G20 STUDY GROUP ON CLIMATE FINANCE PROGRESS REPORT. (November )

G20 STUDY GROUP ON CLIMATE FINANCE PROGRESS REPORT (November 2 2012) SECTION 1 OVERVIEW OF STUDY GROUP INTRODUCTION This study group has been tasked by G20 leaders in Los Cabos to consider ways to effectively mobilize resources for climate finance within the broader set of issues discussed by G20 Finance Ministers and Central Bank Governors. G20 Leaders have identified the need for stronger engagement and cooperation to fight climate change in several declarations since 2009. At their meeting in 2012, the Leaders reiterated their 2011 mandate for G20 Finance Ministers: to consider ways to effectively mobilize resources taking into account the objectives, provisions and principles of the UN Framework Convention on Climate Change (UNFCCC) in line with the Cancun Agreement and asked to provide a progress report to Finance Ministers. In light of these statements, the purpose of the study group created this year as stated in the agreed Terms of reference is to seek to build stronger understanding among the G20 members on ways to effectively mobilize resources in support of the broader multilateral processes underway, including to contribute to the work of the UNFCCC. G20 Finance Ministers have been presented, but not endorsed, two reports on the question of Climate Finance at their previous meetings: the Report of the Secretary General s High Level Advisory Group on Climate Change Financing (AGF Report) in November 2010 and Mobilizing Climate Finance: A Paper prepared at the request of G20 Finance Ministers, coordinated by the World Bank and the IMF, in October 2011. The study group provides an opportunity to discuss these and other analyses and to advance the discussion of climate finance sources. CONTEXT At the 16 th Conference of the Parties to the UN climate change convention in 2010 in Cancun, developed country Parties committed, in the context of meaningful mitigation actions and transparency on implementation, to a goal of mobilizing jointly USD 100 billion per year by 2020 to address the needs of developing countries. All Parties agreed that funds provided to developing countries Parties may come from a variety of sources, public and private, bilateral and multilateral, including alternative sources. This commitment was renewed by the developed countries Parties in 2011. In the discussion on sources that have followed, a range of proposals has been suggested. 1 P a g e

FOCUS OF THE STUDY GROUP The UNFCCC is the forum for climate change negotiations and decision-making at the international level. In 2012, Parties to the UNFCCC have begun a work programme on longterm finance in 2012, including workshops, to progress on long-term finance. The G20 Climate Finance Study Group will serve as forum for sharing national experiences, draw on the expertise of Finance ministries and not seek to duplicate the work undertaken with the UNFCCC, taking into account its objectives, principles and provisions. The G20 Climate Finance Study Group is open to all G20 members. It is co-chaired by France and South Africa. Taking into account the short timeframe on which to deliver on this instruction from Leaders, the study group decided as set out in its Terms of Reference to pursue the following activities: 1. Review lessons learned on how to effectively mobilize climate finance from experiences to date (notably based on reporting from UNFCCC, as well as information provided by G20 members, IFIs and other relevant fora). 2. Review the options for effectively mobilizing resources outlined in the reports presented to G20 Finance Ministers, as well as other potential options, and receive any additional analysis from G20 members; 3. Exchange views on these options, taking into account all potential impacts, and their implications taking into account the objectives, provisions and principles of UNFCCC. The study group has held a series of conference calls to agree on its Terms of Reference and a questionnaire. Eighteen member countries responded to a detailed questionnaire, which aimed at fostering an exchange of views on options for mobilizing climate finance from developed countries and provide specific country perspectives on a wide range of possible sources. The first face-to-face meeting was on the 23rd of September 2012 in Mexico, at the margins of the G20 finance deputies meeting, which enabled preliminary exchanges of views and experiences. SECTION 2 STUDY GROUP DISCUSSIONS LESSONS LEARNED FROM EXPERIENCES TO DATE In Copenhagen, developed countries committed to providing new and additional resources, approaching US$ 30 billion for the period 2010-2012, with balanced allocation between mitigation and adaptation. In 2010, the developed countries parties to the United Nations Framework for Climate Changes (UNFCCC) were invited to submit by May 2011, 2012 and 2013 information to the UNFCCC secretariat on resources provided. The need for enhanced transparency was reiterated in Durban in 2011. 2 P a g e

