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Multilateral Financing Mechanisms

Under the United Nations Framework Convention on Climate Change, the Green Climate Fund is the main vehicle of climate financing. In the Kyoto Protocol, the main vehicles of climate financing include the CDM and Official Development Assistance.[1] It is important to distinguish between UNFCCC parties and Kyoto Protocol parties when discussing climate financing mechanisms. While 192 parties ratified the Kyoto Protocol, the United States did not, due to the absence of binding targets for developing countries and concerns regarding its economic impact.[2] Canada withdrew from the Kyoto Protocol, effective 15 December 2012. Japan and the Russian Federation formally notified the secretariat that they do not intend to make commitments after 2012.[3] At the 2012 COP, Australia and European countries extended their Kyoto commitments. The second commit?ment period runs from 1 January 2013 to 31 December 2020.[4] Thus, there is now a very limited number of Kyoto parties with emissions reduction commitments, which limits the effectiveness of Kyoto climate financing mechanisms.

As we noted in Chapter 2, Kyoto Protocol Article 3(14) requires each Annex I party to “strive to implement” its commitments in such a way as to minimize adverse social, environmental and economic impacts on developing country parties, and to consider issues such as the establishment of funding, insurance and transfer of technology. The Kyoto parties can meet their emissions targets through three market-based mechanisms: the carbon emissions trading market, joint implementation, and the clean development mechanism. The CDM allows industrialized countries to invest in projects that reduce emissions in developing countries as an alternative to domestic reductions. Such projects earn saleable certified emission reduction (CER) credits, each equivalent to one ton of CO2, which can be counted towards meeting Kyoto targets. In 2007, in Bali, the Kyoto parties launched the Adaptation Fund. It was decided that 2 percent ofthe CER would be earmarked for the Adaptation Fund.

At the Copenhagen Convention of the Parties (COP), the UNFCCC developed country parties promised to provide USD 30 billion in “fast start” climate finance in 2010-2012 and to mobilize USD 100 billion per year by 2020 to address the adaptation and mitigation needs of developing countries. At the Cancun COP in 2010, the UNFCCC parties established a “Green Climate Fund” to finance mitigation and adaptation to climate change in developing countries.[5] UNDP has developed an Adaptation Policy Framework.[6] The UNFCCC parties have established the Cancun Adaptation Framework, an Adaptation Committee, a work program on loss and damage and a national adaptation plan process for developing countries.[7]

The UNFCCC parties agreed that the USD 100 billion may come from public and private, bilateral and multilateral sources and that a “significant” share of new multilateral funding for adaptation should flow through the Green Climate Fund. The Green Climate Fund is to be an operating entity of the financial mechanism of the Convention under Article 11, governed by a Board of 24 members, comprising an equal number of members from developing and developed country parties. The trustee for the Green Climate Fund will manage its financial assets in accordance with the relevant decisions of the Green Climate Fund Board; the World Bank is to serve as the interim trustee. An independent secretariat is to support the operation of the Fund.[8] The Green Climate Fund is to balance the allocation of the resources between adaptation and mitigation activities. As of December 2012, the Green Climate Fund was not yet operational, but had received cumulative contributions of USD 4.298 million and cumulative pledges of USD 4.554 million for the administrative budget of the secretariat in South Korea.[9]

