UNCTAD. Background Paper

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1 UNCTAD The Least Developed Countries Report 2010: Towards a New International Development Architecture for LDCs Background Paper Confronting Climate Change: Towards A New International Agenda for Meeting the Financial Challenges of the Climate Crisis in Least Developed Countries Celine Tan Birmingham Law School University of Birmingham Background Paper No. 4. This study was prepared for UNCTAD as a background paper for the Least Developed Countries Report 2010: Towards a New International Development Architecture for LDCs. The views in this paper are those of the author and not necessarily those of UNCTAD or its member states. The designations, terminology and format employed are also those of the author. 1

2 Abbreviations ADB Asian Development Bank AWG-KP Ad-Hoc Working Group on Further Commitments for Annex 1 Parties under the Kyoto Protocol AWG-LCA Ad-Hoc Working Group on Long-Term Cooperative Action CIF Climate investment fund EU European Union FAO Food and Agriculture Organisation FCPF Forest Carbon Partnership Facility G 8 Group of Eight G 77 Group of 77 GDP Gross Domestic Product GEF Global Environmental Facility GNI Gross National Income GHG Greenhouse gas IDA International Development Association IFI International financial institution IMF International Monetary Fund IPCC Inter-governmental Panel on Climate Change IPR Intellectual property rights LDC Least developed country MDB Multilateral Development Bank MDG Millennium Development Goal MRV Monitorable, verifiable, reportable ODA Official development assistance OECD Organisation for Economic Cooperation and Development REDD Reducing emissions from deforestation and forest degradation SIDS Small island developing states TRIPS (Agreement) on Trade-Related Intellectual Property Rights UN United Nations UNCTAD United Nations Conference on Trade and Development UNDP United Nations Development Programme UN-DESA United Nations department for Economic and Social Affairs UNFCCC United Nations Framework Convention on Climate Change UN-ORHLLS United Nations High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States US United States of America UNEP United Nations Environment Programme UNEP FI United Nations Environment Programme Finance Initiative UN REDD United Nations Collaborative Programme on Reducing Emissions from Deforestation and Forest Degradation in Developing Countries WTO World Trade Organisation WWF Worldwide Fund for Nature List of Figures & Tables 1. Figure 1: UNFCCC Funding 2. Figure 2: Financing outside the UNFCCC 2

3 Paper Outline: 1. Introduction 2. Scope and Scale of the LDC Climate Challenge a) Special circumstances and Vulnerabilities of Least Developed Countries b) Financing the Adaptive Capacity of Least developed Countries c) Structural and External Constraints on LDC Financing Capacity 3. LDCs, Climate Change and International Law a) The Global Climate Change Regime b) Least Developed Countries and Climate Change Governance c) Climate Change Financing and the Climate Chang Regime d) The Climate Change Regime Post-Copenhagen 4. International Support Mechanisms or Meeting the Financing Challenge in LDCs a) Legal, Moral and Ethical principles Underpinning Climate Change Financing b) The International Architecture of climate Change Financing c) Coherence with the Climate Change Regime and Global Economy 5. Review of Existing and Proposed Instruments for Climate Change Financing in LDCs a) Financing under the UNFCCC b) Financing Outside the UNFCCC 6. Towards a New International Agenda for Financing Climate Change Adaptation and Mitigation in LDCs a) Equitable Framework and Compatibility with Global Climate Change Regime b) Accountable, Transparent and Representative Governance c) Policy Coherence with International Trade and Finance Regimes and National Development Strategies d) Sustainability and Predictability of Financing 7. Conclusion 3

4 1. Introduction The threat and reality of climate change will be one of the most critical issues facing the international community in the near future and responding to the financial imperatives of the crisis represents a key challenge for countries as the global economy moves beyond the international financial crisis of The science of climate change is clear: greenhouse gas (GHG) emissions caused by human activity have altered the earth s natural climatic processes, leading to global warming and its associated meteorological effects. This is having and will continue to have a significant impact not only on the ecology of the planet but also on the sustainability of human communities who depend on it. Although climate change will affect all nation states and communities, for developing countries and particularly least developed countries (LDCs) 1, confronting the climate crisis is a matter of grave urgency given their economic and geographical vulnerability relative to industrialised countries. The burden of shouldering the fallout from climate change, including increasing climatic variability, extreme weather events and the occurrence of natural disasters, will fall disproportionately on LDCs. The majority of LDCs are located in regions already experiencing environmental stress and this geographical exposure, coupled with low levels of economic and human development and greater reliance on climate-sensitive sectors, render these countries extremely susceptible to the catastrophic effects of climate change. Alongside greater immediate economic and human costs stemming from their inability to mitigate natural disasters, LDCs are also prone to longer term socioeconomic pressures resulting from the lack of resources and capacity to recover from the aftermath of such incidents and to adapt to shifting climatic conditions and gradual environmental erosion. Given the difficult socioeconomic circumstances already facing LDCs, climate change represents a significant threat to their economic development and the achievement of key poverty reduction and human development targets. Responding to the challenges of climate change in LDCs, including reorienting their economies towards more climate-resilient and ecologically sustainable pathways, will require a significant injection of financial resources. These resources would have to be additional to those required to meet existing social and economic development needs to ensure that past, present and future gains in these areas are not compromised. It is unlikely that LDCs will be able to meet the financial costs of climate change adaptation and mitigation 2 without substantial external 1 Least developed countries refer to the 49 countries which the United Nations recognises as the world s poorest and weakest countries, exhibiting the lowest indicators of social and economic development. They have a population not exceeding 75 million and a per capita gross national income (GNI) of less than US$905). See UN- ORHLSS website: (4 January 2010) and further discussion in section 2. 2 Adaptation involves both the actions of adjusting practices, processes and capital in response to the actuality or threat of climate change as well as changes in the policy environment, including social and institutional structures. Adaptation assists in moderating potential damages, take advantage of opportunities or to cope with the consequences of climate change. Mitigation of climate change refers to actions aimed at reducing the sources of climate change, including reducing greenhouse gas emissions or enhancing their sinks, so as to prevent further global warming. Although both sets of actions are important considerations for LDCs, this paper will focus primarily on adaptation costs given the relatively low levels of GHG emissions contributed by LDCs and their negligible obligations to reduce such emissions under the multilateral climate change regime. However, it is important to note that some adaptation measures may also constitute mitigation actions which carry a financial cost in terms of trade-offs with economic development. 4

