CLIMATE FINANCE ISSUES IN THE IPCC REPORT AND POSSIBLE FUTURE PATHWAYS SABINA POTESTIO, ICCG

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1 ICCG Think Tank Map: a worldwide observatory on climate think tanks CLIMATE FINANCE ISSUES IN THE IPCC REPORT AND POSSIBLE FUTURE PATHWAYS SABINA POTESTIO, ICCG

2 CLIMATE FINANCE ISSUES IN THE IPCC REPORT AND POSSIBLE FUTURE PATHWAYS Sabina Potestio (ICCG) Abstract For the first time, an Intergovernmental Panel on Climate Change (IPCC) report includes an entire chapter dedicated to the topic of climate finance, an important and pressing topic within the climate change policy arena. Here an overview of the cross-cutting issues presented in the sixteenth chapter by the Working Group III is provided while reflecting on possible future pathways for the investment in mitigation and adaptation to climate change projects. 1

3 Climate finance in the sixteenth chapter of the IPCC report The sixteenth chapter of the recent Intergovernmental Panel on Climate Change (IPCC) report reflects the growing awareness of the design of efficient and effective climate finance 1. As climate related risks increase dramatically across the globe and the financial crisis limits the economic resources that governments and the private sector are willing to pool to financially support mitigation and resilience to climate change, spending money in a wise and sustainable manner becomes a crucial and pressing issue for stakeholders. In addition, the topic of climate finance is particularly important when it comes to the poorest and most vulnerable countries, such as the Least Developed ones, where the necessary economic resources to confront global warming are lacking and where developmental concerns seem to be more compelling for governments. The IPCC chapter, thus, touches on various topics starting from estimates on the current total climate finance for mitigation and adaptation activities to the enablement of environments, the opportunities and key drivers of financing low-carbon investments, the institutional arrangements for mitigation financing, the synergies and tradeoffs between financing mitigation and adaptation and the financing of mitigation activities in developing countries. An important premise of the chapter, which the authors are keen on highlighting, is the fact that there is no internationally agreed definition of climate finance. Within the available literature the term climate finance, in fact, is used to refer generally to financial resources devoted to addressing climate change globally or to financial flows to developing countries to assist them in addressing climate change. In turn, the two broad definitions include a wide range of concepts whether the financial resources are measured totally or for instance referring only to public finance or incremental investment 2. Secondly, the chapter describes the current sources, managers of capital and financial instruments, which provide climate finance. Financial flows come from various sources such as carbon taxes, general tax revenue, international levies, funds from capital markets, corporate cash flow or household income and they are managed by governments; national, bilateral and multilateral institutions; commercial and financial institutions; corporate actors and households while they are disbursed through grants, project debt, equity, balance sheet financing or credit enhancement 3. As for the estimation of the amount of financial flows the authors point out that no comprehensive system exists to track climate finance and that the available data comes from different sources with various gaps and variable quality and timeliness while also often related to pledges rather that to actual disbursement 4. This prevents more certain estimates although total climate finance for mitigation and adaptation is estimated at 343 to 385 billion USD per year for 2010 to 2012 while that flowing to the developing countries is estimated to be between 39 to 120 billion USD per year from 2009 to An important consideration refers to the fact that most of the resources are spent on mitigation rather than on adaptation projects and that private funding is very uncertain and even more difficult to track compared to public funding. In addition, a crucial question is whether these financial flows are new and additional. On top of this, the authors underline the problem of the recent financial crisis of 2008 as a challenge to investments in renewable energy programs against the need of scaling up resources for climate change activities especially with regards to the developing countries needs. The stabilization of GHG concentrations will require, in fact, even greater investments in the energy, land use, transportation and infrastructure sector and only a few studies have estimated future investment needs. According to the report this information is restricted to energy use and estimates a total annual investment in the energy sector at about 1200 USD billion 6. 1 Gupta et al.,