The Report of the High-level Advisory Group on Climate Change Financing recommended a carbon price of USD 20-25 per ton of CO2e as a key element of reaching the climate finance goal of USD 100 billion per year. The focus of the Advisory Group on revenue raised by developed countries for developing countries raised issues regarding whether to count some sources of financing, because they might imply financial contributions from developing countries. The Advisory Group did not agree on whether private and non-concessional financing (i.e. loans provided with a market-based interest rate) should count towards the USD 100 billion per year, but did agree that the size of such flows is likely to be greater the better the investment climate in the developing countries. They also disagreed on whether carbon offset flows should count, since these mechanisms are designed to reduce the cost of mitigation in developed countries. The Advisory Group notes that the benefit of carbon pricing is that it both raises revenue and provides incentives for mitigation, but did not decide whether this should be achieved via taxes or carbon markets. The Report estimates that allocating 10 percent of total revenues from auctions of emission allowances and domestic carbon taxes in developed countries for international climate action could mobilize around USD 30 billion annually. A further USD 10 billion annually could be raised from allocating 25-50 percent of total revenues from carbon pricing international transportation, but the Advisory Group disagreed on whether such carbon pricing measures should apply to developing countries. USD 10 billion could come from other sources, such as the redeployment of fossil fuel subsidies in developed countries or a financial transaction tax, but there is political resistance to applying the latter in developing countries. International private investment flows in carbon markets could generate USD 10 billion of net transfers. The Report notes that international private investment flows are essential for mitigation and adaptation. Net flows from multilateral development banks could be USD 11 billion. Finally, the Report notes that the domestic fiscal situation of many developed countries is now under extreme pressure, but projects that direct contributions from developed country governments will play a key role in the long term. The Report recommends prioritizing funding for adaptation for the most vulnerable developing countries (the least developed countries, small island developing States, and Africa) and stopping and reversing the destruction of rainforests as a cost-effective abatement solution.[10]

Seventeen years after the UNFCCC was concluded in Rio de Janeiro, a 2009 World Bank report by the Independent Evaluation Group (IEG) recommended that the World Bank more systematically address energy efficiency and climate change in its energy projects. As the report notes, it is not just that fossil fuel subsidies are expensive, inflate GHG emissions, and disproportionately benefit the middle and upper classes. Their reduction also encourages energy efficiency, increases the relative attractiveness of renewable energy, and frees up resources for poverty alleviation, including investments in clean energy for those who do not have electricity. At the same time, the social and economic benefits of providing power to the poorest greatly outweigh the social costs. The World Bank has mobilized concessional finance from the Global Environment Facility and carbon finance from the Clean Development Mechanism to promote renewable energy and other GHG-reducing activities, and has used Global Environment Facility funds to stimulate the development of non-commercial technologies. It has also assisted developing countries and economies in transition with energy pricing reforms. However, energy efficiency and climate change have not been the focus of the overwhelming majority of World Bank energy projects, which have tended to prefer investments in power generation. The 2009 report recommends that the World Bank: (1) systematically promote the removal of fossil fuel subsidies and provide technical assistance and policy advice to address related social and political economy concerns; (2) emphasize energy efficiency policies as a way to transition to market-based energy prices; (3) provide incentives to address climate change across different sectors through system-wide energy planning at the national level;

(4) collaborate with the International Energy Agency on energy efficiency indicators, including information on energy prices and subsidies; and (5) do more rigorous economic and environmental assessments for energy investments that release or prevent carbon emissions. Thus, the report indicates that the UNFCCC process and World Bank energy projects have been working at cross purposes, with the UNFCCC seeking to reduce GHG emissions while the World Bank financed energy projects. World Bank management’s response to the report identified over 20 percent of energy projects as supporting supply-side energy efficiency. Management also noted that the World Bank has committed to accelerate lending for new renewable energy and energy efficiency projects, and funding for low-carbon technologies when the funds become available. Its response also notes the lack of World Bank resources to maintain a comprehensive and reliable database on energy policies, prices, subsidies, and energy efficiency at the national level. The report was the first phase of a three-part IEG evaluation on Climate Change and the World Bank Group.[11]

The second phase of the IEG evaluation examined the World Bank Group’s project-level experience in promoting technologies for renewable energy, energy efficiency, and transport. The transport element addressed issues such as financing for public transportation, such as the Metrobus system in Mexico City. From 2003 to 2008, the World Bank increased annual investments in renewable energy and energy efficiency from USD 200 million to USD 2 billion and helped to mobilize over USD 5 billion in concessional funds for GHG reduction. In 2008, it adopted the Strategic Framework on Development and Climate Change. The report argues that the World Bank can leverage its resources through advice and support for policies to remove energy subsidies and of other obstacles to renewable energy and energy efficiency. It also can support technology transfer and adaptation to local conditions by investing in pilot projects, in order to identify development solutions that can be deployed on a large scale as climate finance expands. It should refocus on high-impact sectors and instruments, particularly energy efficiency, distributing compact fluorescent light bulbs for example. Energy efficiency combines high economic returns and GHG benefits. Other projects individually have high carbon returns (forestry) or economic returns (solar home photovoltaic systems). Carbon finance needs to be redirected away from hydropower, which is more vulnerable to the impact of climate change on water flows, to applications with more leverage, such as long-duration loans for support of renewable energy. Technical assistance can help overcome barriers to capital-intensive investments in less-proven clean energy technologies. When countries pay price premiums for renewable energy, World Bank and Multilateral Investment Guarantee Agency (MIGA) guarantees against breach of contract and other political risks could catalyze investment.[12] This is a useful addition to our analysis of impact of international investment agreements on political risks in renewable energy subsidization programs, which we addressed in Chapter 4.

