Climate-l.org
Climate Financing
Peter Doran, Ph.D.
Climate-l.org Writer
Richard Sherman
Climate-l.org Project Manager and Content Editor
Climate change has become a standing item on the multilateral finance and development agenda, and therefore it is fitting that, as negotiators made their way home from the Accra Climate Change talks, finance and development officials arrived to discuss ways to increase the transparency of aid and make it more results-oriented at the third High Level Forum on Aid Effectiveness in Accra. In the run-up to the December 2008 Poznan Climate Change Talks, a number of similar intergovernmental meetings and processes are planned.  

Under the Bali Action Plan, parties agreed to discuss elements related to enhanced action on the provision of financial resources and investment to support action on mitigation and adaptation, and technology cooperation. The Ad hoc Working Group on Long Term Cooperative Action (AWG-LCA) has held several discussions on this element, and hosted an in-session workshop on “Investment and financial flows to address climate change” at its second session. In conclusions adopted at the Accra Session, the AWG-LCA invited its Chair to prepare a document assembling ideas and proposals presented by parties on the elements contained in the first paragraph of the Bali Action Plan, for further deliberation in Poznan. Commenting on the Accra Session, Yvo de Boer, UNFCCC Executive Secretary, stated that “the highlight of this session is that governments have agreed to compile different proposals for solutions in a structured way for discussion at the next landmark meeting in Poznan. Accra has laid the foundation of what could serve as a first negotiating text for a Copenhagen deal.”

In this article we summarize some of the emerging ideas and proposals tabled, either prior to or during the Accra session, that are likely to feature prominently in intergovernmental climate discussions over the coming months. We also focus on opportunities to further assert the climate change funding agenda in forthcoming deliberations on financing for development.

Proposals for New Mechanisms
A number of proposals have been made regarding new financial mechanisms under the Convention. These include: the Alliance of Small Island States’ (AOSIS) Convention Adaptation Fund; the G77/China’s  financial mechanism for meeting financial commitments under the Convention; Mexico’s World Climate Change Fund; Switzerland’s Multilateral Adaptation Fund;  and the African Group’s African climate change facility. Regarding technology transfer and support, India has proposed a technology transfer fund, a venture capital fund and a collaborative climate research fund, while Ghana and China have called for the establishment of a multilateral technology fund. In relation to climate risk reduction and insurance mechanisms, the Least Developed Countries (LDC) Group has proposed a mechanism for assessing loss and damages, including a financial mechanism to provide immediate help to climate victims. It also called for the establishment of a mechanism for crop insurance and the development of a new and innovative support mechanism such as micro insurance. AOSIS has called for an International Insurance Mechanism and has supported the idea of solidarity funds to address catastrophic risk and collective loss sharing mechanisms to address the unavoidable impacts of climate change. The underlying convergence of these proposals is twofold:  the proposals aim to ensure the enhanced implementation of the Convention through the provision of new, adequate and predictable financial resources; and the proposals aim to develop an inclusive and transparent governance regime under the authority and guidance of, and full accountability to, the Conference of the Parties.

In light of the UNFCCC Secretariat document, Investment and Financial Flows to Address Climate Change, which indicates that, including public and private sources, global additional investment and financial flows required in 2030 to return global greenhouse gas emissions to current levels would amount to US$200-210 billion, a number of parties have made proposals regarding either new sources or measures to assess the level of contributions required to meet the needs of developing countries. The G77/China has proposed that the level of new funding be set at 0.5-1% of the Gross Domestic Product (GDP) of Annex I Parties. Both AOSIS and Norway have proposed using a share of the proceeds from auctioning Assigned Amount Units (AAUs). Switzerland has proposed a uniform global levy of US$2 per ton of carbon dioxide on all fossil fuel emissions. The Republic of Korea has proposed a framework for awarding carbon credits for Nationally Appropriate Mitigation Actions (NAMA) by developing country parties, with a certain share of proceeds being allocated to the adaptation and climate funds.