4 Table 1. Total climate finance for mitigation and adaptation per year (2010/11/12 USD) Total climate finance currently flowing to developing countries per year (2009/10/11/12 USD) Investment needs to limit temperature increase from preindustrial level to no more than 2 C restricted to energy use 343 to 383 billion USD 39 to 120 billion USD 1200 billion USD Another issue raised by the authors concerns the constraints to investments in climate-related projects and the role of the public sector in enabling these investments. Among the challenges for low-carbon investments are investment risks such as political instability, currency risks or technology risks; return on investment; cost and access to capital; market and project size; tenor-risk combination and human resources and institutional capacity 7. The public sector, thus, detains a decisive role in supporting mitigation and adaptation to climate change investments, which are perceived as risky for the private sector. An interesting concept here is the enablement of environments and, although this is not clearly defined, the literature highlights the importance of government action regarding stable and predictable policies with well-established legal institutions 8. Moreover, governments may reduce investment risks and access to capital by offering several risk mitigation instruments such as credit enhancements, local currency finance, loans, grants, equity and tax reductions or feed-in tariffs, which the authors, in this chapter, analyse and indicate as effective tools to scale up climate finance. Last but not least, the authors discuss the synergies and tradeoffs between financing mitigation and adaptation activities. Although the literature, as they state, offers divergent arguments and an optimal mix cannot be precisely determined, international climate finance for both mitigation and adaptation is necessary. A debate strongly connected to this issue is that of the historical contribution of developed countries in having historically contributed most to GHG emissions and, hence, their consequential duty to pay for the costs of adaptation in the developing countries. Future pathways for climate finance Within the realm of climate change policy, the issue of climate finance is a particularly pressing one considering the limited research on the topic and the lack of cooperation among local, national and international actors when it comes to pool the necessary economic resources to combat global warming. A first step towards a more effective and efficient deployment of climate finance in the future is certainly the use of common definitions. The concepts of climate finance in general; the distinction between what counts as mitigation and adaptation activities and the distinction between climate finance and development aid; the concept of new and additional and that of enabling environments need to be clearly defined and agreed upon in order to facilitate research and data collection. The question of additionality, for instance, has brought up various debates coming from the fast-start finance period which may be taken into account as early lessons for the pooling of new and additional economic resources also coming from newly established climate funds such as the Green Climate Fund (GCF). Interesting interpretations refer to funds being additional to Official Development Aid (ODA); new and additional to those promised before COP15 or provided by innovative sources of finance. A solution could be, for instance, to decide to kick-start negotiations on a common definition of new and additional 9 in order to provide sufficient guidelines for new actors within the climate finance arena. 7 Gupta et al., Fallasch and De Marez,

