How to close the climate finance gap in Africa

by MMC
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Climate finance is ineffective, insufficient and unfair. Faced with soaring debt levels and borrowing costs, climate action must be financed thanks to more equity investments and concessional financing. This means focusing on the needs of African countries – which are disproportionately vulnerable to climate change, despite contributing the least to creating the problem – in creating and implementing green finance tools.

The sooner leaders of advanced economies and international organizations understand what Africa needs to achieve a just energy transition and provide the necessary finance and technology transfer, the greater the chance that the world will reach net zero emissions. by 2050.

This week, Kenya hosts the first African Climate Summitas good as African Climate Week, with the aim of increasing commitments and pledges to support climate adaptation efforts and develop renewable energy on the continent. Now is an opportune time for governments, the private sector and multilateral lenders to begin removing systemic barriers to investment and development in African countries.

To meet the emissions targets set by the Paris climate agreement, Africa will need 2.8 trillion dollars by 2030 – roughly equivalent to 93 percent of the continent’s GDP. But, with the continent’s combined public debt reaching $1.8 trillion in 2022, many African countries do not have the fiscal space to mobilize domestic resources.

International investors should fill this gap by providing finance and technology transfer that will help build capacity and grow local industry, rather than simply continuing to exploit the continent’s natural resources. To that end, starting in Kenya this week and leading up to the United Nations Climate Change Conference (COP28) in Dubai in November and December, governments and financiers must begin implementing five critical reforms to ensure that Africa’s financing needs are met.

First, lenders must offer more concessional financing to emerging markets and developing economies (EMDEs). The World Bank and regional multilateral development banks (MDBs), supported by contributions from advanced economies to climate finance, are expected to provide loans to low- and middle-income countries at an interest rate of 1 percent and with a tenor ten years old. a grace period and a repayment period of 20 years for initiatives that strengthen climate resilience.

In addition, lending mechanisms such as the World Bank’s International Development Association, traditionally reserved for low-income countries, should be extended to low-middle-income countries and adopted by various countries. multilateral institutions.

Governments and development agencies should also establish broad and flexible reserves of concessional capital for climate projects. And they should explore new avenues of international taxation to provide grants, rather than loans, when traditional private or public financing is not enough.

Second, MDBs can implement credit enhancement and credit guarantee programs to encourage private sector participation. Such assurances would mitigate project risks and build investor confidence, thereby attracting much-needed private capital to Africa.

Third, creditors, including those in the G20, must provide debt relief to low- and middle-income countries. Given that about 60 percent low-income countries are in debt distress or at high risk of debt distress, suspending debt payments or, better yet, canceling debt would significantly improve their ability to respond to the harmful effects of global warming. MDBs must implement Climate resilient debt clauses in loan contracts for the poorest countries, announced this year by the World Bank. Additionally, debt-for-nature and debt-for-climate swaps could enable beneficiary countries to repay their debts by investing in biodiversity protection and climate action.

Relying on his recent efforts To provide $100 billion in Special Drawing Rights (SDRs) to climate-vulnerable countries, the International Monetary Fund should allocate an additional $100 billion in paid-up capital and redirect SDRs to MDBs, starting with the African Development Bank this month. This would be consistent with the Marrakech Declarationan initiative to reform the global financial architecture that is being developed at the request of African finance ministers.

Fourth, a multi-partner fund should be established to help mitigate foreign exchange risks for private investors by providing cost-effective foreign exchange and domestic hedges for climate investments in Africa. Such a fund would significantly reduce the perceived risks of investing in EMDEs, even in the face of currency fluctuations.

Finally, lenders should support the creation of a mechanism that accelerates existing projects and programs on the continent, particularly those that conserve nature and help communities adapt to extreme weather events such as droughts, floods and heat waves. Many donors and investment vehicles already active in Africa could create such a mechanism, which would avoid the tedious process of creating a new fund.

Progress has already been made on these five reforms. At the Summit for a new global financing pact, held in Paris in June, Senegal secure $2.7 billion from developed countries to invest in renewable energy and Zambia made an agreement to restructure $6.3 billion in debt.

Meanwhile, the African Group on Risk Management Capacitieswhich offers parametric insurance against natural disasters, has already provided $720 million in coverage for 72 million people since 2014. We can significantly increase this assistance by quickly investing money in Fund for losses and damages established at last year’s COP27 climate summit in Egypt.

Innovative financing measures will help African countries recover from climate disasters, build resilience to future shocks and complete the transition to cleaner energy – which can bring sustainable development gains. But the continent needs a significant increase in financing to reap the full benefits of climate action.

Mahmoud Mohieldin is Egypt’s high-level climate champion for COP28 in Dubai. Bogolo Kenewendo is Special Advisor and Africa Director for the United Nations High-Level Climate Champions. Reuben Wambui is a climate finance expert at the Net-Zero Africa Initiative.

Copyright: Project Syndicate, 2023.

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