Climate Finance: Why it matters, and what to look for in COP-21
In the Copenhagen Accord, established at the United Nations Framework Convention on Climate Change (UNFCCC) 15th Conference of the Parties in 2009, developed countries agreed to pledge $100 billion in climate financing per year by 2020 to help developing countries with climate mitigation and adaptation projects. In 2014, the Intergovernmental Panel on Climate Change estimated that government efforts to control greenhouse gas (GHG) emissions increases could require $13 trillion USD through 2030 — approximately $812 billion per year (Bullis). At the same time, the moral imperative to provide a better quality of life to people in developing countries has never been stronger. This effort is also a massive undertaking. Climate change exacerbates these very serious equity issues, considering the concentration of historical emissions in developed countries, the distribution of climate impacts across the developing world, and the lower capacities of developing nations to cope with these challenges. Addressing these equity issues will require significant international finance from developed countries, but just how that finance will be provided remains significantly contested.
Environmentalism is not often spoken of in the same breath as humanitarianism, but the two could go fruitfully hand in hand in the arena of energy. Clean, low-carbon energy, in the words of the UN Secretary-General Ban Ki-Moon, “could be the biggest opportunity of the 21st century” and is one of the major categories of investment that developing countries could use international climate finance for. Such investments promise the opportunity not only to improve the quality of life all over the world, but also to establish electrical grids based on renewable energy from the outset, eliminating the infrastructural lock-in to polluting fuel sources experienced by the developed world.
We cannot expect the clean technology that the climate change requires to be paid for entirely by developing nations, the people least able to shoulder the extra cost. Especially where rural electrification is concerned, the expansion of electricity access is often quite costly. In today’s developed countries, this hurdle was broadly overcome through a combination of government subsidies and cross-subsidies from wealthy, urban customers to rural, poorer customers. Unfortunately this scheme is not very helpful for today’s developing countries; governments are often cash-strapped, and the ratio of urban to rural customers is not favorable for cross-subsidy. Many countries struggle to provide electricity access at all, let along clean energy. Climate mitigation would be crucially aided by mobilizing international climate finance to cover the extra upfront expense incurred by installing electricity infrastructure that is low-carbon.
In early October, the OECD reported that $87 billion of climate finance had been secured, but only 16% of that finance was in the form of grants. The remainder would be in the form of loans and private finance. There is a great deal of debate as to what should ‘count’ as international climate finance — with developing countries preferring more public, grant-based money and developed ones calling for more financing and private money.
If the point of international climate finance is to shift some of the cost of mitigation and adaptation onto developed countries, then a significant fraction of that money has to be in the form of grants, or else loans that are deeply discounted so that borrowers save on interest payments. Market-rate loans can still be valuable in countries where capital markets are not well developed and green projects have trouble getting loans, but they do not truly shift much of the cost onto developed countries; the lender is still ultimately repaid by his developing-country counterpart. For this reason, developing countries are also skeptical of claims by developed countries that private climate finance (which is more likely to be in the form of market rate loans) should qualify as climate finance.
The distinction between grants and loans is not the only major topic up for debate when it comes to climate finance at COP 21 this year. Countries are also debating what institutions that money should flow through. Must they flow through official UN channels? What about development bank institutions like the World Bank, or money from national aid agencies like USAID?
The UNFCCC has a formal Financial Mechanism to oversee the issue of climate finance, and this mechanism is party overseen by the Global Environmental Facility (GEF), which has been around since XX. At COP 17, the Green Climate Fund was also created within the Financial Mechanism; it recently completed its first round of investments with some controversy. Under pressure to make its first disbursements before COP-21, some are worried that it cut corners on transparency, ”social and environmental safeguards,” and impact metrics. These worries make developed nations less comfortable routing their money through the GCF, and they have been pushing developing nations to accept other sources of international climate financing.
Over the next two weeks, finance will be the issue to watch; many developing countries’ INDCs are contingent on receiving sufficient financing. The issues of grants vs loans, public vs private sources of funding, and what institutions are used will be hot-button issues, and the answers will have important implications for how much progress is made not only towards climate mitigation and adaptation, but also towards ensuring a better quality of life for billions of people in the developing world.
