that the world community can meet its climate change and development goals in a manner that doesn’t bring havoc to the global financial system. The IMF’s first test on climate change will be the extent to which it incorporates climate risk into this year’s reform of IMF surveillance activities. Given that these reforms will lock in for close to a decade, if the IMF doesn’t act now the consequences for prosperity and the planet will be grave.

Kristalina Georgieva has been a strong advocate of greening the financial system through her new post of Managing Director of the IMF, which she began in the fall of October 2019.  Unfortunately, she took office when the shareholder of the IMF with the most voting power, the United States, was led by a President who claimed climate change was a hoax. In the face of that pressure and to her credit, Georgieva steadfastly advocated for incorporating climate change into IMF operations and for a green recovery from the COVID-19 crisis even though her biggest patron made it difficult to put her words into action.

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Are African countries heading for a carbon lock-in or leapfrogging to renewables?

By Galina Alova, Smith School of Enterprise and the Environment, University of Oxford

Non-hydro renewables are likely to account for less than 10% of Africa’s power generation by the end of this decade. My recent co-authored study predicts fossil fuels to continue to dominate the electricity mix in many African countries, and the continent as a whole.

Opportunity to power development with renewables

Africa is presented with an important opportunity to make a decisive leap to renewables this decade. The continent’s energy demand is projected to more than double in the coming years, as countries seek to industrialise and improve the development outcomes for their growing populations, including providing affordable power to close the energy access gap. At the same time, Africa – the land of sun and wind – possesses vast renewable energy resources.  

Against this backdrop, renewables have become increasingly more competitive in the past years, with their cost set to decline further compared to conventional fossil-fuel-based generation. The affordability of battery storage has also significantly improved, with lithium-ion battery packs hitting a record low in 2020.

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Climate resilience building in informal settlement upgrading processes

By Jorgelina Hardoy, Instituto Internacional de Medio Ambiente y Desarrollo, IIED – América Latinai

More than half the world’s urban population lives in urban centres with less than a million inhabitants; for Africa, it is 63%; for Asia and for Latin America and the Caribbean it is 54%. These cities get far less attention than their demographic, economic and governance importance deserves – and far less attention to developing their climate change policies. One difficulty facing climate change policy and action in cities is that so much of what is needed is not considered part of climate change policies. Another is that when there is attention paid to climate action, both nationally and internationally, it usually concerns larger cities. We know far less about how intermediary cities are responding to climate change, whom they are engaging with, the types of constraints they face, etc.

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Getting more durable deals in extractives: knowledge is a power best shared

By Iain Steel, Research Associate, ODI & Founding Director, Econias

“It’s a high-risk country, there’s no infrastructure, and the resources are low quality.” I have heard these arguments countless times over the years from investors in extractives projects. And in every single negotiation I have advised governments on, across Africa and Asia-Pacific, investors have asked for tax incentives that they claim are necessary for financial viability. But how are governments to judge these claims when investors don’t share the underlying data?

Extractives projects are uncertain and risky. Nobody knows the true geology of the asset before it is developed, the precise amount of investment required, and the operating costs to extract and refine the resources. And the only thing we really know about commodity prices is that they’re volatile and unpredictable. Who would have thought in January 2020 that within four months the price of oil would be negative?

Unbalanced deals are a bad result for all parties

Investors often have better information than governments when negotiating extractives contracts. This is not a criticism of governments, but a function of the work that is usually undertaken by investors. Investors tend to explore for resources and commission studies to determine the technical and financial feasibility of projects. They are also likely to have deeper sectoral expertise and experience than governments, and know the value of their intellectual property.

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