Reflection 2

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CLIMATE FINANCE ISSUES IN THE IPCC
REPORT AND POSSIBLE FUTURE
PATHWAYS
SABINA POTESTIO, ICCG

Climate finance issues in the IPCC report and possible future pathways
ICCG Reflection No. 26/Month 2014
1
CLIMATE FINANCE ISSUES IN THE IPCC REPORT AND
POSSIBLE FUTURE PATHWAYS
Sabina Potestio (ICCG)
Abstract
For the first time, an Intergovernmental Panel on Climate Change (IPCC) report includes an entire
chapter dedicated to the topic of climate finance, an important and pressing topic within the
climate change policy arena. Here an overview of the cross-cutting issues presented in the
sixteenth chapter by the Working Group III is provided while reflecting on possible future pathways
for the investment in mitigation and adaptation to climate change projects.

2
Climate finance in the sixteenth chapter of the IPCC report
The sixteenth chapter of the recent Intergovernmental Panel on Climate Change (IPCC) report
reflects the growing awareness of the design of efficient and effective climate finance1. As climate
related risks increase dramatically across the globe and the financial crisis limits the economic
resources that governments and the private sector are willing to pool to financially support
mitigation and resilience to climate change, spending money in a wise and sustainable manner
becomes a crucial and pressing issue for stakeholders. In addition, the topic of climate finance is
particularly important when it comes to the poorest and most vulnerable countries, such as the
Least Developed ones, where the necessary economic resources to confront global warming are
lacking and where developmental concerns seem to be more compelling for governments. The
IPCC chapter, thus, touches on various topics starting from estimates on the current total climate
finance for mitigation and adaptation activities to the enablement of environments, the
opportunities and key drivers of financing low-carbon investments, the institutional arrangements
for mitigation financing, the synergies and tradeoffs between financing mitigation and adaptation
and the financing of mitigation activities in developing countries.
An important premise of the chapter, which the authors are keen on highlighting, is the fact that
there is no internationally agreed definition of climate finance. Within the available literature the
term ‘climate finance’, in fact, is used to refer generally to financial resources devoted to
addressing climate change globally or to financial flows to developing countries to assist them in
addressing climate change. In turn, the two broad definitions include a wide range of concepts
whether the financial resources are measured totally or for instance referring only to public finance
or incremental investment2. Secondly, the chapter describes the current sources, managers of
capital and financial instruments, which provide climate finance. Financial flows come from various
sources such as carbon taxes, general tax revenue, international levies, funds from capital markets,
corporate cash flow or household income and they are managed by governments; national,
bilateral and multilateral institutions; commercial and financial institutions; corporate actors and
households while they are disbursed through grants, project debt, equity, balance sheet financing
or credit enhancement3.
As for the estimation of the amount of financial flows the authors point out that no comprehensive
system exists to track climate finance and that the available data comes from different sources
with various gaps and variable quality and timeliness while also often related to pledges rather that
to actual disbursement4. This prevents more certain estimates although total climate finance for
mitigation and adaptation is estimated at 343 to 385 billion USD per year for 2010 to 2012 while that
flowing to the developing countries is estimated to be between 39 to 120 billion USD per year from
2009 to 20125. An important consideration refers to the fact that most of the resources are spent on
mitigation rather than on adaptation projects and that private funding is very uncertain and even
more difficult to track compared to public funding. In addition, a crucial question is whether these
financial flows are ‘new and additional’. On top of this, the authors underline the problem of the
recent financial crisis of 2008 as a challenge to investments in renewable energy programs against
the need of scaling up resources for climate change activities especially with regards to the
developing countries’ needs. The stabilization of GHG concentrations will require, in fact, even
greater investments in the energy, land use, transportation and infrastructure sector and only a few
studies have estimated future investment needs. According to the report this information is
restricted to energy use and estimates a total annual investment in the energy sector at about 1200
1 Gupta et al., 2014
2 Ibid.
3 Ibid.
4 Ibid.
5 Ibid.

