(Article published in www.sustainabilityoutlook.in on December 1, 2011http://www.sustainabilityoutlook.in/content/climate-financing%E2%80%93thoughts-durban)Climate financing–Thoughts for DurbanThis article discusses the emerging status of climate finance ahead of the negotiations on the mechanicsof the proposed Green Climate Fund at the forthcoming Durban climate conference. It introduces thenature of climate finance and their streamlining measure in the short and longer term as per the CancunAgreement. It then discusses the nature and status of climate finance before concluding with remarkson challenges for the Durban conference.Cancun Agreement and Climate Finance commitmentsOne of the most significant outcomes of the Cancun Climate Conference was the consensus onestablishment of a Green Climate Fund. The fund isaimed at addressing ‘climate impacts, support cleanenergy and reduce deforestation in developing countries’(the Conference of Parties (COP), 2010) and isto be designed by a Transitional Committee ahead of the Durban session of the COP in November 2011.While majority of the Committee members belong to developing countries, the trusteeship of thefundwill remainwith the World Bank (for an interim 3 years period) where developed countries aredeemed to have more influence.The climate finance committed under the Cancun Agreement will be streamlined through two measures,as described below – 1. ‘Fast-start finance up to 2012’, wherein funding up to US$30billion will be made available to developing countries for allocation to both their adaptation and mitigation strategies and will include forestry as well as investments on technologies and capacity building.‘Long term funding arrangement’, wherein the aforementioned Green Climate Fund will be establishedfor the developingcountries to access as a part of ‘scale-up provisions’ for mitigation and adaptationstrategies. Developed countries collectively will commit to raise the long term finance up to US$100billion per year by 2020. Finance may come from variety of sources - public and private, bilateral andmultilateral, including alternative sources.After enacting the process of streamlining, the obviousquestion that arises is – how will these finances be mobilized? The entire framework for thismobilization process can be discussed under three key components: 1. Sourcing the funds: Inter-government, inter-governmental and private cooperation, capital markets, national budgets and innovative means of creating revenue sources are seen as primary means of generating fund. 2. Mobilizing agents: Various national implementation entities, multilateral, bilateral and other public institutions as well as independent private entities can act as the agents who would source the funds and channel them through appropriate means while assuming the responsibility of accountability.
3. Channels: Once raised, channeling the funds can happen through three particular means: a) Existing overseas development assistance by the developed countries b) Creating similar assistance focused only on climate change but independent of the first one c) Through carbon market investmentFigure 2 provides a summarized insight into the sources, agents and channels of climate financemobilization in the light of above discussion. Figure 1 Climate finance: Sources, themes and channels (Adapted from UNDP 2011)For any of the sources, agent or channels presented above, capital flows would have two importantfacets to be eligible and reported as climate finance. One is the eligibility screening and other one is“net” flow accounting of fund flow.All finances, public or private, need to go meet the following eligibility criteria for monitoring andverification purpose (Moncel et al. 2009):
1. Additional to Official Development Assistance (ODA): climate financing is not diverted from development resources and does not undermine development objectives. 2. Predictable and sustainable: the financial flows are lasting and consistent over the long term. 3. Recipient-country control: recipient countries exercise a degree of control over the resources provided. 4. Avoiding double-counting: financial resources may not be counted by several actors and should not undermine mitigation objectives.Besides, for transparent accounting purpose, climate finance flows are recommended to be reported ona “net” basisand not on a gross flow basis. In economics terms, this net flow is given by the differencebetween marginal costs of mitigation as revealed by the market (and found in terms of the carbon price)and the lower cost of a specific mitigation action.The question of net flow arises from the concern thatnet benefit accrued to the developing country needs to be understood rather than simply accountingthe gross flow of capital from developed countries. Public finance channeled in form of loan bearsinterest while private capital is expected to generate returns. Such forms of finance can sometimesoffset the flow meant for development. Therefore, net flow of climate finance is argued to be a moreappropriate measure of the benefit accrued by the recipient developing countries.Once the framework is set up, focus would be on determining feasible ways and sources for generatingUS$100billion per annum target. A High Level Advisory Group on Climate Financing within UNFCCC,formed in February 2010, looked into potential sources of funds and came up with a number ofapproaches, including existing and new public funding and increased private flows, in order to achievethe target. An overview of the “net” flows from these sources, as a share of the overall pie ofUS$100billion, is illustrated in Figure 2.Figure2: Breakdown of potential sources of yearly climate finance commitment of US$100billion by 2020 (Data source:UNFCCC 2010) Carbon pricing revenue (levy, ETS) for International transport 10% Redeployment of fossil fuel subsidy or 10% financial transaction tax 39% Net transfer associated transfer of US$100b private capital flows Net transfer from carbon offset 20% market Net flow from multilateral development bank 11% 10% National budgets
Pledges under the fast start financeTable 1 highlights the approximate finances committed by the developed country Parties under the faststart finance measure till 2012. Most finances are channeled in form of development assistance, througheither bilateral or multilateral agents.It is observed the fast start finance, aimed at kick-starting the fund flow, is primarily channeled throughdevelopment assistance in form of grants. This calls for closer monitoring of such flow in order to ensurethat they fulfill the ‘additionality’ requirement to Official Development Assistance (ODA) by thedeveloped country Parties.
