Info Service on Climate Change (July12/02)
UNFCCC workshop highlights concerns over finance issues
Bonn, 11 July (Meena Raman) – The second day of the ‘Long-term finance workshop’ held under the UN Framework Convention on Climate Change (UNFCCC) in Bonn on 10 July highlighted concerns over issues around definitions, methodology and gaps in data as regards climate finance.
The workshop heard presentations and discussions around the topics of ‘sources of climate finance’ and ‘options for mobilising climate finance’.
Sources of climate finance
The session on ‘sources of climate finance’ was moderated by Dr. Surya Seti of India, a university professor based in Singapore, and heard presentations from speakers from the Global Green Growth Institute and London School of Economics, the World Bank, and Climate Policy Initiative. This was followed by a discussion led by representatives from the United States, China and Margaree Consultants.
Dr. Seti, in his summary of the discussions highlighted the following points. There is a huge amount of concern over issues around definitions, methodology, and gaps in data. Some institutions (looking at climate finance issues) are attempting to address these issues but there is a significant gap between what reports (from these institutions who made the presentations) are telling us and what recipients (of climate finance) are telling us and these gaps cannot be brushedaside, said Seti.
He added that despite the reports, many questions remain with respect to what is climate finance, how you estimate it, who receives the money and whether it flows to the developing countries or the private sector of developed countries.
Seti said that no one questioned the importance of finance and there was acknowledgement that without finance, elements of the Bali Action Plan (adopted in 2007) could not be addressed. No one also questioned the role of the private sector. Climate investment was a large multiple of climate finance but the private sector needed to be incentivised by the public sector, for otherwise, the investments would not happen. An example was the provision of subsidies or the existence of policy initiatives for renewable energy projects. Whether this constituted ‘additionality’ or not of finance needs to be figured out.
Referring to discussions that $100 billion (of public funds) can leverage $10 trillion, Seti asked if this was a case of the ‘tail wagging the dog.’ He said that we do not know what finance is needed, where it is going to come from and to what end it would be used for to get results for the dollar.
Seti referred to 10 questions that he had identified at the outset of the session where some views were aired.
These questions were as follows: Does the proposed funding conform to the principles enunciated in Framework Convention (on Climate Change); is the proposed funding new, additional,adequate and predictable; is it feasible and sustainable; does the funding and its end use meet the ultimate objective of the Convention (i.e. stabilisation of the greenhouse gases concentrations and adaptation to climate change); how is the funding different from ODA; does it carry an obligation unlike ODA or is it additional to ODA; what is the nature of this funding - is it a grant, concessionary funding or is it a credit enhancement instrument such as a guarantee or is it a loan; what is the grant equivalent of the proposed funding; does the grant equivalent meet the agreed full incremental costs; how is the balance of the climate investment to be funded; does the co-financing or climate finance impose hidden costs and/or conditionality; does the recipient have direct access to the proposed funding and does the recipient have a say in the end use of the proposed funding and does the proposed funding assist development by making it climate proof?
Seti said that the presentations raised issues about what principles needed to be looked at in relation to climate finance. Another big issue raised was that the commitment in the Cancun decision was to mobilise funding and not to provide the funding, and such a commitment could not be made by the private sector but by governments.
In reference to the private sector, an issue was which private sector was being talked about -whether this was about the private sector in the developing or developed countries. There was need to look at who was getting the benefits of the financing and if there was a big private sector in developing countries. Another issue raised was that the burden of climate financing cannot be shifted from the commitments made under the Convention.
As regards ‘innovative’ sources of financing, Seti said that an issue was whether these were within the Convention or outside it and if it was outside the Convention, is it compatible with it? Whether these sources provided ‘additional’ resources also needed to be understood.
Another important issue raised was the need to keep separate the consideration about the sources of finance and that of financial instruments.
Mattia Romani from the Global Green Growth Institute and the London School of Economics referred to the notion of equitable access to sustainable development and said that ‘equity’ provides a strong argument for a significant part of the funds for climate change to be grants or grant equivalent and public in nature since private flows require payment and come with other obligations. He said that this was the background of the work the Advisory Group on Finance (AGF) which was commissioned by the UN Secretary-General.
What emerged from the AGF report was that it is feasible to raise $100 billion a year by 2020 but what is needed is a reliable and principle-based bundle of sources of finance, said Romani. This involved public and private instruments and funds should be scalable to meet the needs of adaptation and mitigation.
Referring to the work of Climate Policy Initiative (CPI), Romani said that current financial flows are estimated to be about $100 billion a year, with $50 billion being public; $20 billion are actual grants and the rest are loans by Multilateral Development Banks (MDBs). Only $2 billion are carbon market related and $50 billion are private. These flows represent total investment and are not incremental investments. They are gross flows, which include the full amount of loans that carry obligations for repayment and are not in this sense net contributions.
Romani highlighted 6 principles for the sources of finance which were in the AGF report: taxing the bad; additionality as new-ness or innovative finance; incidence on rich countries; public sources needed for adaptation and market failures; scalability, robustness and credibility; raising domestic revenues in developed counties.
On the sources of finance, he identified the following: carbon market revenues ; international transport (maritime and aviation); carbon related revenues (carbon tax, subsidies, royalties) financial transaction taxes (FTTs); direct budget contributions; MDB contribution; carbon market offsets; and public-private leverage. Romani said that the various sources would have different potentials.
In response to Romani, Seti said that one must also look at the scenario of having hard caps on emissions as once there is a hard cap, the question would be if a developing country would want to be involved in emissions trading (where the emission reductions will count to the developed country mitigation efforts and not the developing country mitigation).
