Climate finance

Åsa Persson,Stockholm Environment Institute &

Stockholm Resilience Centre

CEMUS, 2 November 2011

Climate finance is motivated by (i) the fundamental differences in vulnerability and adaptive capacity of societies in the developed and developing world...

Global Adaptation Index 2010

http://gain.globalai.org/

and (ii) the historical responsibility of the developed world for emissions and calls for equitable burden-sharing...

IEA, 2011

Applying a consumption perspective: net emission transfers from developed to developing countries (indexed to 1990) (Peters et al. 2011)

Net change in emission transfers and territorial emissions 1990-2008 (Peters et al. 2011)

and (iii) considering growing emissions by middle income countries and general development aspirations of developing countries, climate finance acts as a ’side payment’ to incentivise strong mitigation commitments from those countries.

CO2 emissions from fuel combustion

IEA, 2011

IEA, 2011

15

Approaching the Rio+20 summit...

• 2 billion people without access to clean cooking fuels

• More than 1.5 billion people without electricity

• More than 1 billion have poor access to fresh water

• About 800 million people chronically undernourished

• 2 million children die per year from diarrhea

• 30,000 deaths each day from preventable diseases

Approaching the Rio+20 summit...

• Basic development objectives on the agenda again, coupled with growing middle-class aspirations of emerging economies

• ’Green growth’ and portrayal of ’easy’ win-win solutions questioned (’environmental imperialism’)

• Acting on climate change: – Direct costs of mitigation and adaptation and their

compatibility with income and wealth in developing countries

– The opportunity cost of less resources for non-climate development objectives

Copenhagen Accord 2009

Copenhagen Accord 2009“In the context of meaningful mitigation actions and transparency on implementation, developed countries commit to a goal of mobilizing jointly USD 100 billion dollars a year by 2020 to address the needs of developing countries.”“The collective commitment by developed countries is to provide new and additional resources, including forestry and investments through international institutions, approaching USD 30 billion for the period 2010–2012 with balanced allocation between adaptation and mitigation.”

Outline

• Background and earlier climate finance commitments• Definition of climate finance• Estimated need for climate finance• Supply and mobilisation of new finance• Governance of funds• Allocation and use of finance• Conclusion: critical issues for Durban and beyond

How much is USD 100 billion?

• 0.2% of world GDP• 6% of world military spending in 2010• 14% of 2009 G20 financial stimulus packages

• Roughly equal to Bangladesh GDP in 2010• 22% of Sweden GDP in 2010

• Almost doubled global ODA (129 billion in 2010)

1. Background: UNFCCC (1992)• Art 4.3 – “The developed country Parties and other developed Parties

included in Annex II shall provide new and additional financial resources to meet the agreed full costs incurred by developing country Parties in complying with their obligations under Article 12, paragraph 1… The implementation of these commitments shall take into account the need for adequacy and predictability in the flow of funds and the importance of appropriate burden sharing among the developed country Parties.”

• Art 4.4 – “the developed country Parties and other developed Parties included in Annex II shall also assist the developing country Parties that are particularly vulnerable to the adverse effects of climate change in meeting costs of adaptation to those adverse effects.”

• Art 11.5 – “The developed country Parties may also provide and developing country Parties avail themselves of, financial resources related to the implementation of the Convention through bilateral, regional and other multilateral channels.”

1992-2007: Bali increases the pressure• 2001 Marrakech Accords (COP7): three multilateral funds under the UNFCCC

launched (LDCF, SCCF, AF)– Around 400 million USD spent by 2011, plus 360 million more by 2013– Voluntary contributions from developed countries

• 2005 Bonn Declaration (COP11): 21 countries declared to provide 410 million per year by 2005

– Lack of monitoring arrangements– Failure to deliver (Pallemaerts and Armstrong 2009)

• Beyond the convention– More climate change focus within ODA, but no use of climate markers to track aid

• 2007 Bali Roadmap (COP13): finance one of four pillars – “Improved access to adequate, predictable and sustainable financial resources and financial

and technical support, and the provision of new and additional resources”– Birth of MRV

2007-2011: ’Climate finance’• National submissions prior to Copenhagen proposed levels of finance and

instruments• Various new ODA funds set up• 2009 Copenhagen Accord (COP15) – 100 billion!• After Copenhagen:

– Intensified work on sources of climate finance, UN AGF and G20– Discussion on baselines for ’new and additional’– Monitoring of delivery of fast-track finance– Mapping of the climate finance landscape (eg www.climatefundsupdate.org, CPI report)

• 2010 Cancún Agreements (COP16): Transitional Committee to design Green Climate Fund, and Standing Committee

