The World's Greatest Market Failure

Geneva, Switzerland - A new analysis issued this month by the World Resources Institute (WRI) examines the challenges of mainstreaming climate change at the Multilateral Development Banks (MDBs).

Entitled Correcting the World’s Greatest Market Failure: Climate Change at the Multilateral Development Banks, the report reveals that despite acknowledging at the 2005 G8 Gleneagles Summit that climate change had been considered in less than 20 percent of the World Bank’s lending for the energy sector, very little has changed.

The new report, written by WRI analyst Smita Nakhooda, reviews the Country Strategies and project documentation for the energy sector portfolios of the World Bank Group, the Asia Development Bank, and the Inter-American Development Bank.

Operationally, opportunities to mitigate emissions and reduce climate risk are still not systematically incorporated into MDBs strategies and project development.  More than 60 percent of financing in the energy sector across these institutions do not consider climate change at all.

The MDBs need to support transformative changes in key sectors to steer investment towards low-carbon, environmentally-sustainable development choices, notes the new WRI Issues Brief. But this will be difficult to achieve when funds remain invested in many "business-as-usual" projects and policies.

To help correct the "world’s greatest market failure," MDBs must do more to internalize the environmental and social costs of climate change into their decision-making, says the report, including:

  • Measure and manage the GHG emissions associated with investments in all relevant sectors.
  • Work with developing country clients to identify low carbon approaches to development.
  • Revise guidelines for country and sector strategies to explicitly integrate climate change considerations, particularly vulnerability to climate variability and change.
  • Maintain high environmental and social standards to manage climate risk.
  • Invest in the capacity of governments to practice good governance in order to respond to the realities of climate change.
  • Significantly increase support for low carbon technologies, particularly in rapidly growing emerging economies.
  • Build capacity and create new incentives for MDB staff to consider climate change in their interventions.

Canada includes climate change as a major area of focus within the Canadian International Development Agency (CIDA’s) program priority of environmental sustainability. The CIDA website notes Canada supports the efforts of its partners to address climate change and to meet their commitments under various international agreements primarily through the Canada Climate Change Development Fund.

This fund enables developing countries to adapt to climate change, reduce emissions, increase the vegetation that absorbs carbon dioxide, and raise research capacity and awareness within governments and among the general public about the importance of dealing with this critical issue.

Canada established the $100 million Canada Climate Change Development Fund (CCCDF) in 2000 to promote activities addressing the causes and effects of climate change in developing countries, while helping to reduce poverty and promote sustainable development. Originally a five-year fund, the CCCDF was extended for 2005-2006.

As of 2005, the CCCDF had supported projects in over 50 countries, in addition to making a $10 million contribution to the Least Developed Countries Fund (LDCF) managed by the United Nations and the Global Environment Facility. The LDCF supports developing countries to prepare and implement national adaptation programs of action (NAPAs): tools to identify priority activities that respond to the urgent needs of developing countries regarding adaptation to climate change.

Change is needed

Since 2005, pressure on the Banks to address climate change has increased significantly with calls for a "Climate Change Marshall Plan" to finance low carbon development, and for the World Bank to re-orient itself as a "bank for the environment.

The 2007 Bali Action Plan adopted through the UN Framework Convention on Climate Change (UNFCCC) emphasizes the role the MDBs can play in supporting developing countries to identify appropriate national actions to address climate change. At the beginning of 2008, the United Kingdom, the United States and Japan committed billions of dollars to a World Bank administered Clean Technology Fund to help finance developing countries’ transitions to cleaner technologies.

To rise to such tasks, MDBs will need to ensure that climate change becomes an integral component of their efforts to support sustainable economic development and poverty reduction, notes the Issues Brief.

The 2008 G8 Summit

In the lead up to this month’s meeting of the G8 economies in Osaka, Japan, Britain, Japan and the United States have urged developing and industrialized countries to sign up to a new framework of multilateral funds to help battle climate change.

Speaking at the outset of a recent Group of Eight (G8) Finance Ministers meeting in Osaka, Japanese Finance Minister Fukushiro Nukaga said he and his colleagues would ’do their utmost’ to get other countries on board of the newly launched Climate Investment Funds (CIFs).

The funds, championed by the World Bank and G8 members Japan, Britain, and the United States and the World Bank, are an effort to support developing countries to meet carbon reduction goals while at the same time trying to prevent obstacles in development.

CIFs are an umbrella structure for two funds: the Clean Technology Fund (CTF), aimed at helping developing countries finance the shift to clean technologies; and the so-called Strategic Climate Fund, comprised of targeted programs with dedicated funding to provide financing to pilot new approaches.

Note to the Reader

The WRI Issues Brief is a short document, but it is full of revealing and at times disappointing facts about how the Multilateral Development Banks are failing to address what clearly is the most pressing environmental, social and economic challenge facing the world today.

The World Resources Institute Issues Brief is available here

Full Report (PDF, 643 Kb)

Annex 1: Evaluation of MDB Country Strategies (PDF, 71 Kb)

Annex 2: Energy Sector Portfolio (PDF, 252 Kb)

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