## Paying Africa’s Climate Bill

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**Canonical URL:** [Paying Africa’s Climate Bill](https://www.imf.org/-/media/files/publications/fandd/article/2024/03/olabisi.pdf)

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### The problem: scale and inequity of climate financing needs
- The world’s poorest countries, especially those in Africa, are struggling to pay for investment to stave off a climate crisis they did not create.
- Climate investment needs exceed the lending capacity of multilateral finance institutions.
- African countries face a disproportionate burden relative to economy size:
  - China needs to raise its annual climate mitigation spending by 2 percent of GDP through 2030.
  - Cameroon needs to increase spending by 9 percent of GDP.
  - The five West African Sahel countries (Burkina Faso, Chad, Mali, Mauritania, and Niger) need to increase spending by about 8 percent of GDP on average.
- Africa’s required climate funding compounds existing development financing needs and COVID crisis recovery.
- Sub-Saharan Africa had a combined GDP of $2 trillion in 2022.
- The African Development Bank estimates Africa needs to spend $3 trillion by 2030.
- Global need for investment to address the worst of climate change exceeds $1.3 trillion a year for the next decade.

### Why additional public debt is not the solution
- Three main reasons public borrowing is inadequate:
  1. Limited borrowing capacity and high costs for poor countries:
     - Among large African economies, debt levels cited for 2021: South Africa nearly 70 percent of GDP; Nigeria about 40 percent.
     - Poor countries either pay above-market rates or accept burdensome conditions from multilateral and development lenders.
  2. Global public finance capacity is insufficient:
     - Even adding the IMF’s entire $1 trillion lending capacity to the World Bank’s $400 billion lending portfolio falls short of needed financing.
     - Including regional development banks would approach the scale needed but would crowd out other lending priorities.
  3. Debt is not well suited for certain climate interventions:
     - Many mitigation or adaptation technologies (e.g., solar- or wind-powered irrigation, retrofitting residences and industrial sites) are recent, untested at scale, and may not generate steady cashflows needed for bankable debt financing.

### Climate-friendly finance and Africa’s opportunity
- Africa has abundant renewable energy potential that could align with global demand as the continent approaches 2 billion consumers of food, energy, and water by 2050.
- Africa’s youthful population supplies labor and ideas for a rapid sustainable-energy transition.
- Policy must enable optimization at a global scale rather than primarily country-specific incentives:
  - Example mismatches highlighted: wealthy countries subsidizing in-country solar installations that produce less energy per dollar than comparable investments in tropical countries.

### Engaging the private sector
- Private-sector financial firepower is sufficient, in principle, to support global climate needs:
  - Top 500 global corporations earned more than $2.9 trillion in profits in the fiscal year ended March 2023, on revenues of about $41 trillion.
  - For the United States, gross private domestic investment was about $5 trillion in Q3 2023.
  - If concentrated, US private sector investment could, in principle, fund a global renewable energy transition 15 times over (based on the author’s illustrative comparison).
- Current public incentives tend to be country-focused; climate action should be driven by global optimization.
- Governments can nudge corporate investment via regulation, taxes with matched public investments, or cap-and-trade approaches:
  - Regulatory examples: new-energy vehicle requirements in China; zero-emission vehicle mandates in California.
  - A global carbon pricing mechanism or global cap-and-trade system could include revenue-sharing commitments to developing economies.
- Empirical patterns of recent energy finance to Africa (2012–2021):
  - Public and private energy financing from Group of Twenty countries and multilateral development banks averaged about $35 billion a year.
  - The private sector provided just over 40 percent of the funds.
  - The largest chunk of financing—$83.5 billion—went to gas and liquefied natural gas projects.
  - Spending on renewables such as solar, hydro, and wind lagged behind.

### Policy implications and a potential win-win
- A coordinated global approach that aligns private returns with global climate gains can create a win-win:
  - Local economies benefit from development and adaptive capacity.
  - Global economy benefits from sustained profits and avoided climate losses.
- A global climate fund paying marginal incentives could boost private sector returns on solar and wind in Africa above returns from gas projects.
- The private sector, guided by the right public policy, can channel resources to finance a green transition faster than governments can via public debt alone.
- The challenge requires astute global governance and incentive alignment so that corporations pursue ecological sustainability because their economic sustainability depends on it.

*Source: Michael Olabisi, “Paying Africa’s Climate Bill,” March 2024.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2024/03/olabisi.pdf_