Barbados PM: Climate change requires a new financial architecture for us all
The writer is Prime Minister of Barbados
On October 10, 2008, G7 treasury ministers and central bankers gathered at the US Treasury Department in Washington as the worst financial crisis since the outbreak of the Depression. Those present recognized the moment and understood it. They tore up the prepared communiqué and wrote another: one of the shortest, most influential ever. The first point was: “We agree to take decisive action and use all available tools.” And they did.
Since then, the G7 central banks have bought $25 trillion in government bonds, avoiding another depression. On that day and the days that followed, they showed that humanity is not limited by ambition or ability.
Today we are gripped by a new crisis – an even bigger one. The Intergovernmental Panel on Climate Change tells us that the average temperature on Earth is 1.1°C higher than it was before European industrialization. And at 1.5C, the Earth’s chemical, biological and physical systems destabilize.
Between the Tropic of Cancer and Capricorn, rising temperatures and sea levels have already made flooding and droughts more devastating and created new problems, from climate refugees to locust plagues to saltwater intrusion into freshwater sources. My country, Barbados, is on this frontline, where a storm can destroy 100 percent of our national income in a matter of hours.
But the front line is moving toward the industrialized north, where there are the resources to make the climate mitigation investments we need. It hasn’t reached those countries yet, but if it does, it will be too late. If 14 years ago governments had instructed their central banks to buy bonds that finance climate mitigation, rather than ordinary government bonds, we would now be halfway through ending the climate crisis.
When the G7 meets again in Bavaria on June 26, the war in Ukraine and food and energy inflation will dominate the conversation. But the greatest crisis facing humanity must also be firmly on the agenda.
Today, multilateral development banks, such as the World Bank, can only lend to the poorest countries on favorable terms – low interest rates and long repayment terms. But, partly as a result of globalization, more than 70 percent of the world’s poor do not live in the poorest countries. And the climate crisis makes frontline middle-income countries vulnerable to losing everything to climate events, or else sinking permanently under the waves.
It is too late to offer condolences afterwards. Climate-vulnerable countries now need money to build defenses. And the G7 can make a difference by extending eligibility for concessional loans to include climate vulnerability.
The poorest countries need all the support they can get. Current efforts to achieve the UN’s sustainable development goals require additional funding. If the G7 agrees to channel some of the nearly $1 trillion in special drawing rights issued by the IMF to help central banks borrow their reserves to multilateral development banks, the latter could borrow $500 billion more.
The countries meeting in Bavaria, plus the former Soviet Union, account for nearly 50 percent of the stock of greenhouse gases causing global warming. But the cost of dealing with the climate crisis rests on the small balance sheets of frontline states that have contributed almost nothing to the problem.
We need a new financial architecture that can better respond to the current reality of massive vulnerability to external shocks. The G7 countries should set the market convention by including Barbados-style natural disaster clauses in all their government bonds. Under these clauses, the debt service is automatically suspended when an independently verified disaster strikes and reactivated at maturity with compensatory interest.
If every country had had such clauses in place during the pandemic, developing countries would have had access to a significant amount of additional liquidity. Instead, developing countries, constrained by the existing debt architecture and fearful of a messy realignment, accounted for just 5 percent of the global fiscal and monetary response.
Finally, we need a new and separate balance sheet that includes the costs of tackling external problems, rather than the balance sheets of the most vulnerable countries. This global balance sheet could be financed through the issuance of new climate instruments where part of the return consists of a verifiable amount of greenhouse gases that have been reduced or removed, or measurable climate adaptation that has been achieved.
This is all unprecedented, but doing nothing is the riskiest option. The wave is coming.