The Study Group benefited from a presentation by the UNFCCC secretariat of this process and the information available through it. The group also benefited from a presentation by the Climate Policy Initiative (CPI) on the landscape of climate finance flows. Transparency on the delivery of fast-start finance (FSF) is key to build trust between developed and developing countries. In this context, developed countries provided, under the framework of the UNFCCC, information on the sources of funding, the channels for delivery, the distribution with regards to sectors and countries, the funding instruments, but also concrete examples of FSF for adaptation, mitigation and REDD+. The UNFCCC secretariat compiled information into a document and established a fast-start finance module on the finance web portal. Developed countries have committed to report regularly to enhance transparency. Many developing countries and civil society organizations indicated a need for greater transparency and reliability in the information presented and questioned the relabeling of traditional ODA as climate finance. The discussion among members following from presentations to the study group by the UNFCCC and the CPI revealed the challenge caused by the absence of clarity and agreement with what constitutes climate finance. A study presented to the group by the Climate Policy Initiative suggested that resources mobilized to reduce GHG emissions and increase climate resilience is much greater than the USD 30bn committed by developed countries through Fast Start Finance, but falls short of the total global investment needs to finance a low-emissions transition. However, the CPI cautioned that the financial flows that its research has tracked should not be confused with the $30 billion on FSF and $100 billion per year for long term finance that has been promised to be mobilized by developed countries in Cancun. In seeking to capture all expenditure, the CPI research producing an aggregate assessment of investment in mitigation and adaptation does not distinguish how this finance has been mobilized and by whom. Private finance forms an important part of the broader effort underway in many countries to address the challenges of mitigation and adaptation. Public policy and public finance play a key, including catalytic, role. Some members emphasized that in this context adequate, predictable, new and additional, and sustainable sources of climate finance should be mobilized in order to meet the scale of the climate challenge, including sources of direct budget contributions, and other public finance, private investment, leveraging and risk mitigation of multilateral development banks, effective carbon financing, and others. Building upon the Fast-Start Finance (FSF) experience and recent research, there is a broad recognition that some lessons can already be drawn, and used to inform on long term climate finance. - Members recognized that public finance plays a critical role both as a direct source and as a catalyst for other resources. In particular, bilateral and multilateral institutions play a key role in distributing climate finance. 3 P a g e

- Predictability is key for countries to be able to implement long term strategies. At the same time, recipient country policies are essential to creating an enabling environment conducive to both public and private inflows. - The involvement of the private sector is recognized by some members as being an important element to improve both sustainability and local ownership. Intermediaries know-how at different stages of the life cycle of climate flows is fundamental to unlock capital. - Improved direct access, including an increasing involvement of national development banks, can be an effective channel for developed countries to provide financing for climate in developing countries. Activities should be country-driven, and clearly addressing developing countries climate change mitigation and adaptation needs, as well as efficiently use financial means. - Finally, at the present time, climate finance remains mostly mobilized for mitigation, with adaptation only representing a small part of the total of both public and private finance mobilized. The FSF experience has demonstrated the importance of transparency, and the importance of tracking climate finance. Beyond fast-start, an enhanced tracking and reporting on international climate flows will be essential in the coming years in order to better understand how to effectively mobilize climate finance. Finally, financing adaptation remains challenging and further work on this issue will be crucial to better mobilize resources for the most vulnerable countries. DISCUSSION ON MOBILIZING CLIMATE FINANCE This assessment largely builds upon the answers to the questionnaire prepared by the cochairs of the study group 1 as well as the exchanges that took place during the first face-toface meeting of the study group. The Study Group benefited from presentations by from office of the UN Secretary General, the IMF and the World Bank Group. GENERAL COMMENTS 1. At the onset, it is important to state that it is developed countries that have committed to the goal of mobilizing US$100bn a year by 2020 to address the needs of developing countries under the UNFCCC. In terms of these agreements the roles and responsibilities of G20 members need to be distinguished, and all discussions within the study group remain mindful of this clear, agreed distinction between developed and developing countries. 1 18 out of the 20 questionnaires sent to the members have been received. 4 P a g e

