Beyond The Climate Finance Gap: The Global Financial System, Decarbonization, and the Failure of the Wall Street Consensus

Introduction

Global decarbonization is a problem of driving and coordinating global green development and economic transformation. It requires policy action and cooperation by the US and other Global North states. Global South states need to have the capacity to rapidly and systematically invest in green capital and infrastructure stocks and to divest from fossil capital and infrastructure stocks. Global financial and economic hierarchy functions to structurally subordinate the development of Global South states by externally imposing constraints on their ability to develop and acquire capital, both physical and financial, and other key inputs which in turn determines their ability to invest in green development and abandon fossil assets and industries.  

International climate finance policy recognizes the need for developed countries to provide external financing to middle income and developing countries to support decarbonization and green development. Yet, the dominant policy paradigm to address this problem rhetorically and practically marshals private finance as the solution to the problem, understood as one of closing the “finance gap”. Critical microfinance scholar Daniela Gabor has dubbed this policy regime “the Wall Street Consensus” (WSC).^[1]  

The assumptions underpinning the WSC are:

• The state and public sector lack the financial capacity and efficiency to lead this transition themselves.
• Trillions of dollars of private financial capital are available to finance and undertake the global energy transition if the right combination of incentives can be implemented.
• Following the national or multilateral implementation of accommodative and subsidization policies to derisk private investment in green infrastructure assets, private finance will flow into the projects needed to achieve sufficient decarbonization.  
• Pursuing this policy regime does not pose additional risks that might thwart meeting global decarbonization goals.  

This report explains why this currently dominant global climate finance policy regime has been and will continue to be structurally insufficient to meet decarbonization and broader green development needs.  

This report argues against these assumptions. The private financing and direct investment at the scale imagined by this WSC and its policy initiatives will not meaningfully materialize or be at all functionally adequate to deliver global decarbonization. The WSC policy regime will exacerbate issues concerning the macrofinancial capacity of countries, further eroding their capacity to undertake the energy transition, even just relating to power sector decarbonization — let alone economy-wide green transformation.

The aim of this Green Planning Commission framework paper is to provide high level principles and policy pathways for global cooperative green development planning to inform The Green Planning Commission’s work to develop a policy program of green democratic planning in the US and UK. Although developing countries are increasingly pursuing green development and electrification, indeed in response to geoeconomic and energy system instability caused by US policy, the next progressive climate agenda in the US and UK must still seek to facilitate global cooperative decarbonization and green development planning. These principles must be embedded in consideration of the politics, practice, and policy programs of democratic planning at the national level.  

This report is structured as follows. First, we provide an overview of the climate finance problem: why are Global South states currently limited in their ability to undertake deep decarbonization without external financing or resources?

Second, we discuss the WSC to demonstrate the functional inadequacy of private financing to meet global decarbonization. Attempts at implementing this regime through policy at the domestic and multilateral levels may deliver some amount of real investment in renewable energy capacity, its auxiliary infrastructure, and the phase-out of investments in coal capacity in some Global South countries. However, we argue that these investments and divestments will be unsystematic, insufficient, and noncomprehensive. Further, these investments and policies risk compounding macrofinancial limitations and structures that will, in a vicious feedback loop, further inhibit necessary investments and divestments.

Third, we conclude that rather than attempting to close the finance gap with private finance, the goal of US global green economic diplomacy should be to create a dynamic multiscalar organism of generative public capacities and institutions that can coordinate global decarbonization. This should be premised on the redistribution of wealth and power, not the avoidance of it. This is not simply because it offers a fairer or more ethical path of development (though it does), but because such an approach will help to create a more resilient, dynamic global economy that supports the prosperity of all, rather than the wealth and power of a very select few. The road to radical restructuring of the global economic hierarchy is politically challenging, but, we argue, necessary to meet decarbonization targets: the rest, violent illusions.^[2]