Could a Bretton Woods system for climate solve the crisis?

Climate change demands an unprecedented level of global solidarity and rapid mobilization of capital, reminiscent of the global, collaborative efforts seen in post-World War II reconstruction with the Bretton Woods system. The current system is limited in its capacity to drive the rapid and extensive changes needed.

The progress made at the recent COP28 in the UAE was good. The operationalization of the Loss and Damage Fund, adoption of the global target to triple renewable energy capacity and agreement on transition away from fossil fuels are positive steps. But we will only see the revised NDCs (Nationally Determined Contributions) by end of 2025, and it is not clear that these will be ambitious enough to bring us back on track for meeting the 1.5 °C target. By that point, we will have just five years left to 2030 and a significantly diminished carbon budget. To reach such aggressive targets, our current systems may be inefficient to address them.

So, what are the solutions? Could it be that we explore a modern and climate-focused version of the institutions created in the 1940s? "A Climate Bretton Woods”? There is merit in the idea.

At its core, this could comprise a new global institution, what we could call a Global UN for Climate Change; a new climate-focused multilateral development bank and an agreement to set up within each country bodies similar to the current central banks.

Through the Global UN for Climate Change, we could solve for:

Much like the current UN Security Council, the entity will also be vested with power to exercise punitive actions, if the commitments are not met by the country governments and private sector. There are several examples available globally of such punitive actions.

While acknowledging several challenges in building up this system rapidly, there are two key benefits in this approach. First, it will be much faster than reforming the existing institutional architecture, which as we have seen in the case of reforms of the UN and Multilateral Development Banks, is an incredibly long and complex political process faced with strong resistance from several quarters. And second, a Bretton Woods for climate will help us to stay on the track we need to be on in the medium term.

The second component of the Climate Bretton Woods system is the creation of a new, climate-focused bank — the Global Climate Bank. The aim will be to bring about a step change in terms of volume of financing catalyzed, vis-à-vis the incremental change that is currently being discussed through the multilaterals reform process, where the target itself being discussed is to mobilize a couple of hundred billion of private capital. The need, as several credible estimates have shown, is in the trillions.

The institution would be a fresh entity, free from the legacy issues of current Multilateral Development Banks. Its focus would be on in-depth climate projects rather than broad poverty-reduction initiatives. Leveraging significant volumes of liquidity available currently in international capital markets for AAA rated entities, it could aim to raise $1 trillion annually for developing countries. It could start with an initial fund of $200 billion, primarily from developed nations. This is equal to only two years of climate finance promised per year.

The third element involves establishing domestic institutions within countries, akin to central banks, but with a focus on climate. Usually, these responsibilities fall on the environment or energy departments, which often lack sufficient influence, analytical capabilities or authority. This results in less ambitious climate goals and slower progress.

These climate central banks would set targets for emission reduction, track progress and guide sectors in adjusting their activities based on their analyses. Should they foresee a rise in emissions, they could limit funding or resources to certain industries or impose taxes to influence market prices. While working in tandem with the government, these banks would maintain independence, possibly being accountable to parliaments or congresses.

These are somewhat radical, but preliminary ideas. At this year’s Annual Meeting in Davos, world leaders from the private and public sectors will engage in meaningful dialogue and action on these proposals and others like them. Our actions today will define our legacy and the world we leave for future generations. The time to act is now, with the urgency, transparency, justness and ambition the climate crisis demands.