## Paying Africa’s Climate Bill

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**Canonical URL:** [Paying Africa’s Climate Bill](https://www.imf.org/en/publications/fandd/issues/2024/03/paying-africa-climate-bill-michael-olabisi)

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## Bibliographic details
- Authors: MICHAEL OLABISI
- Published: March 4, 2024

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### 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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_Source: https://www.imf.org/en/publications/fandd/issues/2024/03/paying-africa-climate-bill-michael-olabisi_