Pearls and Irritations

If leading central banks can grow their balance sheets by billions of dollars during the pandemic, they can do the same to fight global warming.

Last year was the hottest summer on record and, while this summer is not over yet, it feels like it will break last year’s record. My air-conditioning bill has gone up because the nights are hotter. In May, India experienced a record heatwave with temperatures nearing 50 degrees Celsius (122 degrees Fahrenheit).

As I flew into Mongolia’s capital Ulaanbaatar this week, I was made aware that the country had experienced a nearly 2.3-degree increase in average temperature in the past 80 years, double the global average. The warming climate is affecting Mongolia with a decline in precipitation causing drought, desertification and soil erosion.

For a country of about 3.4 million people that accounted cumulatively for only 0.04 per cent of global carbon emissions in 2022, Mongolia is suffering from global warming through external factors rather than internal ones. The current dzud – a period of extreme weather that prevents livestock from accessing pastures – is estimated to have killed 5.2 million heads of livestock, or more than 8 per cent of the country’s total.

One might think there would be some form of global insurance or assistance for small countries that suffer the effects of climate change through no fault of their own.

Multilateral agencies such as the World Bank or Asian Development Bank (ADB) are trying their best, but according to the International Budget Partnership, the primary constraint holding back Mongolia from meeting its UN Sustainable Development Goals (SDGs) is budgetary concerns. More than a quarter of the country’s people live below the poverty line, and the government needs external aid to deal with climate change.

In June, the United Nations estimated that, as of last year, only 16 per cent of its SDGs to deal with global poverty and climate change by 2030 had been met. The annual investment gap for developing countries to meet their SDGs has been estimated as up to US$4 trillion, but official development aid to developing countries was only US$223.7 billion worldwide in 2023. Rich nations pledged in 2009 that they would provide US$100 billion for developing countries to deal with climate change, but that pledge remains unfulfilled.

The Mongolian government launched the Billion Tree Fund in 2022 to try to increase the country’s forest coverage, which was only about 9 per cent in 2021 compared to the 72 per cent considered grazing land. Reforestation would help to slow desertification, capture carbon, retain water and conserve biodiversity.

Each country is experiencing climate change in different ways, and those with poorer populations tend to bear the brunt of natural disasters. Since the richer countries were responsible historically for most of the carbon emissions, you would think they would be willing to fund others’ path to net zero. Not so.

I was with a crowd of central bankers who insisted they should not be directly involved in funding climate action because it was not in their mandate. They feared that moving out of their mandate to deliver price stability, financial stability and full employment would hurt their independence. Few were willing to accept that central banks might be independent from their government but not from the people and society.

Since central bankers in China, the euro zone, the US and other developed economies expanded their balance sheets by a collective US$11 trillion between February 2020 and May 2021, why can’t they be a source of funding for climate action? They choose to remain on the sidelines because they feel that taking action on climate change is the remit of their national governments, while these government can’t agree on how to fight climate change because of geopolitical considerations.

The good news is that global governments agreed in 2021 to increase the special drawing rights by US$650 billion as part of efforts to mitigate the effects of the Covid-19 pandemic. Special drawing rights are an international reserve asset created by the International Monetary Fund (IMF) to supplement the official foreign exchange reserves of member countries.

Since special drawing rights are distributed to countries in proportion to their quota shares in the IMF, about US$275 billion was allocated to emerging and developing countries. These amounts are totally inadequate in terms of the funding needed to deal with climate change.

It would have been more effective if the IMF’s largest shareholders donated their special drawing rights to boost the capital of multilateral development banks such as the ADB and World Bank.

Increasing their capital and allowing them more leverage would create huge amounts of funding for developing nations to achieve their goals in alleviating poverty and fighting climate change. It would also provide some hope of avoiding a global recession and reducing greenhouse gas emissions.

However, such an agreement is very unlikely to happen. The majority shareholders of the IMF all seem to be preoccupied with domestic politics, national security and protectionist measures. They are also concerned about immigration, as growing numbers of people leave poor countries in the Global South to seek cooler climates and jobs elsewhere.

Helping these countries create better jobs at home and deal with the effects of climate change would make them better places to live and would help slow migration, in turn making the world a more peaceful place. Instead, the default solution to our crises is to print more money.

When the weather gets hot, the rich can pay more to stay cool while the poor die. Who said the world is fair?

Republished from South China Morning Post, July 12, 2024

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