Using the Financing for Development Agenda
The 2008 calendar of meetings on finance for development provides opportunities to bolster the international commitment to financing climate change initiatives. Among the key meetings and processes that may assist the climate regime are the: Third High-Level Forum on Aid Effectiveness; UN High-Level Event on the Millennium Development Goals (MDGs) in New York; Financing for Development follow-up meeting in Doha, Qatar; and Group of Twenty (G20) finance ministers and central bank governors in Sao Paulo, Brazil.

In the emerging discussions on the international community’s financial responses to climate change, it has been stressed that funding climate change should not be at the expense of other basic development needs. Developing countries, supported by some industrialized countries, have argued that targets for conventional official development assistance (ODA) directed towards the attainment of the MDGs should be separated from financial targets for climate change, and resource mobilization for climate change policies should be additional to current ODA levels. In line with this position, the Communiqué adopted by Ministers of the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development, following their seventy-ninth meeting in Washington DC, US, on 11 April 2008, noted that, in scaling up the use of existing mechanisms for climate change related actions, the Bank must ensure that its resources are not diverted from its core development objectives, and that the costs of doing business with the Bank not be allowed to increase.

The early signals regarding climate financing are mixed. The Accra Agenda for Action (AAA), which was recently adopted at the Third High-Level Forum on Aid Effectiveness, merely recognizes climate change as a new global challenge that, together with rising food prices, threatens the advances against poverty many countries have made. The AAA does not offer proposals, or support, for new international actions or mechanisms for climate finance.

However, the informal preparatory negotiations for the Doha Review Conference have seen climate change take on a more prominent role. This has included deliberations on the need for appropriate sources of finance for the mitigation of, and adaptation to, climate change and on addressing the threats posed by global warming to the achievement of the MDGs. The draft outcome document for the Monterrey Consensus Review Conference recognizes “increased costs from damage to the Earth’s environment and climate change” as key challenges, and reaffirms the need for concerted global action to address them “while consistently furthering economic and human development for all.” The draft document contains two yet-to-be-agreed commitments, namely agreement to: respond to the additional financial requirements that meet these new challenges with appropriate, concrete international cooperation measures and policies; and facilitate the transfer of low-carbon technology.

With more informals in the coming months, these elements’ fate is far from clear. In their submission, the United States has suggested that the draft outcome document “limit itself to restating general principles that frame the relationship between financing for development and climate change.” A similar view was put forward by the CANZ States of Canada, Australia and New Zealand. In its preliminary views on ‘Increasing international financial and technical cooperation for development,’ the EU identified using the proceeds from emissions trading as one of many innovative sources of financing to generate new long-term funds. Switzerland’s Discussion Paper, ‘Reviewing the Monterrey Consensus,’ identifies the need to liberalize the trade of goods and services with a potentially positive impact on climate change. Switzerland, together with nine other countries, has already tabled a proposal to liberalize 153 such environmentally friendly products.

The November G20 meeting will focus on ‘Competition in Financial Markets, Clean Energy and Economic Development and Fiscal Elements of Growth and Development.’ The meeting is expected to build on the 2007 G20 Communiqué, in which Ministers and Central Bank Governors noted the relationship with other key economic goals as well as the important discussions in other fora on an international policy response to climate change, and agreed that the G20 can play an important role in this debate.

