On January 20th 2019, a ‘Super Blood Wolf Moon’ – a rare event combining January’s full ‘wolf’ moon with the red-shading effects of a total lunar eclipse – hovered above the Caribbean. This dramatic sight, in all its odd splendor, greeted delegates from 15 countries as they descended on the sister islands of Saint Kitts & Nevis. The delegates represented finance ministries from a swathe of Caribbean islands who, along with island nations elsewhere, stand on the front-lines of the effects of climate change.
The previous two years had provided two of the worst hurricane seasons in living memory, with hurricanes Irma, Harvey, and Maria, among others, wreaking havoc across the region. With climate change, damage from extreme weather events are expected to rise, presenting numerous stark policy challenges. Foremost among these is how finance ministries – who hold the purse strings of nations and some of their most important policy levers – can and should respond. As a result, the Eastern Caribbean Central Bank (ECCB), the Caribbean Regional Technical Assistance Centre (CARTAC), and the Climate Action Peer Exchange (CAPE), with support from the NDC Support Facility, convened a three-day workshop to share knowledge on how to make fiscal policy climate-smart.
Opening the workshop, ECCB Governor Timothy Antoine spoke passionately about the need to address climate action. Climate adaptation and mitigation is “essential to ensuring the shared prosperity for all citizens of this region.” Despite this, Caribbean countries had not yet implemented policies or leveraged international finance to respond sufficiently. For instance, despite rapidly rising flows of international climate finance, Caribbean countries had still not issued a single green bond. Clearly, there was work to be done.
The following three days provided a tour de force of climate fiscal policy. In the first day, findings from the World Bank’s recent report ‘Fiscal Policies for Development and Climate Action’ was summarized. Finance ministries were shown to be central to the challenge of responding to climate change, both in mitigation and adaptation. Environmental tax reforms – which put a price on polluting activities while raising funds for development – could help Caribbean countries raise economic activity, reap improvements in human health, while also reducing emissions. Fiscal risks emanating from climate change, including the implicit and explicit commitments they give rise to, needed to be regularly assessed and understood.
The huge and growing gap between current and needed levels of finance for climate adaptation urgently needs to be closed. This entails a diverse array of financial instruments, requiring focusing on fundamentals if these sourcing is from international capital markets, in addition to a revamping of cost-benefit processes to include the benefits of making public investments climate-resilient. The power sector needs to be made resilient through proactive, ex-ante financing to ensure that the lights stay on after the storm passes.
The second day provided further depth on the link between climate change and debt sustainability. Debt sustainability in the context of climate change is a concern among Caribbean countries, given high levels of public debt and high vulnerability to natural disasters.
The joint IMF-World Bank Climate Change Policy Assessments (CCPAs) are analytical products which can help finance ministries assess climate risks, identify and implement effective policies for mitigation and adaptation, helping make their economies more resilient. These were recently completed for Belize, St. Lucia, and Seychelles, with plans to further roll them out across other Caribbean countries. Further, climate change can be put at the core of finance ministries’ planning processes, by incorporating climate considerations into public financial management, including climate-informed cost-benefit analyses.
The third and final day provided an overview of the various financial instruments finance ministries can use to assist them in making fiscal policy climate-smart. Disaster risk financing – including self-insurance, contingent financing, and insurance – could help countries better manage the fiscal cost of disasters, ensure timely resources when disasters strike, and mitigate the long-term growth and fiscal impact of disasters.
‘Green’ and ‘blue’ bonds can help countries tap increasingly climate-aware international capital markets. The World Bank has helped various countries such as Malaysia, Fiji, and Indonesia issue green bonds, and had just helped the Seychelles issue the first ever sovereign ‘blue bond’. Lastly, countries are once again exploring methods to reduce debt while protecting the environment the ‘debt-for-climate’ and ‘debt-for-nature’ swaps that were popular in the 90s.
Reflecting on the three days, participants noted that the topics covered had helped them better understand how to integrate climate change considerations into fiscal policy. Cost-benefit analysis for investments with resilience benefits and tools to assess risks emanating from climate change were especially helpful. These could be brought in-house either immediately or with additional technical assistance. Respondents also noted that new financing instruments like blue bonds and policy crediting could be leveraged to support mitigation and adaptation efforts in the Caribbean region. Lastly, participants enjoyed the group exercises, especially role-playing as an adversarial press corps grilling finance ministries on the actions they had taken in response to climate change.
Upon closing the workshop, the ‘Super Blood Wolf Moon’ was no longer hovering in the skies above this beautiful region. But climate change, and the risks it represents for Caribbean countries, remains. Nonetheless, I leave St. Kitts with a sense of optimism, as these islands appear to increasingly recognize the importance of investing in resilience. As ECCB Governor Antoine cautioned, making short-term investments without considering climate change “will come back to haunt you.”
The World Bank and other partners under CAPE will continue to work with finance ministries in the Caribbean and elsewhere to respond to climate change, so that all nations are better prepared for the coming storms.