Today’s ‘international economic architecture’ – encompassing multilateral institutions such as the IMF, World Bank Group and World Trade Organization, and other forums such as the OECD, G7 and G20 – faces an unprecedented challenge in helping to finance global responses to climate change.
The summer of 2022 saw scorching heat waves in Central Europe, extensive flooding in South Asia, major wildfires in the US and Russia, and devastating droughts in central Africa. Scientific assessments indicate that climate change is increasing the likelihood and intensity of such events. Although it is widely recognized that the global economy must shift to a more climate-sustainable model, today’s ‘international economic architecture’ is poorly equipped to deliver this transition. It is fragmented, lacks effective regulatory and policy levers for climate action, and relies, to a large degree, on institutions that were never designed with climate change in mind. Many of the existing institutions within the architecture have not, at least until very recently, considered environmental issues central to economic policy decision-making.
This architecture is loosely defined, consisting of a patchwork of multilateral institutions, supervisory agencies, and assorted forums with sometimes overlapping interests in – and responsibilities for – different aspects of the global economy. In the context of climate policy and financing for climate action, it can be said to be comprised of the World Bank Group, International Monetary Fund (IMF) and World Trade Organization (WTO). It additionally encompasses supervisory bodies, such as the Financial Stability Board (FSB); ‘minilateral’ forums, such as the OECD, G7 and G20; and a variety of climate-focused financial networks (see ‘Defining the international economic architecture’, below).
The current system was heavily shaped by arrangements and institutions that arose after the Second World War. In recent decades, its leading institutions have confronted a series of disruptive trends: financial deregulation, globalization, financial crisis, rapid technical change, geopolitical shifts, and the rise of emerging markets such as China. Many institutions in this architecture have not easily adapted to such developments, yet the challenges arguably pale in comparison with the existential crisis now presented by climate change.
With this context in mind, this research paper takes stock of current efforts within the international economic architecture to address climate change, and proposes areas for improvement. The analysis is organized as follows:
- First, the author proposes a working definition of the ‘international economic architecture’. Given the potentially broad interpretation of this term, a preliminary frame of reference is needed to inform analysis of each institution’s position in the global system and role in climate-related economic policymaking.
- Second, a brief overview of international policy responses to previous global crises provides historical context to recent efforts on climate action. How has the international economic architecture responded to other crises in the past? What might this reveal about the potential of the architecture to succeed in addressing climate change?
- Third, the current outlook for climate investment and policy cooperation is considered, particularly in light of the COVID-19 pandemic and the geopolitical and energy market impacts of Russia’s war on Ukraine.
- Fourth, the paper reviews climate policies currently being undertaken by a select number of institutions and forums. The analysis presents a snapshot of systemically important actors (particularly those relevant to trade, finance and development assistance) and their roles in tackling climate change.
- Fifth, the paper proposes a list of specific policy and regulatory changes, identifying various ways in which international economic institutions, as member-driven organizations, can further drive the investments needed to address the climate crisis.
Climate change is part of a much wider-ranging set of environmental challenges facing the global economy, and it is critical that the international economic architecture also respond to this broader threat. This paper, however, will primarily focus on the response to climate change.
Defining the international economic architecture
As mentioned, there is no clear definition of the international economic architecture. While some have taken the term to encompass the leading international financial institutions (IFIs), the WTO, and other global economic and financial governance bodies, no consensus on its composition or structure exists. The international economic architecture is organized in such a broad way, within a fragmented and nebulous global system, that no overarching body exists to provide a consistent designation. For the purposes of this study – and given partial consensus among the recent macroeconomic literature – the international economic architecture can be defined as consisting of three major institutional pillars.
The first pillar encompasses the ‘core’ institutions involved in oversight of the global economy today: among them, the original Bretton Woods agencies, more recent IFIs, and other financial supervisory bodies. This group includes the organizations that comprise the World Bank Group, such as the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation (IFC), and the International Development Association (IDA). It also includes the IMF, the WTO
and the FSB.
The international economic architecture is organized in such a broad way, within a fragmented and nebulous global system, that no overarching body exists to provide a consistent designation.
The Organisation for Economic Co-operation and Development (OECD) also falls within this first pillar. Although its membership is not universal, comprising just a select number of industrialized countries, the OECD performs certain functions that are similar to those of the Bretton Woods agencies. The OECD helps coordinate bilateral aid (through its Development Assistance Committee), conducts economic surveillance, negotiates global tax policies, and performs ad hoc climate analysis. Most notably, in the context of climate policy, the OECD tracks progress towards the $100 billion target, pledged at the COP15 climate conference in 2009 by economically advanced countries to catalyse further investments in, and provide policy support for, climate action in developing countries. Regional development banks (RDBs), such as the African Development Bank and the Asian Development Bank, also fall into the above category.
The second pillar includes major international governance bodies and networks focused on political leadership and policy coordination in the economic sphere. Examples include the G7, the G20 and the Asia-Pacific Economic Cooperation (APEC) grouping. These networks typically have no permanent secretariat and rotate their presidency annually among member countries. Governance bodies within this second pillar, such as the G20, play a critical role in helping member governments convene to discuss and coordinate on economic policy priorities. They also help coordinate between institutions within the international economic architecture, and between those institutions and the wider international system (i.e., global governance frameworks around climate change).
The third pillar is composed of certain climate-specific organizations that deal primarily with economic and financial issues of relevance to the global economy. Institutions and networks within this category include environmental funds, such as the Global Environment Facility (GEF) and Green Climate Fund (GCF). They also include financial networks focused on environmental issues, such as the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and the Coalition of Finance Ministers for Climate Action. These organizations and networks are designed, primarily, around the financial and economic challenges of tackling climate change. In some cases, they are closely connected with prominent agencies in the wider climate architecture, such as the United Nations Environment Programme (UNEP) and the United Nations Framework Convention on Climate Change (UNFCCC).
These three pillars are by no means definitive or all-encompassing. Many other institutions play important roles in global economic governance and cooperation, or in addressing aspects of climate change that affect – or are affected by – the global economy. For instance, certain civil society organizations focus on issues at the nexus of climate and economic policymaking. They are therefore useful for driving and coordinating climate action. The private sector plays a similar critical role in financing long-term sustainability investments, reducing energy consumption and interacting with components of the international economic architecture.
Nevertheless, the three pillars outlined above capture the core elements of the international economic architecture that need to be considered in an assessment of current institutional action on climate change.