Review of the UNFCCC Financial Mechanism
Discussions on finance and investments under the AWG-LCA are closely linked to two COP processes, namely the identification of resource needs for the fifth Global Environment Facility replenishment (GEF5), and the fourth review of the financial mechanism. The COP, in its decision 6/CP.13, requested the SBI to recommend a draft decision for adoption at COP14 on the assessment of the funding necessary to assist developing countries, for consideration by the GEF replenishment process. The upcoming GEF Council meeting in early November is likely to consider the options for the GEF5 replenishment process, which is expected to conclude prior to the Copenhagen meeting. The COP also requested the SBI to recommend a draft decision on the review, for adoption no later than COP15. However, the role of the GEF as the operating entity of the current financial mechanism is one of the more contentious issues. During SBI28, the Earth Negotiations Bulletin reported that, while several Annex I countries suggested text highlighting the positive role of the GEF in catalyzing international investments, proposed text from the G77/China stated that GEF funding is “grossly inadequate,” requested the GEF to provide new and additional financial resources, and noted concerns with the Resource Allocation Framework. Disagreement also persisted on a co-financing requirement for GEF projects, with the G77/China suggesting requesting the GEF for information on the nature and objectives of co-financing to determine whether it constitutes an additional burden for developing countries. Discussions also took place on the role of the private sector and on a proposal for a paper on bilateral and multilateral financial initiatives focusing on the Convention’s provision that this should not introduce new forms of conditionalities.

Conclusion
In light of the range and breadth of the financing proposals that have been tabled, there is an emerging consensus that the post-2012 financial arrangements will need to result in effective transfers of resources to developing counties. Financing will need to become more innovative and effective, and mechanisms will be required to ensure that resources are channeled to where they are most needed. However, while there may be general agreement on the need for scaling-up resource flows, negotiations on the financing package are likely to mirror past debates. Agreement on what would constitute adequate resource levels will be complex. Diverse views remain over mandatory funding levels, proportional frameworks for financial commitments based on total greenhouse gas emissions or GDP, and a compliance framework for ensuring parties meet their financial commitments. The increased complexity of the climate financing architecture also raises concerns regarding the challenge of ensuring effectiveness and coherence of the system. The financial package for Copenhagen will need to address the legitimate concerns of all parties. The challenge, therefore, requires negotiators to forge a new spirit of trust and solidarity.
Annex: Summary of Proposals for New Mechanisms
A number of proposals have been made regarding new financial mechanisms under the Convention. The underlying convergence of these proposals is twofold: the proposals aim to ensure the enhanced implementation of the Convention through the provision of new, adequate and predictable financial resources; and the proposals aim to develop an inclusive and transparent governance regime under the authority and guidance of, and fully accountable to, the Conference of the Parties.

The Alliance of Small Island States’ (AOSIS) proposal for a Convention Adaptation Fund, which is to linked to greenhouse gas emissions, would operate under the framework of the polluter pays principle, with criteria established for contributions and the prioritization of resources.

The G77 and China have proposed a financial mechanism for meeting financial commitments under the Convention, to bring about coherence in the global financial architecture for financing, including enabling a shift from a project-based approach when dealing with proposals for funding, to a programmatic approach, where appropriate, in order to make optimal use of the full range of means of implementation available and to allow for implementation at scale.

Mexico’s World Climate Change Fund would aim to build, through common understanding, a non-substitutive but complementary scheme to the Kyoto Protocol, which ensures the full, sustained and effective implementation of the Convention. The Fund would aim to: expand the scale of global mitigation efforts and enable the participation of all countries; support adaptation activities; promote technology transfer and diffusion; and underpin, financially, the new climate change regime.

Switzerland’s Multilateral Adaptation Fund (MAF) would assist low and medium income countries in financing their adaptation policies. The MAF is based on two pillars, namely the: prevention pillar, which will focus on climate change impact (risk) reduction through appropriate policies and measures; and an insurance pillar, which will focus on climate impact response: relief, rehabilitation and recovery. The MAF releases its funds of some US$18.4 billion per year within a clearly defined legal governance framework.

South Africa, for the African Group, has proposed a dedicated African climate change facility as part of a broader coherent financial architecture under the Convention, which would include a package on technology, finance and capacity-building that responds to the climate change priorities of the region, and its particular institutional, financial and technical challenges and needs.