Table 1 Status of fast start funding - major commitment by the developed countries (data source: Fast Start Finance website) Approx. committedDonor countries Agents Type Beneficiaries amount (converted to US$) in 2010-11 Bilateral (71%), multilateral 611mAustralia Grant (94%) Global* (29%) Bilateral (9%), multilateral Small island states, Indonesia, Kenya, 31mBelgium Grant (100%) (91%) Maldives, global Grant, loan 374mCanada Bilteral (4%), Multilateral (96%) investment Haiti, Vietnam, Ethiopia, Africa, global (75%) Bilateral (48%), multilateral Small island states, Indonesia, Kenya, 72mDenmark Grant (100%) (52%) Maldives, global Ethiopia, Small Island States, Nepal, Africa, 82mEuropean Union Bilateral (100%) Grant (100%) global Bilateral (23%), multilateral Indonesia, Ghana, Kenya, Mozambique, 49mFinland Grant (100%) (77%) Nepal, global Grant (9%), Indonesia, Nigeria, Kenya, China, Ghana, 596m Bilateral (82%), multilateralFrance loan/investment Morocco, Niger, Africa, Amapa, Albania, (18%) (91%) China, Guyana, global Grant (12%), 7200mJapan Multilateral (100%) loan/investment Small Island States, Africa, global (88%) Morocco, Peru, South-east Asia, Small island 510m states, India, Fiji, PNG, Solomon Islands, Grant (65%), Bilateral (42%), multilateral Mexico, Brazil, China, Bangladesh, Turkey,Germany loan/investment (58%) Kenya, Indonesia, Benin, Mozambique, (35%) Uganda, Colombia, El Salvador, China, Honduras, Thailand, global Bangladesh, Benin, Bolivia, Ethiopia, 434m Bilateral (17%), multilateral Honduras, Kenya, Burundi, Congo, Rwanda,Netherlands Grant (87%) (83%) Indonesia, Senegal, Tanzania, Uganda, Colombia
Bilateral (33%), multilateral Brazil, Congo, Guyana, Indonesia, Tanzania, 474m Norway Grant (100%) (67%) Mexico, global Grant (48%), 181m Spain Multilateral (100%) loan/investment Africa, global (39%) Bilateral (45%), multilateral Bangladesh, Bolivia, Mali, Burkina Faso, 61m Sweden Grant (100%) (55%) South Africa, global Grant (31%), 1,122m Bilateral (22%), multilateral United Kingdom loan/investment Congo, global (78%) (69%) Uganda, Indonesia, Maldives, Georgia, 575m Grant (8%), United States of Bilateral (11%), multilateral Guatemala, Andean nations, Africa, Kenya, loan/investment America (89%) India, Algeria, Jordan, Morocco, Egypt, (92%) Tunisia, global*Allocated globally through either a fund or a program
Long term financeClimate finance is relatively a new area of finance. Source and strategies to raise such finance in thelonger term for each developed country party will evolve as discussion and negotiation progresses onthe establishment of the Green Climate Fund.A good example is the case for Australia, as discussed in a recently published working paper by theCentre for Climate Economics & Policy at the Australian National University. The paper explores thepotential finance sources to meet Australia’s commitment under the long term finance for the GreenClimate Fund. Four broad categories of finances, namely private finance, public finance, new innovationand allocation from national budget, along with potential sources are analyzed for their suitability (interms of the eligibility, monitoring and accounting requirements as discussed in previous section) andamount where estimation is possible. These are illustrated in Table 2. 60% - 87% of the long termclimate finance commitment is found potentially feasibleby re-allocating the current domestic budgeton fossil fuel subsidies whereas 2% - 3% are possible through revenue raised through carbon levy oninternational transport.Potential to re-allocate the share of existing aid funds is also discussed. IfAustralia raises the share of climate assistance to 5% of the current aid funding budget, that wouldpotentially make up for 1% - 5% of the long term finance commitment by 2020. Table 2 Potential long term climate finance sources for Australia (data source: Jotzo et al. 2011) Finance Sources Estimated per Comments categories annum amount (in AU$, assuming parity with US$) by 2020 1) Private A. Carbon market 1-3.9billion Double counting of any offset in the finance carbon market is to be avoided. 