5 contributions from the international community. At the same time, because LDCs have contributed the least to the problem of climate change, the principle of equity also demands that they should be supported by those responsible for the crisis the industrialised countries in confronting the challenge of climate change. Consequently, finance for climate change adaptation and mitigation should be a key element in the design of a post-financial crisis international financial architecture that responds to the needs of LDCs. In developing a new financial agenda to address the challenges of the global climate crisis, it is not just sufficient to determine the scope and scale of financing needed by LDCs to meet the challenges of climate change but also, importantly, to consider the modalities in which the requisite financial resources will be generated by the international community and the channels through which these resources will be delivered to LDCs. The efficacy of financing for climate change adaptation and mitigation in terms of shoring up their capacity to cope with climatic shocks and the transition of LDCs towards a more sustainable economic trajectory will depend largely on the infrastructure for mobilising and disbursing these financial resources at the international level. This paper considers the challenges confronting LDCs in meeting the adaptation and mitigation requirements brought on by the climate crisis in light of their existing structural constraints. It will review existing international support mechanisms for financing adaptation and mitigation in LDCs and examine key elements of a proposed international framework for the mobilisation, administration and delivery of such financing in the context of international law and policy. Given that the international community s responses to climate change is regulated by an intergovernmental regime under auspices of the United Nations Framework Convention on Climate Change (UNFCCCC) establishing rights and obligations for states party to the regime as well as providing a framework for negotiations on future action, any consideration of a financial architecture for climate change financing must be made with reference to the decisions and outcomes of deliberations within this fora. 2. Scope and Scale of the LDC Climate Challenge a) Special Circumstances and Vulnerabilities of Least Developed Countries Least developed countries are recognised by the international community as the world s poorest and weakest states. They are characterised by extreme poverty, low levels of capital, human and technological development and heightened susceptibility to external economic shocks, natural and man-made disasters and infectious diseases 3. At present, 49 countries are classified as LDCs, with 33 in Africa, 15 in Asia and one in Latin America. Although the LDCs as a group contribute relatively little to global warming emitting less than one percent of the world s total GHG emissions they will be disproportionately affected by changing climatic conditions. Along with the LDCs structural economic weaknesses, the geographical location of LDCs, coupled with their high dependence on natural resources as a source of local livelihoods and national income, render them acutely vulnerable to climate change. It has been estimated, for example, that for every 1 C rise in average global temperatures, annual average growth in poor countries could drop by 2-3 percentage points, with no change in the growth performance of rich countries (UN-DESA, 2009a: viii). The heightened vulnerability of LDCs to economic and climatic shocks has been highlighted by the effects of the aforementioned financial crisis and countries exposure to a series of natural 3 See UN-OHRLLS website: (5 January 2010). 5