2. G20 members have a common interest in discussing effective ways to mobilize climate finance, and in particular for Finance Ministers, due to their role in the national budget process. For instance, the choice of instruments that are being considered by developed countries to reduce their carbon emissions and raise funding can potentially affect the nature and characteristics of the funding that will be available to developing countries. They can also have effects that will impact domestic initiatives to fight climate change in developing countries, for the success of which there is also an interest to share experiences. Finally, some members emphasized that international cooperation would help avoid competitive distortions and carbon leakage, and advance consideration of the impact on developing countries. 3. No single source is going to be appropriate or sufficient to reach the US$100bn mobilization goal and the group could benefit from reviewing several different options for mobilizing climate finance based on national experiences, even if the mobilization of climate finance rests essentially with domestic decisions, and country views differ on which sources to mobilize to that end. Sufficient attention should be given to the economic and distributional impacts of these sources, and there is a need for more clarity on the impact of potential finance sources in order to build a common understanding among G20 members. DISCUSSION OF SOURCES 1. Some members of CFSG argued that direct budget contributions by developed countries are a predictable source of climate finance and the most consistent with meeting the UNFCCC agreement. Other members argued that direct budget contributions and other sources were complementary, but emphasized the vital role of public policy and finance in crowding-in private finance. 2. Carbon pricing instruments were recognized by some members as a useful tool to reduce emissions and could generate revenues, while some members pointed out the adverse effects of carbon tax. Whether being implemented on a voluntary or mandatory basis, a number of G20 members are now implementing carbon-pricing instruments at a national or regional level, or are discussing this issue internally. Some G20 members involved in such policies presented their national experience in developing and implementing them (e.g. Australia, the EU, Korea). Moreover, linkages between carbon markets (such as Australia and the EU s) are being developed in order to increase the overall efficiency of such instruments. While the primary use of carbon-pricing instruments is to reduce emissions, some CFSG members recognized that these could also be a means to raise revenues in developed countries to meet the financing commitments that they have made. Nevertheless, such a decision should rest with national authorities in line with the principles of fiscal sovereignty. Some developed countries have decided to fully use their carbon 5 P a g e

price revenue domestically, while others are directing part of it to international climate finance. Some developing countries are also studying whether to develop carbon markets. 3. International carbon-pricing mechanisms, notably on aviation and maritime sectors were identified both in the AGF and the IFI reports a potential source, however there were divergent views on this issue when these reports were presented. CFSG members shared their views on the potential, feasibility and impact of market based mechanisms to tackle emissions from international shipping and aviation. The discussion showed that there is no consensus on this question. Some members felt that the emissions from this sector are currently small, while others highlighted that their contribution is growing rapidly. Some members raised concerns with respect to the negative impacts that their implementation could have on trade and growth, especially in developing countries, and expressed concerns that these mechanisms are not compatible with the UNFCCC principles of common but differentiated responsibilities and respective capabilities. Many CFSG members emphasized that the appropriate bodies to take this debate forward are the International Maritime Organization (IMO) and the International Civil Aviation Organization (ICAO). As they operate under the principle of non-discrimination, some members disagreed about the applicability of the UNFCCC principles to such mechanisms, while others stressed that for financial flows raised through such mechanisms to count as climate finance, they would have to be reconciled with such principles. Some members indicated that detailed analytical work of potential market-based mechanisms and their potential incidence would be very helpful, or that the G20 could encourage the work of ICAO and IMO, while others raised concerns that this might prejudge or duplicate work within these multilateral processes. 4. Carbon-markets, and the off-set mechanisms associated with them, have been a feature of directing mitigation actions and mobilizing private investment in developing countries. Nevertheless, the current project-by-project approach of carbon markets has resulted in a skewed distribution of participation amongst developing countries and the Clean Development Mechanisms (CDM) could be improved, with a view to scale-up investments and better address the needs of developing countries. More globally, the scaling-up of the carbon markets was outlined as being largely dependent on the level of ambition in terms of mitigation. Some members highlighted that these mechanisms cannot be considered climate finance since they are instruments to reduce mitigation costs in developed countries. Others felt that they could be counted as climate finance if issues of additionality were carefully addressed. 5. Inefficient fossil fuel subsidies that encourage wasteful consumption were also analyzed in the AGF and the IFI report to the G20. This issue is being discussed by the G20 Energy Working Group and the study group was of the view to avoid any 6 P a g e

duplication of work. It was recognized by some members that part of the revenue generated by the phasing-out of such subsidies in developed countries could be used for climate finance, but that it should be up to the countries to allocate it to this end based on their own national budgetary procedures, recognizing that other uses of the revenues, such as implementing targeted support measures to mitigate the impact of subsidy removal on vulnerable industries and households, might be prioritized. 6. Some CFSG members recognized that private financing has an important role to play as part of mobilized climate finance. However, both public policy and public finance are needed to leverage private funding to tackle climate change challenges. Clear, long-term and coherent policy frameworks will be key to raise private climate finance from developed countries. Sound carbon pricing and green-house gas related policies, implemented according to the national context, can help address market failures in a cost-effective way to reduce emissions. At the same time, other instruments such as technical assistance to support local financial intermediaries, subsidies or concessional loans to finance demonstration low-carbon projects and insurance or guarantee products to buy down risks, will be needed to catalyze significant private climate flows. CFSG members agreed that further work was necessary on the identification of market failures and on the different ways to effectively mobilize private finance, including through the multilateral development banks. Work on volatility of private finance flows and on the ways to reduce it could be an important element to take into account in undertaking additional work. 7. Finally, the study group highlighted the role played by the GEF and multilateral development banks (MDBs) on climate change, as well as the future role of the GCF. Some CFSG members stressed that, as sustainable development is an integral part of MDBs mandate, MDBs should mainstream climate change into their activities. Some members stressed that in order to prevent any potential tradeoff between their mandate on poverty reduction and climate change, it will be important to pay attention to the way any incremental costs incurred the financing of climate proof activities and projects will be tackled. For some members such incremental costs should be met by new and additional contributions from developed countries. SECTION 3 WAY FORWARD FOR STUDY GROUP As identified by G20 Leaders at Los Cabos, and the repeated calls for detailed analysis within the G20, there is considerable potential value in furthering understanding among G20 members on climate financing and the sources potential effects, drawing on Finance ministries expertise. Proposals from CFSG members for future work included the following: 1. Experience sharing among the G20 members should be the main focus for the study group to move forward. The group could benefit from the support from relevant international organizations and stakeholders from the private sector, subject to the 7 P a g e

