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IN DEPTH – What’s the role of the 2015 agreement in mobilising climate finance?

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The path towards the next agreement on climate change expected in Paris at the end of the year passed through the UNFCCC ADP 2.8 session in Geneva from 8 to 13 February. According to an informal note by the Co-Chairs of the Geneva session, the objective was to “mak[e] available a negotiating text for a protocol, another legal instrument or an agreed outcome with legal force under the Convention applicable to all Parties before May 2015″. The following analysis aims at underlining the role that the 2015 Climate Agreement to be adopted at COP 21 in Paris could play in mobilising climate finance. It was first published under the ICCG Reflections Publication Series. The full document is available in pdf.

The role of the 2015 agreement in mobilising climate finance

The improved coordination, greater coherence and enhanced transparency of the institutional climate finance arrangements are key issues under the 2015 climate agreement because they could contribute to mobilising increased levels of climate finance.

Enhanced transparency of climate finance is pivotal throughout the timeframe from initialising pledges and commitments to disbursing finance. Acquiring more consistent and reliable information on climate finance could help build trust among various stakeholders, including investors and the public sector. More transparent information could also help improve efficient and effective use of international climate finance, and therefore contribute to raising further international climate finance flows.

Measurement, reporting and verification (MRV) is an essential tool under the UNFCCC to produce and disseminate information on outcomes from particular climate finance instruments or funds, and therefore to ensure transparency. But there are still some challenges and gaps of MRV provisions and methodologies regarding the mobilisation and use of international climate finance. These challenges range from a lack of common definition of climate finance, the fact that not all types of climate finance are required to be reported, the problem in tracking private adaptation finance, and difficulties in attributing specific climate finance flows to certain countries.

To cope with these challenges, the Standing Committee on Finance was requested by the COP 20 in Lima, “as part of its ongoing work on measurement, reporting and verification of support, and with a view to recommending improvements to the methodologies for reporting financial information, to consider the findings and recommendations of the biennial assessment in its annual report to the Conference of the Parties for its consideration at its twenty-first session; and also, “in the context of its ongoing work, including the preparation of the biennial assessment and overview of climate finance flows, to further explore how it can enhance its work on the measurement, reporting and verification of support, based on best available information on the mobilization of various resources, including private and alternative resources, through public interventions.

The enhanced transparency under the 2015 climate agreement could contribute to mobilising climate finance in these following ways:

  • facilitating dialogue among all Parties to develop methodologies on what financial flows need to be measured, reported and verified under the agreement;
  • Using MRV as a tool to generate and disseminate information on results from specific climate financing instruments and funds;

In the end, more transparent information through international and domestic MRV processes could be useful resources for countries and private investors in making their financing decisions.

Another action that the 2015 agreement could undertake in order to mobilise effective climate finance is strengthening cooperation among international finance institutions. Concretely, the COP under 2015 climate agreement could encourage:

  • consideration for geographic and thematic balance in allocating climate finance;
  • facilitating coordination amongst institutions financing climate projects;
  • enhancing synergies between institutional arrangements outside and inside the UNFCCC.

The need for a more balanced allocation between mitigation and adaptation is clearly pointed out in the 2014 Global Landscape of Climate Finance by Climate Policy Initiative. According to the CPI Report, in 2013 annual global climate finance flows totaled approximately US$ 331 billion. Compared to 2012, mitigation finance has decreased, and finance for adaptation has grown. Adaptation received in 2013, US$ 25 billion (7 percent of total flows) of exclusively public resources, up US$ 3 billion from 2012. Private investments are not captured due to scarce and unreliable data. As already observed, the lack of transparent Information about private investment in adaptation remains one of the most important gaps in the tracking of climate finance. Although mitigation investments decreased by US$ 24 billion compared to 2012, mitigation accounted for 91 percent of total climate finance flows, totaling US$ 302 billion in 2013.

As for the geographic distribution of climate finance flows, they were split almost equally between developing (non-OECD) and developed (OECD) countries, US$ 165 billion and US$ 164 billion respectively. The good news reported by CPI Report about adaptation finance allocation is that about 90 percent of total adaptation finance was invested in non-OECD countries of which only 8 percent came from OECD countries. The East Asia and Pacific region has taken the lead in 2013 as the main destination of adaptation finance and the main recipient of Development Finance Institutions (DFIs).

The COP 21 under the 2015 climate agreement with a view to a better coordination among international financial institutions could encourage coordination among local financial institutions and relevant actors in a specific country, especially for effectively catalysing domestic investments.

As for the last point concerning enhancing synergies between institutional arrangements outside and inside the UNFCCC, the 2015 agreement could request entities under the Convention (e.g. the SCF and the GCF Board) to monitor climate-relevant financial flows channelled outside the Financial Mechanism. COP 20 Decision on the Fifth review of the Financial Mechanism recalls this idea for the GCF: “There is ample room for the GCF to learn from the experiences of other funds in terms of improving the enabling environments in recipient countries. It can do this by linking investments with focused efforts to engage stakeholders within countries in programming, and by providing technical assistance and capacity-building so as to strengthen enabling environments – institutions, policies, and regulations – that support mitigation and adaptation actions in developing countries.”