6 disasters in recent years. While the epicentre of the current global recession was located in the financial sectors of developed countries and its immediate fallout was felt keenly in these countries and developing countries closely integrated into global financial markets, LDCs have been significantly affected by the downturn in the real economy following the financial crisis 4 (UNCTAD, 2009a: 1 2; Karshenas, 2009: 1). It has been estimated that the initial impact of the global crisis on LDCs has amounted to a total income loss of around US$7.5 billion in 2009 or 30 percent of the GNI of affected LDCs with negative impacts on prospects of economic growth and poverty reduction (Karshenas, 2009: 31). At the same time, LDCs have been adversely affected by the cumulative effects of increased natural disasters caused by shifting weather patterns, such as hurricanes, tornados, droughts and flooding, leading to food shortages, collapse of local livelihoods and rising economic insecurity. Ninety-eight percent of those seriously affected by natural disasters between 2000 and 2004 and 99 percent of all disaster casualties in 2008 were borne by developing countries, including LDCs (Global Humanitarian Forum, 2009: 1; 60; UNDP, 2007: 8). Developing countries also bear the brunt of the immediate economic impact of climate-related disasters and of longer term environmental degradation, such as on agricultural crop yields, with more than 90 percent of the US$125 billion in annual climate-related economic losses suffered by developing countries (ibid: 60). According to the UNFCCC, developing countries, on average suffer more damage from climate-related impacts as a percentage of their GDP than developed countries (UNFCCC, 2008: para 81). Recent data points to an increasing frequency and intensity of natural disasters, with four times as many such incidents occurring annually from as during the 1970s and resulting economic damage increasing sevenfold to US$83 billion a year (UN-DESA, 2009b). Currently, over 2.8 billion people reside in areas prone to one or more of the physical manifestations of climate change, namely desertification, droughts, floods, storms and sea level rise (Global Humanitarian Forum, 2009: 15). The regions most at risk from droughts and floods are sub- Saharan Africa and South Asia where the majority of LDCs are located (Global Humanitarian Forum, 2009: 15; UN-ORHLLS, 2009: 14 15). These are also the areas that are least able to cope with the social and economic fallout from climate-related incidents. The worst affected regions are sub-saharan Africa, South Asia and small island states. Africa remains the most vulnerable region, with 15 out of 20 of the world s most vulnerable countries located in the region (ibid: 58). A third of Africa s population live in drought-prone areas and it is projected that by 2020, between 75 and 250 million people in Africa will suffer from the effects of increased water stress resulting from climate change (UN-ORHLLS, 2009: 15). The ten countries most vulnerable to the socioeconomic impacts of climate change countries are all LDCs: Afghanistan, Burundi, Chad, Comoros, Eritrea, Ethiopia, Niger, Somalia, Rwanda and Yemen (Global Humanitarian Forum, 2009: 59). There have been 180 incidents of storms or floods in these countries during the last 30 years, with 11 million people affected by drought in 2008 alone and 85 million having been affected by droughts in the last three decades (ibid). Least developed countries are most at risk from shifting weather patterns and environmental degradation and suffer the greatest burden of adjusting to threats of climate change because they are already challenged by what is known as multiple vulnerabilities on account of their low levels of economic and human development (UN-DESA, 2009a: 71). According to the United Nations Department for Economic and Social Affairs (UN-DESA): 4 This is includes the effects from a combination of a sharp reduction in world trade, rapid decline in commodity prices, decline on foreign direct investment (FDI) and slowdown in remittance flows from migrant workers due to rising unemployment in host countries (Karshenas, 2009: 1). 6

7 Poorer countries and communities with poor health care, lack of infrastructure, weakly diversified economies, missing institutions and soft governance structure may be exposed not just to potentially catastrophic large-scale disasters but also to a more permanent state of economic stress as a result of higher average temperatures, reduced availability of water sources, more frequent flooding and intensified windstorms... Thus countries that are already vulnerable to climatic shocks often find themselves trapped in a vicious circle of economic insecurity, persistent poverty, vulnerability to shocks and inadequate capacity to cope with those shocks (ibid). LDCs clearly fall short of the requirements for a high adaptive capacity to climate change set out by the Intergovernmental Panel on Climate Change (IPCCC) in 2001, including: a stable and prosperous economy, a high degree of access to technology, well-delineated roles and responsibilities for the implementation of adaptation strategies, systems for dissemination of climate change adaptation information at national, regional and local levels and the equitable distribution of access to resources (IPCC, 2001 in UN-ORHLLS, 2009: 7). The low adaptive capacity of LDCs to the climate change will be eroded further if the countries are unable to recover quickly from the immediately aftermath of current financial and climate-related crises and suffer additional economic stress brought on by future economic and climatic shocks. It will also be exacerbated if global mitigation action and targets are not achieved within a reasonable timeframe and countries remain locked into unsustainable development paths, leading to higher emissions, more climate change impacts and larger investment and financial flows needs for adaptation in the longer term (UNFCCC, 2009a: 2). b) Financing the Adaptive Capacity of Least Developed Countries The urgency of addressing the low adaptive capacity of LDCs to climate change is clear. Unless immediate action is taken to redress the vulnerabilities of LDCs to the threat and reality of changing climatic conditions and gradual environmental degradation, the economic and human costs will be substantial. Climate change is a critical threat to LDCs sustainable development and will impact considerably on their achievement of key poverty reduction and human development targets, notably the attainment of the Millennium Development Goals (MDGs) 5. The impacts of climate change on countries water supplies, food security, natural ecosystems and biodiversity will affect the health and livelihoods of communities who reside within them. Climate change will slow, and in worst cases, reverse, these countries progress towards eradicating poverty, combating diseases and raising levels of human and economic development (Global Humanitarian Forum, 2009: 67). LDCs are already off-track in meeting their MDGs and the adverse effects of climate change will ensure that most, if not all, will be unable to do so in the foreseeable future. Global food and fuel shortages which are expected to accompany climate change are expected to impact disproportionately on LDCs, particularly oil-importing LDCs. LDCs reliance on agriculture as a source of household income and the production and export of primary products as a source of national income means that increased climate variability and their effects will have a significant socioeconomic impact on their capacity to maintain current levels of development. For example, in sub-saharan Africa, where over 60 percent of households rely on agriculture for their livelihoods, heat-related plant stresses are expected to contribute to reduced yields in key crops 5 The Millennium Development Goals are a set of time-bound targets aimed at reducing poverty and facilitating human development and committed to by the international community and adopted as the United Nations Millennium Declaration in September

