Climate finance: issues still remain between rich, poor states

Ministers who attended the world finance ministers’ meeting on climate finance in Lima this week say it has helped to build trust between developed and developing countries. But thorny issues for negotiation remain, with only weeks to go until the crucial Paris summit in December.

  • By Thierry Ogier, Lucien Chauvin, Oliver West, Jon Hay
  • 11 Oct 2015
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 The two hour meeting on Friday, convened by Peru and France as outgoing and ingoing chairs of the UN COP negotiating process on climate change, was intended to garner support among developing countries for a climate deal.

They have seen rich nations, which promised at Copenhagen in 2009 to be channelling $100bn of finance a year to the South from 2020, take six years and still not have a coordinated plan for how to come up with the money.

In September, 18 developed states and the European Commission finally agreed an outline of what should count, but this has not been fully defined or agreed with the developing states.

Now, with just weeks to go till the crunch meeting in Paris, the rich states urgently need to present a “politically credible pathway”, in the commonly used jargon this week, to the $100bn target.

That meant the $100bn would not all be accounted for in time for Paris, but it would be clear enough to developing nations how the target would be achieved, so that they were willing to sign up to a deal.

In a vast hall at the Lima Convention Centre, some 50 finance ministers and 20 heads of organisations listened to 27 speeches, supposed to be two minutes each, besides the introductory words from Peru, France, UN secretary-general Ban Ki-Moon and the presentation of two reports on climate finance.

The crucial one, prepared by the OECD, was the first census of how much the rich countries are actually doing now. It found they provided $52bn in 2013 and $62bn in 2014.

“It’s a bit higher than I would have thought – a very positive outcome,” said Christian Grossmann, climate director at the International Finance Corp.

Many of the speeches consisted of countries including the Netherlands and Luxembourg and bodies such as the World Bank committing extra funds (see table below).

“Climate change is the preeminent challenge of our time. We need financing to mitigate and adapt to its impacts,” said Asian Development Bank president Takehiko Nakao, in a comment that reflects how the climate has moved to centre stage for all the multilateral development banks in the last few years, but especially in 2015. “Action on the global climate is essential to attain other development goals, such as poverty elimination, water and food security, and sustainable economic growth,” Nakao said.


A useful step

Peru, France, the UN and the OECD have presented the report as a successful confidence-building exercise. It shows the $100bn target has not been reached yet, but that at least a common methodology has begun to be established for counting who is doing what.

Friday’s meeting was never going to produce a formal collective decision on climate finance – not even to accept the OECD report.

During the debate that followed, both China and India raised questions about the methodology used in the OECD’s survey.

India asked, according to the paraphrase of a witness, “are we sure this is not just a nice way to shift ODA [overseas development assistance] from one place to another?”


New money or old?

Ever since Copenhagen, several difficult questions have surrounded the vague $100bn pledge. One is that it was supposed not to be achieved by diverting money from existing aid budgets.

But it is hard to verify that this is not done. Asked by Emerging Markets at a press conference on Wednesday whether the OECD had checked that its $62bn did not include rebadged aid, OECD secretary-general Angel Gurria, said: “It’s something we’ll only know later. We have to count ODA and climate finance. This is not an ODA count. The route towards $100bn is not about ODA — it’s about all sources of finance. It’s not [just] about concessional finance either.”

He added that with interest rates so low, there was not a great difference between concessional finance and loans at normal rates, and emphasised that “we went painstakingly into each of our sources to make sure it was a hard number — not duplication, and that we were not counting intentions or commitments,” just actual financing.

This clarity appeared to concern only the internal consistency of the data on 2013 and 2014, not whether this climate finance activity was additional to what the rich states were doing before Copenhagen, or included flows diverted from aid budgets in intervening years.

Janos Pasztor, the UN assistant-secretary general on climate change, has experience of trying to build a method to check ‘additionality’, having helped to design one for the Clean Development Mechanism that followed the Kyoto Treaty in 1997.

Although that was completed, he said it was difficult. “Let’s not push additionality too far,” he said. “If you get in any formal way into the concept of additionality, you’ll never get there.”

Pasztor said the Copenhagen promise was that “we will mobilise $100bn annually by 2020 from all sources” — so it was not explicit that no budgets that had existed before 2009 could be counted.

Joe Thwaites, sustainability research analyst at the World Resources Institute, pointed out that there was a tension between the desire for additionality and ‘mainstreaming’ – the idea that all development finance should become sustainable.

“Many donors do count ODA” towards their climate finance totals, Thwaites said, but added “is it diversion or are ODA projects” simply more likely now to tackle the climate.

At the ministerial meeting, Gurria answered India’s question by saying that the OECD was in charge of counting ODA as well, so was in a good position to be able to check aid was not being diverted. This is through the Development Assistance Committee, an international system for accounting for aid.