The 2015 climate agreement could also play a role by facilitating the efficient use of financial instruments and tools. Which financial instrument is best suited for targeting different types of climate activities is highly case-specific. For example, instruments such as grants are very well suited for capacity building and for adaptation measures in most vulnerable countries, whereas concessional loans are best suited for projects with high risk-return profiles such as utility-scale renewable energy projects and power transmission grids. Other financial tools are better suited for attracting private sector finance in more mature markets, such as green bonds and equity.

The importance of a new bottom-up approach

The 2009 Copenhagen Climate Change Conference (COP 15) highlighted how the top-down approach adopted in climate negotiations and climate agreements had been a failure, and launched the new bottom-up approach. This approach has now become even more urgent and should be followed in the negotiations leading to the 2015 climate agreement.

The introduction of the Intended Nationally Determined Contributions (INDCs) at COP 19 in Warsaw was a clear signal that each nation is responsible for pledging its own contributions for post-2020 action. This means that each individual country (INDCs indeed refer both to developed and developing countries’ plans) is being asked to come forward with its own ambitions and plans for carbon reduction. INDCs put forward by countries will form a key input to the negotiations leading towards the 2015 climate agreement. It is worth recalling that the minimum characteristics required for the INDCs are those of comprehensiveness, transparency, and ambition.

INDCs bring together elements of a bottom-up system, in which countries put forward their contributions in the context of their national priorities, circumstances and capabilities, with a top-down system, in which countries collectively aim to reduce global emissions. As a result, INDCs can create a constructive feedback loop between national and international decision-making on climate change.

Although the bottom-up system is positive in terms of raising consciousness on climate change issues, it may be risky for two reasons. The first is that without a defined target the risk of free riding is high, and the second is that it keeps the differentiation of responsibility for poorer countries not having the resources for undertaking climate actions. This risk is reinforced by the fact that the principle of common but differentiated responsibility has been kept in the Lima Call for Climate Action, and also by the consideration that the term “contribution” was the result of a compromise of the terms “commitment” used until then for developed countries and “nationally appropriate mitigation actions” (NAMAs), used until then for developing countries. Moreover, the fact that in COP 20 Decisions there is no mention of the division between Annex I and non-Annex I parties, but only a weak reference to different contributions “in light of different national circumstances” is not clear enough and could lead to weakening climate actions.

Conclusions

The need for scaling up climate finance has been widely acknowledged by all Conference of the Parties’ countries, and this is recognised by the central debate at COP 20 around the role of the Green Climate Fund (GCF), with its initial capitalization under way, and its Private Sector Facility that will be a very useful tool for catalizing a significant multiplier effect in attracting private finance.

The recognition of the growing role of private finance, also due to constrained public budgets, encourages even further the strengthening of enabling environments conducive to private investors, better coordination at various levels, and the improvement of transparency by enhancing Measurement, Reporting and Verification (MRV) systems. Also, the role of Public-Private Partnerships should be strengthened and officially recalled in the climate agreement as one of the most useful tool for attracting private finance. Among more direct measures, the 2015 climate agreement could play a very important role in mandating the operating entities under the Convention, i.e. the GCF and the GEF, to prioritise some part of their funding to specific regions or countries, or issues where climate finance would not be directed automatically.

The 2015 climate agreement should definitely cope with this lack of transparency and better clarify the differentiation of responsibility in all fields of climate action, both in mitigation and adaptation. Moreover, the agreement should forge a clear link to the new set of Sustainable Development Goals (SDGs) that the world’s governments are currently negotiating and that will be adopted at the “UN Summit for the adoption of the post-2015 development agenda” next 25-27 September in New York. The climate agreement and the SDGs should be seen as complementary, and lead to important opportunities for mutual benefits in areas such as the transition to a low carbon society, climate adaptation and resilience, and the new financial flows needed for both mitigation and adaptation actions.

Furthermore, a review of financial and insurance standards to promote long-term finance should be encouraged. Both Basel III and Solvency II should be reviewed to allow for a further mobilisation of private finance, especially towards needed energy infrastructure investment, which is usually long-term. Estimates by UNCTAD show that in climate change mitigation, and in particular in relevant infrastructures for renewable energy generation and research and deployment of climate friendly technologies, the total annual investment required between 2015 and 2030 is in the range of 550-850 US$ billion, and the annual investment gap is still very high, at 380-680 US$ billion.

In conclusion, although it is true that at COP 20 the debate was more on distributional issues i.e. how much will developing countries receive and how much will they contribute, rather than on efficiency issues and that “the Green Climate Fund will be far from covering both the required investments in adaptation, particularly in developing countries, and the costs to support the transition to a low-carbon economy”, this reflections aims at highlighting some potential positive actions that the 2015 climate agreement could concretely undertake in the way forward to the longstanding debate on climate finance.

(Image: UN event on “Mobilizing Long-term Climate Finance for Developing Countries”, 2011. Photo credit:UN Climate Change/Flickr)

Credit: Climate Policy Observer


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