Hacking Climate Change: Funding 2.0

By Wolf Hindrichs
Contributing Writer
June 26, 2017

On June 1, President Donald Trump announced the United States’ withdrawal from the Paris Agreement, a multilateral accord under the United Nations Framework Convention on Climate Change (UNFCC) designed to stem greenhouse gas emissions that contribute to global warming. The announcement has led to a roiling debate over whether the decision was a strategic move to strengthen the American negotiating position or an abdication of American leadership and a shift to asymmetrical polarization. In response to the Trump administration’s action, American cities and states have become key stakeholders through non-binding agreements with counterparts abroad and multilateral institutions charged with carrying out climate change mitigation. This shift comes with its complications, as multilateral development banks (MDBs) currently only fund subnational projects with national support; to remain effectual, they must reexamine this practice and consider funding city-and state-led projects in developing countries without explicit national government support

The new role that cities and states are assuming as subnational counterforces to national governments comes at a political inflection point for much of the West. Not only the United States, but also across Great Britain and the EU, hyper-nationalism is a growing force, but not one without resistance. Notably, these embattled entities are working directly with institutions (the European Union, United Nations, World Bank, and the International Monetary Fund, among others) originally designed as supranational tools to temper the nationalist forces.

This raises an important issue: the changing role of MDBs and private funding. Under the current scheme, the Paris Agreement will not survive without American financial backing. While other nations assert that Paris will survive irrespective of the United States’ participation, G20 finance ministers are already effectively backing off from their July communiqué seeking a $100 billion annual investment to deal with greenhouse gas emissions, and are instead pushing MDBs to use private funding to address climate change. If this trend holds, MDBs will need to fundamentally change how they operate in order to work with cities, states, and subnational governments in that outpace their national governments in order to sustain global progress on climate change.

MDBs are financial institutions comprised of developed nations, which loan money, and less developed nations, which borrow money for short-term development projects. Member states’ voting shares of the bank are based on their contributions, often leading to a large imbalance of power between the most developed nations, which generally determine the investments made by the bank, and everyone else. For instance, in terms of voting shares in the World Bank, the United States has 17.25 percent, while the next three highest shares, 7.42, 4.78, and 4.33 belong to Japan, China, and Germany, respectively. The United States is the only shareholder that maintains veto power, which means it enjoys much greater influence than other countries.

Like many other MDBs, the World Bank’s Articles of Agreement prevent the International Bank for Reconstruction and Development (IBRD) from giving financial resources directly to cities if the concerned national government is against or ambivalent to the measure, even if the development project itself is in line with the MDB’s development goals. This is highly relevant to the climate change challenge. Cities are moving faster than national governments towards regulating climate, and this is not just an American trend. For instance, Norway’s capital city of Oslo finds itself at odds with its right-wing national government as it seeks to cut carbon emissions in half by 2020 by banning private automobiles from the city, reducing parking availability, and encouraging the use of bicycles and the soon-to-be renewably-powered bus system. This same trend is manifesting in the developing world in cities like Nairobi, Buenos Aires, and Bangkok.

In order to preserve their original mission of mitigating the global geopolitical threats presented by hyper-nationalism, multilateral banks should reform their methods in order to engage subnational stakeholders while maintaining national governments as primary interlocutors—in short, the World Bank and other MDBs must reform in order to finance subnational development without national governmental support.

While this might seem like a radical shift in the way MDBs conduct business, a devolution process was initiated between 1995 and 2005 under former World Bank President James D. Wolfensohn after he assumed control of the institution during a tumultuous time. Under his leadership, the World Bank enacted a series of reforms, not the least of which was expanding discussion of development to draw upon the expertise of civil society organizations like think tanks, non-governmental organizations (NGOs), and religious groups. This same spirit of change is what is needed to make principal MDB institutions operate directly with subnational elements. Additionally, other member institutions comprising the World Bank are already more flexible—specifically, the Articles of Agreement for the International Development Association do not explicitly require a sovereign guarantee, but the institution generally adheres to IBRD procedures, while the private arm of the World Bank, the International Finance Corporation (IFC), requires neither sovereign guarantee nor on-lending. Allowing the IBRD and other MDBs to fund city-led projects is the next logical step.

For fighting climate change, this would be just one step. A fundamental problem remains with the G20’s move to rely on MDBs and private financing to address climate change, and it has to do with shareholders. Many of the MDBs have a singularly powerful shareholder. For instance, even if the majority of the World Bank shareholders decided to amend the Articles of Agreement, the United States remains the largest shareholder, and as such, has the potential to veto the policy change, which process is dependent upon reaching an 85% threshold of shareholder votes. However, it would be in the United States’ best interest to pursue this policy change from both environmental and strategic standpoints. Firstly, this would enable the United States to allow other responsible entities to pursue climate change development projects without requiring American commitment in a manner that could be seen as threatening the national economy and jobs. Secondly, and perhaps more pointedly, the United States does not want other MDBs outside of the western liberal order, namely the Asian Infrastructure Investment Bank (AIIB), to assume the leadership mantle of the World Bank.

The face of legislation is changing. Roles that were once within the purview of national government are being seized by cities and states unwilling to be party to inaction and laggard policies. To remain relevant, MDBs must embrace this spirit of change and increase their flexibility in lending to subnational elements when parent governments are either incapable of or unwilling to take necessary action towards development. Subnational actors and development banks must not fall victim to the false dichotomy offered by nationalist governments. It’s not the economy or the environment; with development, there can be both.

Wolf Hindrichs is a human geographer currently pursuing a Master in International Policy and Practice at The George Washington University’s Elliott School of International Affairs. An active duty Army officer, husband, and father; he is a veteran of the wars in Iraq and Afghanistan, and other operations in support of Operation Enduring Freedom. The views expressed in this post are his and do not necessarily reflect those of the Department of the Army or the Department of Defense.

Picture licensed under CC-BY-2.5.

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