Macron summit can revamp global finance for a safer future

Laurence Tubiana is CEO of the European Climate Foundation and a key architect of the Paris Agreement on climate change.

In an era when climate impacts and financial instability tightly intertwine, we urgently need to reform our global financial architecture to align with the Paris Agreement. We are at a crossroads, and this week’s Summit for a New Global Financing Pact marks a renewed effort to champion a Paris Action Plan: a visionary roadmap for climate and biodiversity goals, robust enough to uphold our financial stability and human security. The decision by French President Emmanuel Macron to host a global financing summit shows the acute need for new diplomatic spaces - and fresh ideas - to chart a path ahead amid extreme weather, inflation and war.

One in five people live in a country at risk of debt distress. The latest report from the Intergovernmental Panel on Climate Change highlights that up to 3.6 billion - or nearly one in two people - will live in regions “extremely vulnerable” to extreme climate impacts. The world needs cheap capital to put us on a safer path, and shield against the climate impacts already unleashed.

The financing gap is in the trillions, and many nations’ fiscal space is extremely strained – if not at serious risk of debt default – at present. The world of Bretton Woods in 1944, which gave rise to the World Bank and International Monetary Fund (IMF), bears little resemblance to the world of 2023.

As the Prime Minister of Barbados, Mia Amor Mottley, a driving force behind the summit, told representatives from 197 nations at the COP27 climate summit: the original injustice is that governments “in this room today did not exist at the time.” Nearly 80 years later, global financing decisions have been taken with limited consideration of the world’s challenges.

The battles of Barbados with debt servicing and exorbitant borrowing rates, amidst escalating hurricanes and a COVID-19 crisis, expose the systemic injustices within the climate-debt nexus. The pandemic response further amplified the disparity between emergency borrowing by advanced economies and the rest of the world. The emergency release of Special Drawing Rights (SDRs), the IMF’s reserve asset, during the pandemic also underlines the need for their active deployment during crises. PM Mottley’s leadership is a powerful clarion call: what are we waiting for?

In 2015, the world came together in Paris at COP21 to agree the response to climate change. It was a historic moment: the gap was bridged between the views of the most vulnerable countries and the more powerful and polluting advanced economies. Since then, the “spirit of Paris” has remained a rallying cry among climate diplomats, scientists and activists, but one that is harder to apply to the daunting challenges of rewiring the financial system.

As the world gathers here again this week, we need to channel the “spirit of Paris” once more. But this summit is the beginning, not the end of a process. Practically speaking, it can deliver two things: headroom in the short term, and a vision beyond that.

New taxes on industry

A shipping levy proposal, led by the Marshall and Solomon Islands, has the potential to galvanise government support, after decades at the table of the International Maritime Organization (IMO). Shipping is responsible for about 3% of global greenhouse gas emissions caused by human activities. If it were a country, the shipping industry would be the sixth-largest polluter in the world. The revenue from a tax on the sector could be used to reduce emissions in the shipping industry and fund other climate initiatives.

Governments should also explore other tax options, such as levies on the oil and gas sector and aviation - this should only be the beginning of getting industries to contribute for their climate impacts. Calls for a financial transaction tax are also growing louder - this option should be on the table.

G20 countries must also deliver on their promise to transfer $100 billion in Special Drawing Rights to the International Monetary Fund's (IMF) new climate-focused Resilience and Sustainability Trust, as well as the pandemic-related Poverty Reduction and Growth Trust, providing vital funding to the most vulnerable nations. Both the IMF and the World Bank are also expected to step up their climate role. At the summit, governments could call on the IMF to formally align with the Paris Agreement

The new World Bank president, Ajay Banga, is expected to lead the bank's transformation into a major global and national climate policy institution. Furthermore, the World Bank's “evolution” reform programme should lead it to accept more risk in its lending. This approach, as urged by a G20-appointed expert group and endorsed by U.S. Treasury Secretary Janet Yellen, would significantly enhance the bank's ability to catalyze climate action, and "de-risk" projects for other lenders.

Beyond the summit, it is clear we need a concerted discussion on even more vexing subjects, such as the effectiveness of the G20 Common Framework to tackle sovereign debt, or the transparency and integrity of carbon markets.

A guiding principle throughout should be to align our international financial architecture with the Paris Agreement. We cannot impose outdated and rigid governance systems in a fluid and multipolar world, but we can agree norms and standards to guide us to safety. Europe’s balancing role will be crucial.

We face an unprecedented diplomatic sequence, culminating in a special U.N. summit in September, COP28 in the oil-rich UAE, and Brazil’s G20 presidency in 2024. President Lula's plan to host COP30 in the Amazon in 2025 could be a transformative moment. As Bretton Woods approaches its 80th anniversary in 2024, we must shun empty commitments. Our multilateral system is at stake.

Sums vastly greater have been mobilized in the name of the COVID-19 response, increased defense spending, and to bail out private banks when their balance sheets cratered. These efforts are entirely within reach if leaders make it a priority.

We need to invest for the future. For people and planet, we need a Paris Action Plan: a practical roadmap, definitive deadlines, and a vision for climate, development and biodiversity goals to underpin our financial stability and human security.