8 by as much as 50 percent in some areas (UN-DESA, 2009a: xiii). In the same continent, 200 million people (or a quarter of the population) are already facing water stress and this is likely to exacerbate existing health and sanitation problems, straining already precarious health services in many areas (ibid: 78 79). Adaptation measures should therefore be a critical aspect of development policy in LDCs and a priority for the international development community. Adaptation actions are necessary to reduce vulnerability and enhance adaptive capacity to climate change risks (UNFCCC, 2008: para 96). LDCs will have to make significant adjustments in their economic planning, infrastructural development and natural resource management, among others, in order to scale up their climate resilience and capacity to respond to the adverse effects of changing weather conditions. These adjustments include climate proofing socioeconomic activities by integrating future climate risk, expanding the adaptive capacity of socioeconomic activities to deal with current and future climate risks and initiating actions to cope with the adverse effects of climate change (UNFCCC, 2008: para 8; ). These adaptive actions include capacity building, research and assessments, disaster risk reduction and risk management and specific interventions into relevant socioeconomic sectors and activities (ibid: para 9; 106). Conservative estimates of costs for such adaptation vary but there is a general consensus that they would run into tens of billions in US dollars annually. Although adaptation measures should be integrated or mainstreamed into wider development planning generally, the UNFCCC has stressed that the financing of adaptation needs to reflect the fact that adaptation is responding to the additional burden posed by climate change, quite distinct from the aggregate flow of resources towards overall socio-economic development goals (ibid: para 97). This means that the costs of shoring up the adaptive capacity of developing countries, particularly LDCs and other vulnerable countries, should be calculated in addition to the resources necessary to stay on existing economic and human development trajectories (see below). A UNFCCC review in 2007 estimated that the additional investment and financial flows in 2030 to address climate change mitigation will amount to 0.3 to 0.5 percent of global GDP in 2030 and 1.1 to 1.7 percent of global investment in 2030 (UNFCCC, 2009a). To reduce global GHG emissions to current levels by 2030, global investment and financial flows of between US$ billion per annum would be needed in 2030 in addition to the amount expected to be available under a business as usual scenario (UNFCCC, 2009a: 1 2; 2008: para 60). Over half this amount would be needed in developing countries (UNFCCC, 2008: para 60). Additional investment and financial flows for adaptation in developing countries is estimated at between US$28 to US$ 67 billion annually, with an additional US$52 62 billion needed for agriculture, water, health, ecosystem protection and coastal-zone protection (UNFCCC, 2009a: 2; UNFCCC, 2007: para ). These figures are likely to be much higher if mitigation action is not taken to prevent further global warming. Non -UNFCCC sources have provided higher estimates for the cost of adaptation. The United Nations Development Programme (UNDP) for example calculates adaptation costs to reach US$86 billion by 2015 (UNDP, 2007). There is a significant gap between what is available now and these projected figures. The UN-DESA estimates current climate financing levels to be about US$21 billion and heavily skewed towards mitigation (UN-DESA, 2009: 157). Most developing countries, especially LDCs which are heavily reliant on official development assistance (ODA) as a source of revenue, are unlikely to meet the costs of such adaptation through domestic sources (see further discussion below). However, these costs exceed the total amount of ODA available to developing countries as a whole, already insufficient to meet 8