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USD billion6.
Table 1.
Another issue raised by the authors concerns the constraints to investments in climate-related
projects and the role of the public sector in enabling these investments. Among the challenges for
low-carbon investments are investment risks such as political instability, currency risks or technology
risks; return on investment; cost and access to capital; market and project size; tenor-risk
combination and human resources and institutional capacity7. The public sector, thus, detains a
decisive role in supporting mitigation and adaptation to climate change investments, which are
perceived as risky for the private sector. An interesting concept here is the enablement of
environments and, although this is not clearly defined, the literature highlights the importance of
government action regarding stable and predictable policies with well-established legal
institutions8. Moreover, governments may reduce investment risks and access to capital by offering
several risk mitigation instruments such as credit enhancements, local currency finance, loans,
grants, equity and tax reductions or feed-in tariffs, which the authors, in this chapter, analyse and
indicate as effective tools to scale up climate finance.
Last but not least, the authors discuss the synergies and tradeoffs between financing mitigation and
adaptation activities. Although the literature, as they state, offers divergent arguments and an
optimal mix cannot be precisely determined, international climate finance for both mitigation and
adaptation is necessary. A debate strongly connected to this issue is that of the historical
contribution of developed countries in having historically contributed most to GHG emissions and,
hence, their consequential ‘duty’ to pay for the costs of adaptation in the developing countries.
Future pathways for climate finance
Within the realm of climate change policy, the issue of climate finance is a particularly pressing one
considering the limited research on the topic and the lack of cooperation among local, national
and international actors when it comes to pool the necessary economic resources to combat
global warming. A first step towards a more effective and efficient deployment of climate finance
in the future is certainly the use of common definitions. The concepts of climate finance in general;
the distinction between what counts as mitigation and adaptation activities and the distinction
between climate finance and development aid; the concept of ‘new and additional’ and that of
enabling environments need to be clearly defined and agreed upon in order to facilitate research
and data collection. The question of ‘additionality’, for instance, has brought up various debates
coming from the fast-start finance period which may be taken into account as early lessons for the
pooling of new and additional economic resources also coming from newly established climate
6 Ibid.
7 Gupta et al., 2014
8 Ibid.
Total climate finance for
mitigation and adaptation per
year (2010/11/12 USD)
Total climate finance currently
flowing to developing countries
per year (2009/10/11/12 USD)
Investment needs to limit
temperature increase from pre-
industrial level to no more than
2° C restricted to energy use
343 to 383 billion USD 39 to 120 billion USD 1200 billion USD

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funds such as the Green Climate Fund (GCF). Interesting interpretations refer to funds being
additional to Official Development Aid (ODA); new and additional to those promised before
COP15 or provided by innovative sources of finance. A solution could be, for instance, to decide to
kick-start negotiations on a common definition of new and additional9 in order to provide sufficient
guidelines for new actors within the climate finance arena.
For what concerns the scaling up of financial resources, the future of climate finance heavily
depends not only on public and national funding but also on the engagement of the private
sector. The focus of recent meetings of the Green Climate Fund’s Board on the design of a Private
Sector Facility (PSF), for instance, may be a good example for further future engagement of private
stakeholders in low-carbon investments. As one of the documents (GCF/B.04/07) of the GCF
Board’s meeting states, “the facility will promote the participation of private sector actors in
developing countries, in particular local actors, including small and medium-sized enterprises and
local financial enterprises and intermediaries”10. Options for the operations of the PSF would be to
increase the viability of investments, reduce investment risks, build capacity and readiness, support
technology development and information dissemination11. Compared to the public sector and
particularly concerning mitigation activities, the private sector detains the advantage of having
the relevant expertise and owning many of the assets and technologies that are needed to
support low carbon development12.
Another important point for the future of effective and efficient climate finance is that of national
ownership and direct access. Newly established funds such as the GCF are focusing on this aspect
which was first discussed and introduced in the decision to operationalise the Adaptation Fund (AF)
in 2007. To ultimately be effective, in fact, international finance will need to support the realisation
of nationally owned and led responses to climate change13. Direct access operationalizes the
concept of national ownership and was defined as the option for eligible Parties to directly submit
project proposals to the AF, and for institutions (normally termed ‘entities’) chosen by governments
to approach the AF directly14. Direct access will contribute to improve coherence with national
needs and priorities although countries’ ability to directly access funds will vary from country to
country depending on their institutional capacities and, thus, will need to be supported by the
international community to prepare for this modality of climate finance delivery15.
Regarding the synergies and tradeoffs between adaptation and mitigation activities, as the
authors state in the sixteenth chapter of the IPCC report, adaptation projects receive, especially on
the part of the private sector, less funding compared to mitigation programmes. Although an
optimal mix between the two is not easy to determine, it seems safe to say that adaptation to
climate change deserves the same attention and economic resources as mitigation. In particular,
adaptation finance raises questions of equity and fairness since the developed countries have
historically been the largest GHG emitters and detain the burden of financially supporting the most
vulnerable countries to build resilience to global warming. On this topic, the issue of vulnerability
and how to measure it has been often debated. Hence, how should adaptation resources be
distributed amongst countries? A crucial challenge for the future of climate finance, then, also
depends on ethical and normative issues, on how to distribute the available resources amongst
vulnerable countries in the fairest and most equitable way possible.
Another issue discussed in the IPCC report is that of the institutional landscape of climate finance
becoming more and more complex over time as additional actors and stakeholders enter the field
9 Fallasch and De Marez, 2010
10 Green Climate Fund, 2013
11 Ibid.
12 Nakhooda, 2013
13 Ibid.
14 Berliner et al., 2013
15 Ibid.