The third phase of the IEG evaluation examined adaptation issues. This report notes that the World Bank lacks a comprehensive, outcome-oriented results framework for guiding and tracking its adaptation efforts. The Independent Evaluation Group recommended modifying the results framework to better track resilience outcomes and to promote learning; developing operational guidelines on screening projects for climate risk; investing more in hydrometeorological systems and promoting their use, especially in Sub-Saharan Africa; and devoting more attention to learning how to promote resilient land uses. Climate adaptation comprises adaptation to current climate variability and to future climate change. The World Bank has extensive experience with efforts to address climate variability, but new efforts explicitly designated as climate adaptation are mostly framed as current climate variability. The World Bank Group is just beginning to examine when and how to invest to insure against future risks, for example with the Pilot Program on Climate Resilience to integrate resilience into development activities. This report focuses on disaster risk management, agriculture, and hydrometeorological services to deal with adverse climate, climate variability, and climate extremes. In agriculture, World Bank attention has focused on rain-fed areas, which face the most climate variability and have high poverty rates. World Bank support for watershed management and sustainable land and water management has increased agricultural yields and incomes, but there is little or no project-based evidence of direct biophysical impacts on agricultural resilience. The report considers expansion of irrigation as a potentially important avenue of adaptation, as well as financial products for risk management, where there is a major gap in international climate resilience risk management. One of the areas that the report identified as requiring anticipatory adaptation is the development of a portfolio of new crop varieties to be ready for emerging pests and climate patterns. The World Bank has supported this goal indirectly by funding the Consultative Group on International Agricultural Research. However, with respect to conservation of agrobiodiversity, which could be an important input into new crop and animal varieties, the World Bank has supported only a few projects.[13] The report does not analyze the international legal constraints on multilateral investments in new crop varieties, in particular regarding intellectual property rights and subsidies, which we analyze in Chapter 5 and in this chapter, respectively.

There are a number of other multilateral initiatives such as the Forest Carbon Partnership Facility, the Climate Investment Funds established at the World Bank, Reduced Emissions from Deforestation and Degradation (REDD) and the proposal for using the Special Drawing Rights of the International Monetary Fund (IMF) for mitigating and adapting to climate change. They all have the same problem: financing comes from the developed countries and a substantial part of the money will be spent in the developing countries.[14]

The World Bank has played a leading role in the provision of fast-start climate finance through the Climate Investment Funds, which include adaptation. However, institutional developments on adaptation finance will become more complex and more diverse, with new organizations emerging with core mandates in adaptation support (such as the Green Climate Fund). The World Bank will have to adapt to such changes.[15]

REDD will both reduce emissions and lead to new development finance. The World Bank’s Prototype Carbon Fund is important in this context.[16] Indigenous and protected areas that permit sustainable use have reduced tropical deforestation. Forest loss generates a quarter of developing countries’ emissions. The local and global values of forests often greatly exceed the gains from their destruction. The Forest Carbon Partnership Facility is a pilot program for monetizing the value of standing forests. However, the mechanisms to use the funds to conserve forests are still being planned. These findings support the feasibility of the REDD initiative.[17]

The current state of climate finance has been criticized for three main reasons: (1) for not achieving sufficient scale; (2) for the relatively low share of private-sector investment; and (3) for insufficient institutional framework. This section has provided an overview of current multilateral efforts for scaling up climate finance. In the next section, we analyze the consistency of such finance mechanisms with WTO law. We then highlight the importance of reallocating fossil fuel subsidies to free up funding for climate finance.