9 international development goals, and meet the economic development needs of LDCs. The UN- DESA reports that based on some estimates, the adaptation costs for developing countries could be 9 10 times the 2008 levels of ODA (ibid). According to the Global Humanitarian Forum, unless additional financing is made available for adaptation to climate change, responding to climate change is expected to consume an increasing share of development aid (Global Humanitarian Forum, 2009: 67). The World Bank s concessional lending facility, the International Development Association (IDA) has also argued that it would require additional resources of between US$600 million to US$1.9 billion annually (or between six to 21 percent of IDA financing at 2006 levels) to maintain the net benefits of its projects to client countries at their without climate change level (IDA, 2007: para 18) In addition to meeting the costs of adaptation, LDCs will also have to factor into account the economic impact of climate change mitigation, both in terms of their own transition to a lowcarbon economy and the implications of a wider global transition which may result in changing external economic circumstances, such as a reduction in world trade. As the figures above have shown, investment and financial flows for mitigation will run into hundreds of billion US dollars annually, with 46 percent of such new flows needed in developing countries in 2030 due to expected economic growth and population increase, leading to higher energy demands (UNFCCC, 2009a: 2; UNFCCC, 2008: para 60). These estimates do not include operating or maintenance costs of mitigation investments (UNFCCC, 2008: para 63). The climate crisis may yet provide LDCs with the opportunity to restructure their economies onto a more sustainable track, including expanding access to clean energy, facilitating greater sustainability in agriculture through improved land use, and protecting biodiversity through better forest management. However, presently, LDCs lack the financial and technological capacity to shift towards a low carbon growth path and develop more sustainable patterns of production and consumption. Many continue to be locked into unsustainable development trajectories as a consequence of their structural weaknesses and external constraints (see discussion below). Two key areas of focus for developing countries, including LDCs, in this regard are energy use and forestry management. As energy use, primarily sourced from high carbon-emitting fossil fuels, account for 60 percent of total GHG emissions, transiting towards more sustainable and secure energy sources while maintaining and expanding access to affordable energy for industrial and household use will be a major challenge for all developing countries, especially LDCs (see UN-DESA, 2009: xi xii; 35). Two-thirds of developing country parties to the UNFCCC have reported energy supply measures as key priorities for investment and financial flows, notably switching from fossil fuels to renewable energy (UNFCCC, 2007: para 758). The UN-DESA has identified energy as the critical link between development climate change mitigation as global access to energy services remain as unequally distributed as income (UN-DESA, 2009: 42). Aside from the fact that developing countries still face significant obstacles in expanding energy services to its citizens 6, access to sustainable energy sources is crucial to meeting the socioeconomic development objectives of developing countries. LDCs are also faced with the challenge of sustainable forestry management. Deforestation and forest degradation contribute 17.4 percent of carbon emissions, accounting for 35 percent of emissions from developing countries and 65 percent from LDCs (ibid: 36). At the same time, forests remain a source of livelihoods for around 25 percent of the world s population, most of who reside in LDCs and other developing countries (ibid: xiv). There is therefore an urgent need to develop effective 6 It has been estimated that between 1.6 billion and 2 billion people worldwide, mainly those in rural areas, lack access to affordable energy services(un-desa, 2009: 51). 9

10 forestry management and land-use change policies in LDCs to assist them in meeting the twin challenges of mitigation and adaptation in this context. Meanwhile, changing production and consumption patterns in industrialised and other developing countries will also have an impact on LDCs, especially those reliant on external trade as demand for commodities and manufacturing decrease in a shifting global economic environment. Mitigation actions, both within and outside LDCs, may therefore have negative implications on financial flows to LDCs and impact on their capacity to generate resources for sustainable development. The sensitivity of LDC economies to fluctuations in demand and supply in the global market means that LDCs will be adversely affected by shifts in trade and financial flows resulting from climate-related policies in other countries. At the same time, there is also a danger that LDCs, along with other developing countries, will be affected by the rise of so-called climate protectionism the imposition of trade restrictive measures, such as trade tariffs, taxes or other charges on the imports of products from developing countries on climate grounds which will have a significant impact not just on the economic development of countries subject to such measures (mainly larger developing countries) but also on the global economy as a whole (Khor, 2009a & b; see further discussion in section 4 (c)). c) Structural and External Constraints on LDC Financing Capacity The problem of financing climate change adaptation and mitigation in LDCs is compounded by the inherent structural weaknesses of LDC economies and the external economic constraints faced by these countries. The combination of greater integration into global markets and the lack of economic diversification in LDCs notably the high dependence on primary commodity production and export in African LDCs and reliance on low-skill manufactures for Asian LDCs have rendered these countries extremely susceptible to external economic shocks (see UNCTAD, 2009a: ii iii). The rapid falls in export revenues from declining commodity prices and weak demands for manufactures resulting from the financial crisis of (ibid: 1-3; see discussion above) have illustrated the precarious state of LDC finances and highlighted their lack of capacity to cope with unexpected shocks, including dealing with the adversities of climate change. In addition to financial resources, LDCs also lack the technological capacity necessary for climate change adaptation and mitigation and their access to such technology are hampered by financial and legal costs as a consequence of stringent intellectual property rights (IPR) regimes (see discussion below and in section 4(c)). LDCs are also characterised by high levels of sovereign indebtedness. In spite of international debt relief measures in recent years 7, the debt burden remains unsustainably high in most LDCs compared to other developing countries. The debt of LDCs average 42 percent of their GNI compared to 26 percent in other developing countries and almost half of LDCs (22 countries) shoulder debt burdens of between 50 and 100 percent of their GNI (UNCTAD, 2009a:2 3 ). Debt servicing continues to absorb an average of a significant percentage of LDCs total financial outflows and LDCs are heavily reliant on ODA as a source of revenue. For many LDCs, ODA make up about 61 percent of their total net resource flows (UNCTAD, 2009a: 24) and given the current state of the global economy, it is unlikely that this dependence will be reduced in the short to medium-term. 7 The enhanced Heavily Indebted Poor Countries (HIPC) initiative (launched in 1999) and the Multilateral Debt Relief Initiative (launched in 2005) have committed overall assistance amounting US$124 billion in nominal terms, of which about US$52 billion are under the MDRI, to 35 eligible LDCs in 2009, amounting to 40 percent of their 2008 GDP (IDA and IMF, 2009: para 4). 10