agreement of the CFSG members. This could cover, on a voluntary basis, both public policies and instruments to increase public finance, as well as private finance leveraging. This would help move forward on the identification of challenges, market failures and barriers to public and private finance and on the ways to better mobilize climate finance on both mitigation and adaptation activities. 2. The CFSG could usefully share domestic experiences and best practices, as well as promote knowledge sharing on carbon-pricing instruments, including carbonmarkets, notably on the ways to address economic and distributional impacts, as well as GHG related policies. It could also analyze offsets instruments. Among others, the G20 study group may wish to draw on a voluntary basis upon the Partnership for Market Readiness, a forum at which information about national market-based policies to tackle climate change is exchanged. 8 P a g e

ANNEXURE 2009: 33. we welcome the work of the Finance Ministers and direct them to report back at their next meeting with a range of possible options for climate change financing to be provided as a resource to be considered in the UNFCCC negotiations at Copenhagen (Pittsburgh) 2010: 41. We reiterate our commitment to a green recovery and to sustainable global growth. Those of us who have associated with the Copenhagen Accord reaffirm our support for it and its implementation and call on others to associate with it. We are committed to engage in negotiations under the UNFCCC on the basis of its objective provisions and principles including common but differentiated responsibilities and respective capabilities and are determined to ensure a successful outcome through an inclusive process at the Cancun Conferences.. We look forward to the outcome of the UN Secretary-General s High-Level Advisory Group on Climate Change Financing which is, inter alia, exploring innovative financing. 42. We note with appreciation the report on energy subsidies from the International Energy Agency (IEA), Organization of the Petroleum Exporting Countries (OPEC), OECD and World Bank. We welcome the work of Finance and Energy Ministers in delivering implementation strategies and timeframes, based on national circumstances, for the rationalization and phase out over the medium term of inefficient fossil fuel subsidies that encourage wasteful consumption, taking into account vulnerable groups and their development needs. We also encourage continued and full implementation of country specific strategies and will continue to review progress towards this commitment at upcoming summits (Toronto) 2010: 66. In this regard we welcome the work of the High-level Advisory Group on Climate Change Financing established by the UN Secretary General and ask our Finance Ministers to consider its report. We also support and encourage the delivery of fast-start finance commitments (Seoul) 2011: 63. Financing the fight against climate change is one of our main priorities. In Copenhagen, developed countries have committed to the goal of mobilizing jointly USD 100 billion per year from all sources by 2020 to assist developing countries to mitigate and adapt to the impact of climate change, in the context of meaningful mitigation actions and transparency. We discussed the World Bank -- IMF -- OECD -- regional development banks report on climate finance and call for continued work taking into account the objectives, provisions and principles of the UNFCCC by international financial institutions and the relevant UN organizations. We ask our Finance Ministers to report to us at our next Summit on progress made on climate finance; 64. We reaffirm that climate finance will come from a wide variety of sources, public and private, bilateral and multilateral, including innovative sources of finance. We recognize the role of public finance and public policy in supporting climate-related investments in developing countries. We underline the role of the private sector in supporting climate-related investments globally, particularly through various market-based mechanisms and also call on the MDBs to develop new and innovative financial instruments to increase their leveraging effect on private flows. (Cannes) 9 P a g e

April 2012: 13. We will continue to work on climate finance with the establishment of a G20 study group to consider ways to effectively mobilize resources and support the operationalization process of the Green Climate Fund taking into account the objectives, provisions and principles of the UNFCCC. [G20 Finance Ministers and Central Bank Governors, Washington DC] June 2012: We welcome the creation of the G20 study group on climate finance, in order to consider ways to effectively mobilize resources taking into account the objectives, provisions and principles of the UNFCCC in line with the Cancun Agreement and ask to provide a progress report to Finance Ministers in November. [G20 Leaders Declaration, Los Cabos] 10 P a g e