Paying Africa’s Climate Bill
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- Authors: MICHAEL OLABISI
- Published: March 4, 2024
The problem: disproportionate burden on Africa
- The world’s poorest countries, especially those in Africa, are struggling to pay for a climate crisis they cannot afford.
- Africa will contribute the most to human population growth in coming decades, increasing the need for funds to mitigate climate-warming emissions.
- Climate-linked productivity losses will expose a greater share of the region’s agriculture; desertification is worsening in countries such as Mali, Niger, and Senegal.
- Large coastal cities, including Lagos, lack meaningful defenses against rising oceans.
- Example country needs (World Bank’s 2023 Country Climate and Development Reports):
- 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.
Why more public debt is not the answer (three core reasons)
- Limited borrowing capacity and high costs
- Poor countries must either pay above-market rates to borrow in international debt markets or accept burdensome conditions from multilateral and development lenders.
- Rising debt strains service payments relative to revenues; among large African economies:
- South Africa’s debt was nearly 70 percent of GDP in 2021.
- Nigeria’s debt was about 40 percent of GDP in 2021.
- Investment needs exceed multilateral lending capacity
- Global need for investment to address the worst of climate change exceeds $1.3 trillion a year for the next decade.
- African Development Bank estimates Africa needs to spend $3 trillion by 2030.
- All sub-Saharan Africa combined had a GDP of $2 trillion in 2022.
- Even adding a $1 trillion lending capacity of the IMF to a $400 billion lending portfolio of the World Bank leaves a clear shortfall.
- Including regional development banks would approach required scale but would preclude banks from financing other priorities.
- Debt is not always the appropriate instrument
- Many promising climate interventions (for example, solar- or wind-powered irrigation, retrofitting residences and industrial sites) do not fit typical debt-funded public project models.
- Much climate funding is preventive—avoiding human and economic losses or boosting adaptive capacity—which may not generate the steady cashflows needed for traditional debt financing.
Climate-friendly finance: opportunities and rationale
- Africa’s renewable potential and demographic trends
- Africa’s solar potential greatly exceeds its fossil fuel resources.
- Africa could have 2 billion consumers of food, energy, and water by 2050; currently it is a continent of 1.2 billion.
- The youthful population presents labor and innovation potential if opportunities are provided.
- Policy objective
- Climate investment is necessary and not optional; many African countries lack fiscal policy wiggle room for structural adjustment.
- Financing approaches should be optimized at a global scale, not only country-by-country.
Engaging the private sector: scale and mechanisms
- Private sector capacity (ballpark figures)
- The 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 alone, gross private domestic investment was about $5 trillion in the third quarter of 2023.
- If US private sector investments converged uniformly on climate action, the US private sector alone could, in principle, fund a global renewable energy transition 15 times over.
- Policy levers to nudge private investment
- Regulation (for example, new-energy vehicle requirements in China, zero-emission vehicle mandates in California).
- Taxes matched with direct public investments (e.g., a global carbon pricing mechanism with robust revenue-sharing commitments to developing economies).
- Cap and trade schemes with tradable points for renewable-energy-based production.
- Mismatch in current incentives
- Public incentive programs are typically designed to spur spending for country-specific climate goals, whereas climate action should be optimized globally.
- Example inefficiency: subsidies for solar panels in northern European countries that would produce more energy per dollar if installed in tropical settings such as Côte d’Ivoire or Ghana.
- Current energy finance patterns in Africa (2012–2021 averages and recent allocations)
- Public and private energy financing from Group of Twenty countries and multilateral development banks to African countries averaged about $35 billion a year between 2012 and 2021.
- 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 renewable energy sources such as solar, hydro, and wind lagged behind.
Policy recommendations and the “win-win” approach
- Core recommendation: mobilize stepped-up private sector investment for climate action in poor countries, supplemented by innovative public finance arrangements rather than relying primarily on public debt.
- Design global incentives to align private returns with global climate goals
- Create incentives that increase private sector returns for renewables and adaptation projects in Africa above short-term gains from fossil fuels.
- Consider a global climate fund to pay marginal incentives that shift private investment toward solar and wind in Africa.
- Use a mix of regulation, taxes, and market mechanisms adapted to the political economy and type of investment required.
- Emphasize global optimization of climate spending to maximize energy produced per dollar and climate gains per dollar (for example, redirecting investments toward high-yield equatorial renewable projects connected to global value chains).
- Leverage the growth of renewable energy firms and linked equity markets, with policy guidance to channel resources to finance a green transition faster than debt-based public financing alone.
Key scenarios and implications
- If global private capital is effectively nudged:
- Local African economies could gain from development and jobs while the global economy gains from sustained profits and avoided climate losses.
- Renewable energy transition in Africa could be accelerated, turning high renewable potential into global climate gains.
- If current incentives persist:
- Fossil-fuel-oriented investments (evidenced by the $83.5 billion to gas/LNG projects) will continue to dominate, delaying emissions reductions and perpetuating financing shortfalls for renewables and adaptation.
Source: Paying Africa’s Climate Bill by Michael Olabisi, F&D Magazine, March 2024.
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