11 The indebtedness of LDCs and their reliance on ODA flows have also meant that LDCs are often locked into external financing arrangements which further constrain their economic and human development. Conditionalities established by international financial institutions, notably the World Bank and the International Monetary Fund (IMF), bilateral donors and by official creditors under debt restructuring and debt relief agreements have circumscribed the autonomy of LDCs to devise national development strategies appropriate to their needs and circumstances. Many LDCs remain tied into structural reform and stabilisation programmes which are premised on the neoliberal model of economic policymaking as conditions for ODA and debt relief. These policy prescriptions have had and continue to have adverse consequences for domestic resource generation and the stimulation and maintenance of productive sectors within LDCs as well as constraining the policy space available to LDCs in terms of socioeconomic planning and public service delivery. Consequently, alongside the financial factors which have limited LDCs ability to respond to the adaptation and mitigation challenges posed by climate change, LDCs high aid dependency have also weakened their adaptive capacity and their ability to transit towards a more climate-resilient economy. Firstly, a general ideological opposition to state intervention in the economy on the part of IFIs and bilateral donors is a major hurdle for the utilisation of resources for adapting and mitigating climate change. In particular, the shift in emphasis from the state to the market as a provider of goods and services has led to fiscal retrenchment and the accompanying decline in public investment across much of the developing world (UN-DESA, 2009a: 73). The retreat of the state under structural adjustment programmes has also left LDCs with weak administrative and policymaking capacity and this has an impact on their adaptive capacity. Without strong central institutions to manage national responses to climate change and options to utilise policy tools such as agricultural or industrial policy with a strong state-directed component, it will be difficult for LDCs to formulate coherent and comprehensive strategies to respond to climate change. Secondly, many LDCs are locked into reform programmes, namely with the IMF, with tight macroeconomic frameworks which establish fiscal ceilings for public expenditure. This means that even where financing may be available for climate change activities, the thresholds for fiscal expenditure established by the IFIs may make it difficult for countries to utilise this financing 8. Structural adjustment and aid conditionalities have also continued to focus on liberalisation, deregulation and privatisation of economic sectors rather than mobilising domestic resources and financing investments in productive sectors in LDCs (see UNCTAD, 2009a: 8). Again, as many adaptation and mitigation actions would require state involvement, these could hamper the capacity of LDCs to harness and utilise resources available for such efforts. Thirdly, conditionalities associated with project and programme financing from the Bretton Woods institutions and other multilateral development banks (MDBs) and bilateral donors have also trapped many LDCs into unsustainable high-carbon development trajectories. In particular, promotion of and financial support for extractive industries and carbon-intensive agricultural production as well as a reliance on export-led trade and investment strategies have a rendered LDCs extremely susceptible to fluctuations in oil prices and hampered their capacity to transit towards a low-carbon economy. For example, civil society groups have long argued that the World Bank and other MDBs remain heavily committed to investments in carbon-intensive 8 Studies of public health expenditure in IMF recipient countries have shown evidence that stringent fiscal conditions, such as caps on civil service expansion, tight budget deficits and conservative inflationary targets, have in some cases affected countries ability to both absorb additional external financing for healthcare expenditure as well as constrained governments ability to expand and develop healthcare services (see for example, CEGAA and RESULTs, 2009 and Centre for Global Development, 2007). 11

12 energy projects and reforms in energy sectors that have focused on large-scale, privatised energy provision without corresponding safeguards to ensure universal access (Tan, 2008a: 24). The prioritisation of investments in centralised and large-scale fuel and hydropower projects, coupled with the privatisation of public utilities in client countries, have not only caused social and environmental dislocations for communities residing within the project jurisdiction but have also contributed towards higher carbon emissions and reduced the poor s access to energy (Christian Aid, 2007). On the other hand, the promotion of large-scale agricultural investments focused on mechanised farming and the utilisation of fossil fuel-based agricultural inputs, such as chemical fertilisers, over and above organic and small-scale farming, have also exacerbated countries reliance on oil and their vulnerability to oil shocks, with significant impacts on food security. The loss of policy space in and susceptibility of LDCs to conditionalities resulting from aid dependency may be further exacerbated by recent events. The aforementioned financial crisis has increased the dependence of LDCs to IFIs and ODA, meaning that many of the gains, including the reduction of debt stock, attained during the period preceding the crisis may be compromised. Both the World Bank and the IMF have seen an unprecedented rise in demand for financing from developing country members, including LDCs as a consequence of the financial crisis 9. This renewed reliance on the Bretton Woods institutions will have two consequences on LDCs: 1) the debt burden of LDCs are likely to increase as a consequence and may adversely affect their debt sustainability in the longer term, reversing debt relief gains and 2) LDCs will remain committed to problematic policy conditionalities. This will impact on LDCs efforts to adapt to climate change and transit to a low-carbon economy for reasons discussed above. Additionally, the policy autonomy of LDCs (and hence, their adaptive capacity) are also constrained by international trade and investment rules. Most LDCs are members of the World Trade Organisation (WTO) and are also most likely to be signatories to various other bilateral, regional and multilateral trade and investment regimes. These regimes have effectively reduced the range of policy instruments which could have been deployed in developing countries to achieve the level of economic (and consequently, human) development enjoyed by industrialised and (and to some extent, newly industrialising) countries (see UNCTAD, 2006: 61; 167). International trade and investment rules, such as those facilitating the liberalisation of industrial tariff; the elimination of subsidies in industrial and agricultural sectors; the national treatment of foreign investors and the imposition of mandatory minimum standards for IPR protection, have had the effect of limiting the policy options available to developing countries to develop their domestic productive and technological capacity (ibid: 167). This has implications both on the ability of LDCs to mobilise domestic financial resources for socioeconomic development and climate change adaptation and mitigation as well as on the shoring up of their overall adaptive capacity (see further discussion in section 4(c)). 3. LDCs, Climate Change Financing and International Law a) The Global Climate Change Regime There is currently one intergovernmental regime for the regulation of climate change and that is the United Nations Framework Convention on Climate Change (UNFCCC) which opened for 9 The IDA for example has seen a historic rise in disbursements totalling US$14 billion in fiscal year 2009, a 25 percent increase from US$11.2 billion in 2008, with the largest share of commitments (56 percent) going to Africa(World Bank, 2009a: 7, 53). Of the total figure, US$11 billion was disbursed as credits compared to only US$2.9 billion in grants (ibid: 53). 12

