Towards a Climate Just Financial System

This paper calls for a justice focussed approach to address the ongoing and adverse effects of climate finance on the ecosystems and economies of the global south. The author – Yannis Dafermos, professor of Economics at the University of London – outlines a climate justice financial stabilisation mechanism which seeks to address climate debt sustainability and support an economically sustainable global transition.

A “major limitation” of climate finance is that it ignores questions of justice and creates inappropriate “one size fits all” solutions that exacerbate economic instability and undermine global climate efforts, says Dafermos. The paper states that there is an “urgent need” for global financing and policies built on the principle of common but differentiated climate responsibility.

Differentiated responsibility refers to the historical “climate debt” owed by the global north to the global south which is least responsible for, and yet disproportionately affected by, climate change. Countries in the global south often have less fiscal space to finance adaptation or cover climate losses. To reflect such differentiated responsibilities and capacities, the global north should primarily be responsible for mitigation and the south for adaptation, says the author.

Without a climate justice lens, the incorporation of climate risk into central bank operations may cause unsustainable debt traps in the global south, says the paper. If sovereign bonds in climate vulnerable countries are characterised by higher physical risks, financial institutions might decide to sell them to reduce their exposure. This would place a downward pressure on bond prices and drive up the costs of sovereign borrowing in those countries, damaging their ability to adapt to climate change or cover losses.

Another unintended consequence of disregarding justice in climate finance is “green extractivism”. This refers to instances when “green” funds harm ecosystems and communities, particularly in the global south, to achieve mitigation targets. For instance, the supply chains of materials needed for renewable technologies, such as cobalt and copper, have been plagued by human rights and biodiversity concerns, including instances of serious damage to local water supplies.

To address these issues, Dafermos recommends creating a climate just financial system. Climate just policies recognise the principle of differentiated responsibilities, exclude green extractivism and provide permanent and sustainable financing to the global south. Dafermos also states that climate justice principles should be included in monetary and financial policies.

The paper outlines a proposal for a financial stabilisation mechanism, the climate justice facility (CJF). The CJF is a holistic framework for the endogenous creation of money by central banks in the global north based on a permanent commitment to provide climate finance without exacerbating the global south’s economic vulnerabilities. The CJF has six key aspects:

1. responsibility to provide loans in proportion to a country’s historical contribution to global emissions
2. pooling of loans in providers’ currencies and provision of funding in local currencies
3. provision of perpetual and very low interest loans with no maturity date, in which the lack of principal repayment would compensate for climate debts
4. use of taxonomies and screening criteria to prevent funds from going to green extractivist activities
5. loans to be managed by local accredited organisations that include civil society groups
6. development of fast track mechanisms to cover loss and damage following natural disasters

Finally, Defermos says the CJF should be complementary to other climate justice stabilisation measures, such as special drawing rights and debt-for-climate swaps.