• 2011 Durban (COP17): Decision on Green Climate Fund• History of failed promises and lack of trust until 2007 – increased

delivery on commitments since but high uncertainty and strategic behaviour

2. Definition of climate finance• Lack of legal definition – ambiguities relating to what counts as ’mitigation

and adaptation’, how to measure what is ’new and additional’, what is meant by ’mobilise’

• Emerging technical definitions focusing on specific flows: multilateral funding, ODA, some FDI (see CPI 2011)

• Unresolved issues:– Baseline (see Stadelmann et al. 2011)

• Over and above ODA target of 0.7% of GNI• Over and above 2009 ODA levels• New sources of finance only• UN channels only• No agreed baseline – current status

– Public and/or private finance

Definition of climate finance ...cont• A broader, more political definition Mitchell and Maxwell (2010, p. 2) :

“[c]limate finance… signals a new global relationship, shaped by– “polluter-pays” rather than charity. It means: – governance structures to allocate money weighted toward developing

countries; – resistance to the use of traditional aid rules and conditions; – new lines of accountability to the UNFCCC, rather than to traditional “aid

givers”; and– demands from developing countries for direct access to finance, without the

need to work through intermediaries”.

• The dilemma: to create trust we need to account, but lack of trust prevents the definition of what to account for

• Currently a learning period for MRV practices in climate finance

Source Annual Cost (billions)

Notes

AdaptationWorld Bank (2006) $9 - 41 Costs to mainstream adaptation in

development aidOxfam International (2007) > $50 Costs of adaptation in developing

countries in immediate term.UNFCCC Secretariat (2007a,b) $49 - 171 Costs of adaptation in 2030

(summarized in Table IX-65, p. 177)UNDP (2007) $86 Costs of adaptation in developing

countries in 2015MitigationUNFCCC Secretariat (2007a;2007b)

$380 Costs in 2030 to return emissions to 2007 levels. (Table 64, p. 196).

IPCC AR4 (2007: SPM Table 7) <3% Costs as percentage of GWP in 2030 for stabilizing in 445 -535 ppm CO2e range.

Stern Review (2007, 2008) 2007:1% (±3%) 2008: “450 may be substantially

> 2% GDP”

2007: Costs percentage of GWP through 2050 for 500-550 ppm CO2e. Target was revised in 2008 to 450-500 CO2e

European Commission (2009) €175 Bottom up analysis of incremental costs

3. Need for climate finance

Need for climate finance ... cont• Roughly equal needs for adaptation and mitigation (100 billion per

year by 2030), but• High uncertainty and strong assumptions

– E.g. adaptation used to be considered as purely private concern in integrated assessment models (autonomous adaptation)

– Now concern that 100 billion is at low end considering that ecosystem impacts not considered (Parry et al. 2009)

• 100 billion commitment less than cost assessments indicate• However, project proposals are not coming forward currently at this

scale– NAPAs: 483 projects with total value of 1.8 billion – NAMAs: just starting to be submitted

4. Supply and mobilisation of new finance

• What is already supplied?• What new sources could be developed?• What should be the respective responsibility of each

developed country?

Spaghetti diagram

How much climate finance has been provided so far?• Coding of ODA project data – 11 billion USD in 2006• Self-reported climate finance projects – 4.5 billion

since 2009• Fast-Start Finance 2010-2012 – 28 out of 30 billion

USD pledged• CPI report: 97 billion per year

– 55 billion from private sector– Includes carbon offset flows (2 billion)– Self-reported data on ODA marked as ’climate’

Sources and instruments proposed• Carbon-linked fiscal instruments – for contributions from national

budgets– Reduction of fossil fuel subsidies – 4-12 bn– Carbon market revenues – auctioning of allowances under EU

ETS or sales of AAUs – 2 bn– Carbon tax revenue – 7 bn – if international carbon price of

25$/tonne applied to all Annex II countries, 25-50 bn– (General tax revenue)– Problem: opposition against earmarking of funds, requires

expansion of ODA/climate finance budget line in times of economic recession

• Carbon offsets – measurable by country– CDM and JI under the Kyoto Protocol – 2-3 bn– Problems: validity as ’new and additional’, uncertain future

Sources and instruments proposed .. cont• Fuel taxes in international aviation and shipping – ’new’

source, does not pass national budget– Could raise 7-11 bn– Problems: requires significant international cooperation,

need to provide tax rebates for developing countries• Private finance

– Targeted FDI – 37-72 bn– Public instruments to facilitate and leverage private

investment: guarantees, demonstration projects, PPPs• Financial transactions tax (Tobin tax)