13 signature in 1992 and was entered into force in With 192 state parties, the Convention has attained near universal membership. Currently, 48 out of 49 LDCs are parties to the Convention. The objective of the UNFCCC and its related instruments is to stabilise greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system (Article 2 of the UNFCCC). The UNFCCC is complemented by the Kyoto Protocol 1997, adopted by 187 states, under which 37 industrialised countries and the European Community commits to reducing their GHG emissions by an average of five percent by 2012 against 1990 levels. The UNFCCC is a multilateral framework treaty, sometimes known as a regulatory treaty. These treaties do not always contain clear of detailed rules or establish specific, binding obligations on parties but prescribe the principles under which these may be established (Birnie, Boyle and Redgwell, 2009: 17 18). The Kyoto Protocol is the first and, currently, the only binding instrument under the Convention. This does not mean, however, that the UNFCCC is without legal effect. The commitments by parties to the UNFCCC are relevant to the formulation of any future regulatory framework on climate change, including that of climate change financing. The provisions of the UNFCCC establishes the parameters under which parties are to work towards in achieving the objective of the Convention, including establishing the guiding principles relevant for the interpretation and implementation of the Convention and for the negotiation for further legal instruments under the Convention (ibid: 359). It also commits parties to undertaking actions specified under the treaty, albeit without specified international standards, and establishes a governance structure for the regime. The UNFCCC is governed by the Conference of Parties (COP) whose responsibility is to keep under regular review the implementation of the Convention and any related legal instruments that the Parties may adopt as well as to make, within its mandate, the decisions necessary to promote the effective implementation of the Convention (Article 7 of the UNFCCC). COP meetings are held annually. In undertaking actions to achieve the ultimate objective of the UNFCCC, the parties to the treaty must be guided by the principles laid down in Article 3 of the Convention, including the principle of equity, common but differentiated responsibilities, sustainable development and the precautionary principle (UNFCCC, Article 3). In this regard, the UNFCCC, along with the Convention on Biological Diversity (CBD) 1992, can be viewed as a key outcome of the watershed political compact, the Rio Declaration on Environment and Development (hereinafter the Rio Declaration ) which emerged from the United Nations Conference on Environment and Development (UNCED) (popularly known as the Earth Summit) held in Rio de Janeiro, Brazil in The Rio Declaration envisioned a new and equitable global partnership towards meeting the challenges of sustainable development based on equity among nations (intra-generational equity) and equity through generations (inter-generational equity) 11 (Preamble to the Rio Declaration on Environment and Development 1992). These norms translated into commitments by states party to the Declaration to recognise the historical and contemporary asymmetries in the economic 10 Although negotiations for the UNFCCC had taken place before and in tandem with the Rio process, this treaty and the CBD are often linked with the Rio Declaration in the embrace of the key principles of the Rio compact. 11 While the latter refers to the need to fulfil developmental and environmental needs of present and future generations, the former refers to the need to ensure a just distribution of resources across states. 13

