The urgent need for global financial reform at the Bonn Climate Summit

Reforming the global financial system is not just about fairness. In the context of the climate crisis, it’s about survival. The Bonn Climate Summit this week is a golden opportunity to start making essential changes to the way the global economy works.

To prevent catastrophic climate impacts and have a hope of achieving sustainable development, climate-vulnerable countries need vast resources and increased fiscal and policy capacity, and they need them now. As Cafod argues in its new discussion paper, Fair Finance for the Climate Fightback, achieving this demands a radical overhaul of the international financial system.

At the Bonn gathering, which marks the halfway point between last year’s COP28 and this year’s pivotal COP29 in Azerbaijan, debate rages among governments and policy experts around what constitutes truly fair financing for the climate fightback. But as the discussions drag on, the situation becomes ever more desperate.

Forty-seven lower-income countries face insolvency within the next five years if they are to ramp up investments sufficiently to meet climate and development goals. These nations face an impossible dilemma: do they pay off crippling debts, or invest in life-saving climate resilience and development? Without significant changes to global financial mechanisms, the prospects for these countries are dire.

First, this means urgent reform of the global tax system. Africa – home to dozens of the most climate-vulnerable states – loses almost $90 billion each year to tax evasion, leaving governments with a fraction of what they need to tackle the climate crisis.

Support for the historic UN Tax Convention could see a more effective global tax regime that prevents illicit tax practices and raises life-saving revenues for countries around the world. The UK government has an outsized responsibility here: to increase transparency in the global tax system, it should require tax havens in British Overseas Territories to publish registers of beneficial ownerships.

Climate taxes, when targeted at the wealthiest and highest-polluting individuals and corporations, also have enormous potential to generate revenues while promoting sustainable practices. Oxfam estimates that the UK could have raised up to £19 billion in 2022 by taxing the most polluting activities. To put this into context, these revenues are more than double the Foreign, Commonwealth, and Development Office's budget. With widespread support for taxes on unearned and extreme wealth, these measures could together ensure that those who have profited from emissions contribute fairly to addressing the damage.

Global sovereign debt is another massive barrier to climate investment. Right now, 93 per cent of climate-vulnerable countries are either in debt distress or at significant risk of it. The result is that these countries are paying five times more on debt interest payments than on climate action.

High interest rates on loans from highly profitable private banks like BlackRock and HSBC are bleeding climate-vulnerable nations dry, making it nearly impossible for them to invest in climate resilience without risking financial ruin. Cafod’s paper calls for new laws to compel private creditors to participate in fair debt resolution processes on the same terms as other lenders. In the longer term, a new global debt framework that’s permanent, transparent, and democratic, situated within the UN, will be crucial to give these countries the financial breathing room they need to fight climate change.

Finally, international financial institutions like the World Bank and the International Monetary Fund (IMF) must be reformed to ensure that climate finance is sufficient and fair. They must become radically more transparent, accountable, and representative of low-income and climate-vulnerable countries; and end the harmful conditionalities that often accompany their financing, trapping countries in poverty and hindering investment in essential public services and climate measures.

Climate-vulnerable countries should be allocated a greater proportion of Special Drawing Rights – financial assets that supplement countries’ reserves – enabling life-saving investments in times of crisis. Such reforms would lead to more representative international financial institutions that prioritise the wellbeing of people and the planet.

Cafod’s analysis is clear: the international community must heed the calls of climate-vulnerable countries and acknowledge the moral imperative that the overwhelming bulk of global climate finance should consist of public, grant-based money from high-income, historically polluting countries. The necessary reforms go beyond aid and must ensure that major polluters pay their fair share towards the climate clean-up.

Climate-vulnerable countries are at the front line of a crisis they did not cause and cannot be left to shoulder the burden alone, under intense pressure from a global financial system that sees a net transfer of wealth away from them, rather than to them.

As we look to Bonn and beyond, Cafod’s message is simple: we need to make systemic changes to ensure a fair and sustainable future for all. The time for fair finance is now.