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causing a lack of transparency, fragmentation of efforts and a substantial bureaucratic burden for
recipients16. An issue that may be taken into account to improve effectiveness and efficiency of
future climate finance is policy integration. Interesting arguments have been taken up by
academics on the topic of organizational change such as clustering, upgrading, streamlining or
hierarchization. These arguments have been discussed for environmental policy in general but
could easily be applied to the climate finance discussion. The proposals include sharing functions of
convention secretariats in order to synchronize activities; the upgrading of the United Nations
Environment Programme (UNEP) to a specialized agency, which would coordinate norm-building
and norm-implementation; the streamlining of institutions, organizations and bureaucracies with a
more centralized architecture which would challenge the overlap between the multitude of
institutions and organizations and, last but not least, the creation of a hierarchical
intergovernmental organization and a new agency17.
To conclude, a further concern for the future of climate finance is the lack of research on the
effectiveness and efficiency of the work of the various funds. Certainly, a solution could be that of
creating a common framework for analysing effectiveness, which would have to look at the whole
process of funding starting from the governance and decision-making aspect to the disbursement
and ultimate outcomes of the funded projects and programmes.
References
Berliner, J., Gruning, C., Menzel, C., and Harmeling, S. (2013). Enhancing direct access to the Green
Climate Fund. Climate & Development Knowledge Network Policy Brief. Retrieved from
http://cdkn.org/wp-content/uploads/2013/06/CDKN_GCFPolicyBrief_Pr2_21-06-13_WEB.pdf
Biermann, F., Davies, O. and Van der Grijp, N. (2009). Environmental policy integration and the
architecture of global environmental governance. International Environmental Agreements:
Politics, Law and Economics 9(4) 351-369.
Fallasch, F., and De Marez, L. (2010). New and additional? A discussion paper on fast-start finance
commitments of the Copenhagen Accord. Climate analytics. Retrieved from
http://climateanalystics.org/sites/default/files/attachments/publications/101201_additionality_final.
pdf
Green Climate Fund (2013). Business Model Framework: Private Sector Facility. Retrieved from
http://gcfund.net/fileadmin/00_customer/documents/pdf/B-04_07_BMF_PSF_12Jun13_1745s.pdf
Greene, W. (2004). Aid fragmentation and proliferation: Can donors improve the delivery of climate
finance?. IDS Bulletin 35 66-75.
Gupta, S., Harnisch, J., Barua, D. C., Chingambo, L., Frankel, P., Vazquez, R.J.G., Gomez-Echeverri,
L., Haites, E., Huang, Y., Kopp, R., Lefèvre, B., de Oliveira Machado-Filho H., Massetti, E., Enting, K.,
Stadelmann, M., Ward, M., Kreibiehl, S., Carraro, C., Karrouk, M.S., Arriaga, I.P., and Enting, K. (2014).
Cross-cutting investment and finance issues. IPCC Working Group III AR5. Retrieved from
http://report.mitigation2014.org/drafts/final-draft-postplenary/ipcc_wg3_ar5_final-
draft_postplenary_chapter16.pdf
Nakhooda, S. (2013). “The effectiveness of international climate finance”. Overseas Development
16 Greene, 2004
17 Biermann et al., 2009

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Institute (ODA). Working paper 371.

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