14 and social conditions of countries, notably between developed 12 and developing countries and within developing countries, and acknowledge the special situation of the least developed and environmentally vulnerable states (Tan, 2008b: 3). It also the commits states parties to international action on the problems identified by the document based on this recognition (ibid). This has important implications for the negotiations of environmental treaties both in during and after the UNCED era. The UNFCCC and the CBD are both underpinned the normative principles established in the Rio Declaration, notably the principles of equity, outlined above, and the principle of common but differentiated responsibilities. The latter principle is crucial to framing the rights and obligations of parties to the UNFCCC. Article 3(1) of the UNFCCC provides that in achieving the objective of the Convention and in implementing its provisions, parties should protect the climate system for the benefit of present and future generations of mankind, on the basis of equity and, in accordance with their common but differentiated responsibilities. This principle provides what Birnie et al describe as the explicit basis for the very different commitments of developed and developing states parties under the Convention and under the Kyoto Protocol (Birnie et al, 2009: 357). While acknowledging that regulation of climate change and its effects are is the responsibility of all nation states, it recognises that some states are more culpable than others and thereby should bear the higher burden of responsibility under international law. The principle of common but differentiated responsibilities therefore imposes higher standards of conduct for developed countries with regard to their international legal obligations, in this case for the regulation of climate change. The balance of obligations between developed and developing countries is one based on this principle as well as on the science of climate change which has established unequivocally that developed countries have been responsible for three-fourths of historical GHG emissions and more than half of current emissions 13 (see Yu, 2009). Accordingly, the UNFCCC recognises that developed countries should take the lead in combating climate change and the adverse effects thereof (Article 3(1) of the UNFCCC) and that the specific needs and special circumstances of developing country Parties be given full consideration under the Convention (Article 3(2) of the UNFCCC). Two sets of obligations are therefore created under the UNFCCC regime. Developed countries commit themselves to: a) reducing GHG emissions and protecting and enhancing GHG sinks and reservoirs (parties to the Kyoto Protocol further commit themselves to meeting binding legal targets for emissions reductions); and b) assisting developing countries with finance and technology to meet their obligations under the Convention and to adapt to climate change (Articles 4 of the UNFCCC; Article 3 of the Kyoto Protocol). Meanwhile, developing countries are exempt from undertaking binding emissions reductions but are encouraged to undertake 12 Developed countries are grouped into Annex I or Annex II countries for the purposes of UNFCCC, referring to the appendices to the Convention and the Kyoto Protocol. Annex I Parties include the industrialised countries that were members of the OECD (Organisation for Economic Co-operation and Development) in 1992, plus countries with economies in transition (the EIT Parties), including the Russian Federation, the Baltic States, and several Central and Eastern European States. Annex II countries consist of the OECD members of Annex I, but not the EIT Parties. These are the countries which bear the primary responsibility for emissions and provision of financial resources to developing countries. Developing countries are commonly referred to as non-annex I parties. See: (9 January 2009). 13 The Preamble of the UNFCCC recognises the historical responsibility of developed countries, noting in its third paragraph that the largest share of historical and current global emissions of greenhouse gases has originated in developed countries, that per capita emissions in developing countries are still relatively low and that the share of global emissions originating in developing countries will grow to meet their social and development needs. 14

15 mitigation and adaptation measures and are obliged to collect data on emissions and other measures and communicate them to the COP 14 (Articles 4 & 12 of the UNFCCC). However, as discussed below, the extent of developing countries compliance with their obligations under the Convention is depends on the effective implementation by developed countries of their aforementioned commitment to provide finance and technology transfer (Article 4(7) of the UNFCCC). Another important feature of the UNFCCC regulatory regime is its recognition of the right to development of developing countries. In other words, the social and economic development needs of countries should not be compromised by actions to mitigate climate change. Article 3(4) of the Convention enshrines this right and stipulates: Policies and measures to protect the climate system against human-induced change should be appropriate for the specific conditions of each Party and should be integrated with national development programmes, taking into account that economic development is essential for adopting measures to address climate change. Article 4(7) further recognises that social development and poverty eradication are the first and overriding priorities of the developing country Parties. The link between development policy and climate change regulation under the UNFCCC regime is thus clear. Developing countries, especially LDCs, cannot afford to see their economic and human development constrained by climate change, particularly given their relatively small contribution to the problem (Yu, 2009). Moreover, it is also recognised that development is necessary to minimise the effects of and prevent further climate change risks by improving the adaptive capacity of developing countries (ibid). Again, this reflects the balance of obligations between developed and developing countries within the Convention, with the developmental needs of developing countries taken into account in reference to their limited mitigation actions and the obligations of developed countries to support such actions and that of adaptation activities in developing countries. b) Least Developed Countries and Climate Change Governance The international community has recognised the specific needs and vulnerabilities of LDCs under the global climate change regime underpinned by principles of equity and common but differentiated responsibilities. As discussed in section 2, the consequences of climate change will be shouldered disproportionately by the countries least responsible for the problem. LDCs have contributed the least to the build-up of GHGs, and yet will be the most adversely affected by the impacts of climate change and least able to adapt to their changing environment. Consequently, in addition to providing that the needs and circumstances of developing countries generally be taken into account in implementing measures to meet the objectives of the UNFCCC, including mitigation (see previous discussion), the Convention also stipulates that full consideration be paid to the requirements of those states that are particularly vulnerable to the adverse effects of climate change and of those... that would have to bear a disproportionate or abnormal burden under the Convention(Article 3(2) of the UNFCCC, emphasis added). Article 4(9) of the UNFCCC refers specifically to the LDCs, committing all parties to the Convention to take full account of the specific needs and special situations of the least developed countries in their actions with regard to funding and transfer of technology. Further, Article 4(8) commits UNFCCC parties to giving full consideration to actions necessary under the Convention to meet the specific needs and concerns of developing countries arising 14 This reporting requirement is also an obligation of the developed country parties (Article 12 of the UNFCCC). 15