2) Public A. Private capital No figure There is a possibility of using finance leveraging in Australia’s public finance to leverage developing private capital in developing countries countries. 3) New A. Carbon levy on 0.2 - 0.5 billion This is primarily from a levy on jet innovative international fuels and after setting aside 25% of sources of transport the levy revenue for domestic finance industry support B. Financial No figure It is argued that such instrument can transaction tax distort financial market and so far, there is no clear emergence for using such instruments for climate financing. C. Share of revenue 0.1 - 0.8 billion Revenue from domestic carbon from domestic prices are currently earmarked to carbon prices household and local industry assistance. The estimated amount can be available if the Govt. relocates 1-7% of this revenue.
4) National A. Reducing tax 3 billion The estimate is from the current budget re- exemption on budgetary support on such activities allocation industrial 6 billion The estimate is from current activities that use budgetary support for off-road and fossil fuel on road fuel use by heavy vehicles B. Resource tax No figure It is estimated that current mineral exemption rent tax cover the entire climate finance budget for Australia C. Aid funds 0.1 – 0.8 billion This would represent 5% of Australia’s aid budget by 2020.Challenges for DurbanAgreement on the process of the Green Climate Fund is a key deliverable of the Durban conference.While developed countries expect to identify the governing structure of the fund, developing countrieswould want to have the confidence in the financing commitments of their counterparties – both in fasttrack and long term by 2020.Status of fast track funding shows less than 40% of the US$30 billion amount has been raised till dateand hence means for getting together the balance before the 2012 deadline will form a key part of thedeliberations. Besides, developed countries are required to present their roadmap for their respectiveshares of the long term finance arrangement (as discussed in an earlier section). The issues arounddiversion of existing aid funds and additionality criteria for climate finance have been contested for awhile now. These will continue to find relevance in Durban too.Regardless of such debates, the challenges for Durban also provide an exciting opportunity to thinkabout innovative means of raising and mobilizing climate finance. As discussed earlier, carbon levy oninternational transport, particularly for shipping, is receiving serious attention as a new source of fundsfor the developed countries. Similarly there is an onus on the recipient developing countries to come upwith strategies for utilizing the climate assistance funds in the most effective manner. A key role thatsuch international assistance can play is to provide a platform for leveraging private capital formitigation and adaptation activities and reduce investment risks in developing countries.All this is achievable – Durban is the key !ReferencesFast Start Finance website, http://www.faststartfinance.org/home, accessed on 15th November 2011Jotzo F, Pickering J, Wood P J (2011) “Fulfilling Australia’s International Climate Finance Commitments:Which Sources of Financing are Promising and How Much Could They Raise?” Working paper, CentreClimate Economics and Policy, Australian National UniversityMoncel R., Mcmahon H. &Stasio K. (2009) “Counting the Cash: Elements of a Framework for theMeasurement, Reporting and Verification of Climate Finance” Working paper, World Resource Institute
UNDP (2011) “Guidebook for the Design and Establishment of National Funds to Achieve Climate ChangePriorities” published by the United Nations Development Program in September 2011UNFCC (2010) “Report of the Secretary-General’s High-level Advisory Group on Climate ChangeFinancing”The Conference of the Parties (2010) “Draft decision -/CP.16 - Outcome of the work of the Ad HocWorking Group on long-term Cooperative Action under the Convention” Cancun