This section has highlighted the role that the World Bank can play in creating incentives for private-sector investment, by investing in pilot projects and lowering political risk for private investors. In Chapter 4, we have highlighted the importance of international investment agreements in this regard. Later in this chapter, we will examine the role of international trade in services private-sector investment.

This section also has provided an overview of the work that is being done to improve the institutional framework, both at the World Bank and with respect to the Green Climate Fund. In Chapters 3 and 5, we have provided an analysis of WTO issues that are relevant to climate change mitigation and adaptation. Later in this chapter we add a further analysis of WTO subsidies law in the context of climate finance, analyzing the Agreement on Agriculture and agricultural adaptation and the Agreement on Subsidies and Countervailing Measures and climate finance.

  • [1] Little Climate Finance Book (accessedDecember 28, 2012).
  • [2] Fabio Morosini, “Trade and Climate Change: Unveiling the Principle of Common but Differentiated Responsibilities from the WTO Agreements” (2010) 42 George Washington International Law Review 713.
  • [3] Amendment to the Kyoto Protocol pursuant to its Article 3, paragraph 9, Report of the Ad HocWorking Group on Further Commitments for Annex I Parties under the Kyoto Protocol, Draftdecision proposed by the President, Conference of the Parties serving as the meeting of the Partiesto the Kyoto Protocol, Eighth session, Doha, November 26—December 7, 2012, FCCC/KP/CMP/2012/L.9, December 8, 2012 (accessedDecember 28, 2012).
  • [4] Amendment to the Kyoto Protocol; Roger Harrabin, “UN Climate Talks Extend KyotoProtocol, Promise Compensation” BBC News, December 8, 2012 (accessed December 28, 2012).
  • [5] The Cancun Agreements: Outcome of the work of the Ad Hoc Working Group on Long-termCooperative Action under the Convention, 1/CP.16, Report of the Conference of the Parties on itssixteenth session, held in Cancun from 29 November to 10 December 2010, FCCC/CP/2010/7/Add.1, March 15, 2011 (accessed December 29, 2012); Robert N. Stavins, “Why Cancun Trumped Copenhagen: WarmerRelations on Rising Temperatures” The Christian Science Monitor, December 20, 2010 (accessed December2, 2012).
  • [6] Morosini, “Trade and Climate Change.”
  • [7] Draft decision 1/CP.18, Agreed outcome pursuant to the Bali Action Plan (Advance version) (accessed April 10, 2013).
  • [8] Decisions adopted by the Conference of the Parties, Report of the Conference of the Parties on itssixteenth session, held in Cancun from November 29 to December 10, 2010, Addendum, Part Two:Action taken by the Conference of the Parties at its sixteenth session, FCCC/CP/2010/7/Add.1,March 15, 2011, paras. 98-112.
  • [9] Draft decision 1/CP.18, Agreed outcome pursuant to the Bali Action Plan para. 72; Draftdecision 6/CP.18, Report of the Green Climate Fund to the Conference of the Parties and guidanceto the Green Climate Fund (Advance unedited version) (accessed April 10, 2013).
  • [10] Report of the Secretary-General’s High-Level Advisory Group on Climate Change Financing,November 5, 2010 (accessed January 1, 2013).
  • [11] World Bank, Climate Change and the World Bank Group, Phase I: An Evaluation of World BankWin-Win Energy Policy Reforms (World Bank, Washington 2009).
  • [12] World Bank, Climate Change and the World Bank Group, Phase II: The Challenge of Low-CarbonDevelopment (World Bank, Washington 2010).
  • [13] World Bank, Climate Change and the World Bank Group, Phase III: Adapting to Climate Change:Assessing World Bank Group Experience (World Bank, Washington 2013), advance copy (accessed January 4, 2013).
  • [14] Sarah A. Mason-Case and Marie-Claire Cordonier Segger, “International Law and ClimateFinance”, Working Paper, The Center for International Sustainable Development Law and TheInternational Development Law Organization, 2010, (accessed April 10, 2013); Katherine Serra, “Designingthe International Green Climate Fund: Focusing on Results” Global Economy and Development atBrookings, Policy Paper 2011-5, April 2011 (accessed December 8, 2012).
  • [15] World Bank, Phase III.
  • [16] World Bank, Phase I, xxxiv.
  • [17] World Bank, Phase II, xvi—xvii.
 
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