India has proposed a new financing architecture consisting of different financing streams to address technology acquisition and a technology transfer fund, a venture capital fund for emerging technologies, and a collaborative climate research fund.

Both Ghana and China have called for the establishment of a multilateral technology fund. China has put forward the option of establishing an international mechanism for cooperation on research and development (R&D) and transfer of technologies, with a particular focus on the removal of obstacles to technology transfer and to ‘appropriately’ address the issue of intellectual property rights. 

Bangladesh for the Least Developed Countries (LDC) Group has identified the need for compensation for climate victims and refugees, and has proposed a mechanism for assessing loss and damages, including a financial mechanism to provide immediate help to climate victims. It also called for the establishment of a mechanism for crop insurance and the development of a new and innovative support mechanism such as micro insurance.

AOSIS has called for an International Insurance Mechanism that would be an internationally-sourced pool of funds to help small island States manage financial risk arising from increasingly frequent and severe extreme weather events. AOSIS has also supported the idea of solidarity funds to address catastrophic risk and collective loss sharing mechanisms to address the unavoidable impacts of climate change.

Proposals for New Sources of Finance
A number of parties have made proposals regarding either new sources or measures to assess the levels of contributions required to meet the needs of developing countries. The UNFCCC Secretariat document, Investment and Financial Flows to Address Climate Change, indicates that, including public and private sources, global additional investment and financial flows required in 2030 to return global greenhouse gas emissions to current levels would amount US$200-210 billion. The UNFCCC review found that the additional investment and financial flows in 2030 to address climate change amounts to 0.3-0.5% of global domestic product in 2030 and 1.1-1.7% of global investment in 2030. It also noted that this is a small amount in overall global figures, but large compared to the currently available public and private financial resources for climate change.

China has proposed that in addition to existing ODA, developed countries should provide financial support of no less than 0.5% of their total Gross Domestic Product (GDP) per annum to support actions by developing countries to address climate change.

In a similar vein, the G77/China has proposed that the level of new funding can be set at 0.5-1% of the GNP of Annex I Parties. The G77/China has argued that the main source of funding will be through the implementation of commitments under Article 4.3, with funding being “new and additional” financial resources, which is over and above ODA. The major source of funds would be the public sector. It has further argued that any funding pledged outside of the UNFCCC should not be regarded as the fulfilment of commitments by developed countries for measurable, reportable and verifiable (MRV) means of implementation in relation to finance, technology and capacity-building under the Bali Action Plan. The resources shall be essentially grant-based (particularly for adaptation), without prejudice to certain concessional loan arrangements in appropriate form, to meet the needs of a specific programme.

Mexico’s proposal states that contributions shall be agreed multilaterally and could be determined by criteria, such as: greenhouse gas emissions; population; and GDP levels. Mexico has suggested that, in its initial phase, the Fund should mobilize no less than US$10 billion per year. Several mechanisms could mobilize new financial resources that could be directed to the fund, such as auctioning permits in domestic cap and trade systems in some developed countries, or the possibility of taxing air travel, without putting excessive pressure on public financing.

The G5 Political Declaration (Brazil, China, India, Mexico and South Africa), adopted in July 2008, welcomed further exploration of China’s proposal for  GDP based climate finance targets, as well as the Mexican initiative for a World Climate Change Fund.

The African Group has called for adaption finance to be massively scaled-up (by 2 or 3 times present levels) and must redress the historical inequity in allocation of funds for adaptation

Norway has proposed using a share of the proceeds from auctioning Assigned Amount Units (AAUs). Norway’s proposal includes the option of a small portion of AAU’s being withheld from national quotas, which would be auctioned by an appropriate international institution. The resulting revenue would then be placed in a fund to be used on adaptation actions or other specified purposes such as technology development. Even a small percentage of auctioning would generate a large source of finance.