Jane Ebinger of the World Bank said that the definition of climate finance was finance flows that go to low carbon and for climate resilient development. She said that public and private flows are complements. Public sources included comprehensive carbon pricing policies; market based instrument for aviation and maritime fuels; and fossil fuel subsidy reforms.
Leveraging private and multilateral flows would involve other policies and instruments to engage private finance; carbon markets, strengthening MDB leverage and pooled arrangements.
Barbara Buchner of CPI said that there was no internationally agreed definition on what constitutes climate finance. Some definitions start with capital flows to target low carbon development or climate resilient development. She said that the amount of private finance is almost three times greater than public finance and capital investment is crucial.
She also said that CPI’s research shows that out of $97 billion in current finance flows, the private sector provides on average $55 billion, public budgets at least $21 billion. Private funding is through direct equity and debt investments; bilateral and multilateral agencies and banks contribute $20 billion by leveraging the public funding they receive; carbon markets, voluntary/ philanthropic contributions constitute less than $3 billion and public finance is raised through carbon market revenues, carbon taxes, and general tax revenues.
$ 93 billion out of $ 97 billion is used for mitigation measures and only a very small share goes to adaptation efforts ($4.4 billion), said Buchner further.
She cautioned that not all of the $97 billion is necessarily additional. The $97 billion includes some developing countries and domestic money, includes public and private sources and includes incremental costs and capital investment.
Paul Bodnar from the United States said that it is essential that the long-term finance work programme must be grounded in reality as to how investments happen in mitigation and adaptation. Years had been spent on ideological debates about public and private finance and there is need to move beyond definitional debates. The goal is to get funds flowing on the ground, the public and private sources should not be seen as alternatives and should be beyond co-existing. He said there was need to see how public and private financing get blended together at the project level.
He said that under the new negotiating process of the Durban Platform, there was need to consider how the world would be beyond 2020. Referring to developed countries in Annex 2 of the Convention (who are responsible for providing financial resources), Bodnar said that when looking at the GDP per capita of countries in the world in the longer term, the conversation may be different.
In response to this remark by the US delegate, Seti said that it must be clarified that the countries in Annex 2 of the Convention had nothing to do with the GDP per capita but had to do with historical responsibility for GHG emissions. He also stressed the need to look at the consumption side of emissions in developed countries (and not just emissions from production).
Guo Wensong from China said that public finance should continue to make a major contribution to climate finance as the nature of public finance was adequate and reliable. He said that the private sector had considerable limitations and constraints given the experience of market failures and that capital markets are less developed in developing countries. He also said that developing countries had many challenges in meeting their basic needs, faced natural disasters and had problems regarding technologies available. Developed countries had already reached their industrial development while developing countries were still in this development process with differing development levels and national conditions.
Erik Haites of Margaree Consultants said that not all revenues collected at the domestic level in developed countries accrue to national governments as some go to provincial levels. Hence, this may not go to the financial mechanism of the Convention. Funds collected domestically through international agreements include FTTs, border cost-levelling and carbon exports optimisation tax. Funds collected internationally through international agreement include share of proceeds (under the Kyoto Protocol), and pricing of international aviation and shipping emissions.
Options for mobilising climate finance
In the session on ‘options for mobilising climate finance’ which was held in the afternoon of 10 July, presentations were made by the European Bank for Reconstruction and Development (EBRD) and Standard Bank and UNEP Finance Initiative. The session was moderated by Delia Villagrasa of the European Climate Foundation.
Villagrasa in summing up the session said that the discussions showed that carbon markets can deliver only if the price of carbon is high through higher targets in emission cuts. Public funds are important but results must be shown to taxpayers so that they are satisfied. Long-term commitments for financing are needed from developed countries, and public and private sectors are important so that bundling can take place. Lessons in adaptation projects need to be shared.
Terry McCallion of the EBRD shared its experience in climate finance. His conclusion was that using MDBs to combine different funding sources to raise climate finance in the private sector is a working model that can be scaled up.
Geoff Sinclari of Standard Bank and UNEP Finance Initiative said that private finance mobilization to deploy climate mitigation technologies in developing countries will require national governments and the international community to address critical barriers which are: no level playing field between high-carbon and low-carbon investment alternatives; regulatory barriers in developing countries; in the energy sector, for instance, there is often no easy market/grid access for low-carbon technologies and political and regulatory investment risks.
The session also saw some delegates leading the discussions. Norbert Gorissen of Germany said that public financing is not a reliable and predictable source of finance as was perceived to be, especially in the current times of the financial crisis. He stressed the importance of revenues from the carbon market through the auctioning of allowances. One challenge is the carbon price and it was low due to low ambition in mitigation which affects climate finance.
Seyni Nafo of Mali, commenting on reliance on the carbon market for revenues said that all the reports (like the AGF and the G20) have assumed that the mean price of carbon would be $25 per ton. To get that price, it has to be underpinned by strong demand for high targets and commitments for emission reductions. He also expressed concerns about the impact of climate change in Africa and the scale of financing required.
He stressed the importance of having renewable energy targets and right institutional policies. Most African countries had renewable energy policies and a good number have renewable targets and good potential for wind, hydro and solar power. There were cases of blending of private and public sources of finance.
Nafo said that there was a strong case for grant and concessional funding as this is how predictable and sustainable finance is obtained. He gave the example of conflicting interests between the public and private sector as regards the energy sector. A developing country government would want to keep energy prices low to have economic and industrial growth but the private sector wants high prices. He also lamented that not much money has flowed to adaptation in Africa and asked where sustainable and predictable resources for this is going to come from.
Daisy Streatfeild of the United Kingdom also said that there are difficulties in mobilising public finance when countries are involved in budget cuts. Donors needed to know what would happen on the ground to justify the funds. She said that enabling environments and policy frameworks for incentivising the private sector are important.+