5 For what concerns the scaling up of financial resources, the future of climate finance heavily depends not only on public and national funding but also on the engagement of the private sector. The focus of recent meetings of the Green Climate Fund s Board on the design of a Private Sector Facility (PSF), for instance, may be a good example for further future engagement of private stakeholders in low-carbon investments. As one of the documents (GCF/B.04/07) of the GCF Board s meeting states, the facility will promote the participation of private sector actors in developing countries, in particular local actors, including small and medium-sized enterprises and local financial enterprises and intermediaries 10. Options for the operations of the PSF would be to increase the viability of investments, reduce investment risks, build capacity and readiness, support technology development and information dissemination 11. Compared to the public sector and particularly concerning mitigation activities, the private sector detains the advantage of having the relevant expertise and owning many of the assets and technologies that are needed to support low carbon development 12. Another important point for the future of effective and efficient climate finance is that of national ownership and direct access. Newly established funds such as the GCF are focusing on this aspect which was first discussed and introduced in the decision to operationalise the Adaptation Fund (AF) in To ultimately be effective, in fact, international finance will need to support the realisation of nationally owned and led responses to climate change 13. Direct access operationalizes the concept of national ownership and was defined as the option for eligible Parties to directly submit project proposals to the AF, and for institutions (normally termed entities ) chosen by governments to approach the AF directly 14. Direct access will contribute to improve coherence with national needs and priorities although countries ability to directly access funds will vary from country to country depending on their institutional capacities and, thus, will need to be supported by the international community to prepare for this modality of climate finance delivery 15. Regarding the synergies and tradeoffs between adaptation and mitigation activities, as the authors state in the sixteenth chapter of the IPCC report, adaptation projects receive, especially on the part of the private sector, less funding compared to mitigation programmes. Although an optimal mix between the two is not easy to determine, it seems safe to say that adaptation to climate change deserves the same attention and economic resources as mitigation. In particular, adaptation finance raises questions of equity and fairness since the developed countries have historically been the largest GHG emitters and detain the burden of financially supporting the most vulnerable countries to build resilience to global warming. On this topic, the issue of vulnerability and how to measure it has been often debated. Hence, how should adaptation resources be distributed amongst countries? A crucial challenge for the future of climate finance, then, also depends on ethical and normative issues, on how to distribute the available resources amongst vulnerable countries in the fairest and most equitable way possible. Another issue discussed in the IPCC report is that of the institutional landscape of climate finance becoming more and more complex over time as additional actors and stakeholders enter the field causing a lack of transparency, fragmentation of efforts and a substantial bureaucratic burden for recipients 16. An issue that may be taken into account to improve effectiveness and efficiency of future climate finance is policy integration. Interesting arguments have been taken up by academics on the topic of organizational change such as clustering, upgrading, streamlining or hierarchization. These arguments have been discussed for environmental policy in general but could easily be applied to the climate finance discussion. The proposals include sharing functions of convention secretariats in order to synchronize activities; the upgrading of the United Nations 10 Green Climate Fund, Nakhooda, Berliner et al., Greene,

6 Environment Programme (UNEP) to a specialized agency, which would coordinate norm-building and norm-implementation; the streamlining of institutions, organizations and bureaucracies with a more centralized architecture which would challenge the overlap between the multitude of institutions and organizations and, last but not least, the creation of a hierarchical intergovernmental organization and a new agency 17. To conclude, a further concern for the future of climate finance is the lack of research on the effectiveness and efficiency of the work of the various funds. Certainly, a solution could be that of creating a common framework for analysing effectiveness, which would have to look at the whole process of funding starting from the governance and decision-making aspect to the disbursement and ultimate outcomes of the funded projects and programmes. References Berliner, J., Gruning, C., Menzel, C., and Harmeling, S. (2013). Enhancing direct access to the Green Climate Fund. Climate & Development Knowledge Network Policy Brief. Retrieved from Biermann, F., Davies, O. and Van der Grijp, N. (2009). Environmental policy integration and the architecture of global environmental governance. International Environmental Agreements: Politics, Law and Economics 9(4) Fallasch, F., and De Marez, L. (2010). New and additional? A discussion paper on fast-start finance commitments of the Copenhagen Accord. Climate analytics. Retrieved from pdf Green Climate Fund (2013). Business Model Framework: Private Sector Facility. Retrieved from Greene, W. (2004). Aid fragmentation and proliferation: Can donors improve the delivery of climate finance?. IDS Bulletin Gupta, S., Harnisch, J., Barua, D. C., Chingambo, L., Frankel, P., Vazquez, R.J.G., Gomez-Echeverri, L., Haites, E., Huang, Y., Kopp, R., Lefèvre, B., de Oliveira Machado-Filho H., Massetti, E., Enting, K., Stadelmann, M., Ward, M., Kreibiehl, S., Carraro, C., Karrouk, M.S., Arriaga, I.P., and Enting, K. (2014). Cross-cutting investment and finance issues. IPCC Working Group III AR5. Retrieved from Nakhooda, S. (2013). The effectiveness of international climate finance. Overseas Development Institute (ODA). Working paper Biermann et al.,