Switzerland’s proposal for global solidarity in financing adaptation is based on applying a uniform global levy of US$2 per ton of carbon dioxide on all fossil fuel emissions. According to the Swiss proposal, this would equate to a tax burden of about US 0.5 cents per litre of liquid fuel. Under this scheme, a basic tax exemption of 1.5tCO2-eq per inhabitant would be applied to take into account the principle of common but differentiated responsibilities.

Bangladesh, for the LDC group, has proposed a range of options including: a levy on international air travel; an international fuel levy on aviation and maritime transport; extending the adaptation fund levy to other mechanisms; and using the carbon markets and venture capital to generate additional resources.

The Republic of Korea has proposed the creation of Nationally Appropriate Mitigation Actions (NAMA) by developing country parties, supported and enabled by technology, financing and capacity-building, that are measurable, reportable and verifiable. Under the NAMA framework, carbon credits would be awarded with a certain share of proceeds being allocated to the adaptation and climate funds.

The European Union (EU) has suggested that discussions focus on developing a broad toolbox approach that can leverage private and public financial flows for both mitigation and adaptation activities. Regarding adaptation, the EU toolbox would focus on: existing mechanisms such as the CDM levy; national policies and private-public partnerships; and generating finance while enhancing mitigation by exploring innovative financing sources and implementing them. On mitigation, the tool box would focus on: the potential of the carbon market to become a key vehicle for financing mitigation; innovative financing mechanisms that can assist in creating and strengthening the price of carbon while enhancing mitigation efforts; and public sector and public finance in developed and developing countries. The EU has further proposed that it will be important to ensure effective provision of finance through a coherent, consistent and effective financial architecture that has strong synergies with national and international policies and efforts.

Australia has suggested that further consideration be given to criteria for prioritizing the allocation of financial support for clean development, including through maximising the effectiveness of existing funding, including domestic and private sector funding. It has further proposed that the coverage of carbon markets should be expanded, given the ability of markets to encourage behavioral change, and deliver least cost abatement. It has also suggested that the AWG-LCA recommend expanding the number of countries subscribed in Annex II, based on current capacity to provide support, who under Convention Articles 4.3 and 4.4 agreed to provide financial resources to assist others to better implement climate change policies and measures.

Sri Lanka has proposed establishing a mechanism to enable the Annex I countries to contribute to the Adaptation Fund in a formal manner. They have also suggested that such a mechanism would also facilitate channeling a significant portion of funds to the Adaptation Fund from the revenues of the Joint Implementation and Emission Trading mechanisms.

Pakistan has proposed increasing the current CDM levy to a level of 3-5% share of the proceeds.

Turkey has argued that access to the Protocol’s Adaptation Fund should not be based on being a party to Protocol. Instead, the necessary conditions should be determined by vulnerability to the adverse effects of climate change, the level of associated risks, and the financial capacity of the Convention parties to cover the costs of adaptation.

A note on sources
Official Submissions made by parties, in response to decision 1/CP.13, that instructed the Ad Hoc Working Group on Long-term Cooperative Action under the Convention (AWG-LCA) to develop its work programme at its first session in a coherent and integrated manner, and invited parties to submit to the Secretariat, by 22 February 2008, their views regarding the work programme, taking into account the elements to be addressed by the AWG-LCA. The Secretariat also received submissions from accredited non-governmental organizations and intergovernmental organizations.

Presentations made at three workshops at the second session of the AWG-LCA on:
Advancing adaptation through finance and technology, including national adaptation programmes of actions (NAPAs); 
Investment and financial flows to address climate change; and
Effective mechanisms and enhanced means for the removal of obstacles to, and provision of financial and other incentives for, the scaling up of the development and transfer of technology to developing country Parties in order to promote access to affordable environmentally sound technologies; and ways to accelerate deployment, diffusion and transfer of affordable environmentally sound technologies.
Submissions made by Parties in preparation for the third session of the AWG-LCA, held in Accra, Ghana, from 21-27 August 2008.
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