Allocation of burden among developed countries

• Responsibility – in proportion to historical emissions• Capacity – in proportion to GDP (eg as applied for

assessed contributions to the UN)• Unilateral pledges – no formula, a ’grandfathering’

approach

• Unlikely with burden-sharing formula in the near future

National Obligations in 2020 (for climate costs = 1% of GWP)

Per capitaIncome

($/capita)

NationalCapacity(Billion $)

NationalObligation(Billion $)

NationalObligation(% GDP)

Average obligation per capita above dev threshold

EU 27 $38,385         $15,563 $ 216 1.12% $436

- EU 15 $41,424         $13,723 $ 188 1.12% $468

- EU +12 $25,981         $ 1,840 $ 28 1.09% $300

United States $53,671         $15,661 $ 275 1.50% $841

Australia $37,999        $ 720 $ 14 1.60% $611

Japan $40,771         $ 4,139 $ 62 1.23% $504

Russia $22,052         $ 1,927 $ 41 1.40% $326

China $9,468         $ 5,932 $ 98 0.73% $169

India $4,374         $ 972 $ 11 0.19% $58

South Africa $14,010         $ 422 $ 10 1.42% $395

Mexico $14,642         $ 1,009 $ 15 0.84% $207

LDCs $1,567         $ 82 $ 1 0.06% $58

Annex I $38,425         $40,722 $ 652 1.29% $529

Non-Annex I $6,998         $18,667 $ 292 0.66% $180

High Income $44,365         $40,993 $ 655 1.33% $602

Middle Income $8,797         $18,190 $ 286 0.69% $149

Low Income $2,022         $ 206 $ 3 0.08% $51

World $12,415         $59,388 $ 944 1.00% $330

5. Governance of funds

• Under UNFCCC or beyond? Private/public• Comprehensive fund (a new World Bank) or

fragmented architecture?• Strong interest in the political economy of

climate funds:– Decision-making and power - board structure and

decision rules– Regulations on access to funds – direct or via

multilateral organisations

Green Climate Fund• Transitional Committee to present a ’design’ to COP17• Still unclear business model

– GCF to become ”the main global climate fund” but no pathway outlined

• Equal representation of developing and developed countries on Board

• Direct access modality proposed• Minimal guidance on objectives of fund, environmental and

social safeguards, accountability to beneficiaries

6. Allocation and use of funds• Uneven allocation between adaptation and mitigation, 14:86

ratio• Uneven and inequitable allocation between countries

– Most mitigation investments in emerging economies (eg CDM)– Not clear that ’particular vulnerability’ criterion for adaptation finance

is applied

• Uneven allocation between individuals and communities in different countries:– Eg Adaptation Fund proposals show a difference in dollars/beneficiary

by 4 orders of magnitude– Countries vs. communities as recipients raises i) democracy issues and

ii) equity issues

• Accountability, transparency and anti-corruption

7. Conclusion

• Important progress since Copenhagen 2009:– Climate finance commitment survived Global Financial

Crisis?– Pledges near the fast-start finance commitment (30 billion)– Green Climate Fund to be ’considered’ by the COP– Strong monitoring by NGOs, academia and stakeholders of

climate finance progress and accounting practices

Critical issues unresolved• Interim targets for scaling up between 2012-2020 missing• If no proposal on baseline for determining what is ’new and additional’ from

Parties soon, large chance that ’no baseline’ continues to be applied– Unlikely with explicit national burden-sharing quotas for provision of finance from developed

countries

• Need for convergence of expectations whether climate finance should come mainly from public or private sources

• The bleak prospects for the Kyoto Protocol suggests that ’new’ sources of climate finance (international aviation and shipping tax) could be more promising than carbon-related national revenue streams

– However, growing level of ambition of national climate policy independently of international agreement

– G20 to digest new World Bank report on sources, finance ministries taking over the climate issue

• Need to improve needs assessment and use of finance, to maintain credibility and cooperation

• Critical start-up phase of Green Climate Fund

Key references• IEA (2011) CO2 emissions from fuel combustion – Highlights.

http://iea.org/publications/free_new_Desc.asp?PUBS_ID=2450 • Peters et al. (2011) Growth in emission transfers via international trade

from 1990 to 2008. PNAS April 25, 2011.• CPI (2011) The landscape of climate finance.

http://climatepolicyinitiative.org/files/attachments/177.pdf • Mitchell, T. and Maxwell, S. (2010) Defining Climate Compatible

Development. CDKN Policy Brief. Climate & Development Knowledge Network, London, UK.

• The World Bank (2011) Mobilizing Climate Finance. Paper prepared at the request of G20 finance ministers. Washington, DC.

• Persson et al. (2009) Adaptation Finance under a Copenhagen Agreed Outcome. http://sei-international.org/publications?pid=1309

Thank you!