“Gurria said they had not seen any shifts,” said one participant at the meeting. “They identified that $19bn of the $62bn was part of ODA, but it had always been earmarked for climate — that was not a change.”

Gurria said the OECD would be very transparent and that if any country diverted substantial funds from one part of ODA to climate financing, he would make sure it was brought to public attention.

China also questioned the OECD’s methodology, on a more technical point about  how callable capital was counted.

Gurria answered that the OECD had counted 10% of this, but that if that percentage was reduced to zero, the total figure would only fall by about $1bn.


Public or private?

A second important grey area about the $100bn pledge is how much of it can be from the private sector. The Copenhagen text left it open so that private money could be counted, but gave no guidance as to how much.

In the years since, developed countries have pushed for a high percentage of public aid, while rich states have argued for more leeway to count private flows.

According to the OECD report, of the $57bn average yearly financing across 2013-14, $23bn (40%) was provided bilaterally by governments, $18bn (32%) by multilateral development banks, $2.4bn by multilateral climate funds and UN bodies, $1.6bn in export credits, mainly for renewable energy.

The other 26% came from the private sector, split into $7.3bn of co-investment with bilateral projects, and $7.4bn of co-financing with MDB projects.

Whether money comes from public or private coffers matters, because there is a leverage effect.

All involved in climate finance emphasise that public investment attracts extra private dollars.

Grossmann at the IFC said that in the year to June 2015, the IFC did $2.3bn of climate financing, which brought in $2.2bn of private co-financing.

But that means the more public money there is in the first place, the larger, by a multiple, is the total investment. If the leverage factor was three — the rule of thumb used by the European Investment Bank for its normal lending — $100bn of public money would mobilise $300bn of total investment, while $70bn of public money would bring only $210bn.

The European Investment Bank, in its new European Fund for Strategic Investment, will make riskier investments, so is expecting a higher multiple for private financing of five.

Although developing countries have in the past pushed the developed ones on the quantum of public money, none are understood to have raised the issue in Friday’s meeting.

The OECD has tried to be fairly conservative in its approach to counting private money, only including amounts provided in specific co-financing arrangements with the public sector.

Thwaites at the World Resources Institute said: “The public sector has to lead the way. It has to show these are safe investments. If the government puts money in, it shows it is not a risky move for the private sector to do the same. What’s clear is there needs to be more public finance.”


Low multiple

Another observation to emerge from the OECD report is that the co-financing multiplier achieved so far has been quite slight: only about 1.3 for the bilateral projects and 1.4 for the MDB ones.

That is not particularly encouraging when many involved in climate policy say at least $1tr of investment a year will be needed, just for renewable energy — never mind other aspects of mitigating and adapting to climate change.

Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change, told Emerging Markets the $100bn “is a political pledge and a commitment, but this transformation is about trillions, not billions. It is about changes in the financial system that will make the transition to trillions possible.”


Protection needed

A further area of concern for developing countries is the shortage of funds for adaptation to the effects of climate change, rather than trying to slow the process, known as mitigation.

This is typically less attractive to donors and lenders because the needs may be harder to define, investment cases difficult to justify because little is known about how climate change effects will develop, and the prospects of returns are unclear.

While wind farms and even energy efficiency projects can generate revenues, flood defences do not.

Yet adaptation is the sharp end of the battle against climate change for many developing countries.

“This is really a defining challenge of our generation, because we should not pass on the solution to the next generation,” Cesar Purisima, finance minister of the Philippines, told Emerging Markets. “Various estimates have shown that just to cope with a 2% increase in temperatures we will need over $90tr in investment.”

Purisima added that extreme weather conditions were already happening, such as recent floods in the US.

After Typhoon Haiyan devastated parts of the Philippines in 2013, “the people who were just above the poverty line slipped back into poverty because of climate change,” he said.

The OECD estimated 77% of North-South climate financing is going to mitigating (slowing) climate change, 16% to adaptation and 7% to activities that have elements of both. For the private flows, over 90% went to mitigation.

Manuel Pulgar-Vidal, Peru’s environment minister, said the shortage of adaptation finance was discussed at the ministers’ meeting and that it was “important to explore ways to increase the flow”.

Thwaites said one possibility might be a commitment by the developed countries to commit a certain percentage of their contributions to adaptation finance, and perhaps a pledge that this part would be public funds.


Which is which?

After the OECD report, the UN presented to ministers another report prepared by its climate team under Pasztor on trends in private sector climate finance.

It highlighted progress in five areas: financial institutions committing “hundreds of billions of dollars in additional finance”; the growth of the green bond market; companies adopting internal carbon pricing; investors expressing concern about carbon-intensive companies; and the insurance sector covering more climate and weather risks.

A final issue that may need to be defined in the Paris talks is which countries count as developed and which as developing, and whether all of the developing states should be eligible for climate finance, or choose to ask for it.

The two camps are defined by criteria in the UN Framework Convention on Climate Change, signed in 1992. Since then, some countries’ wealth has changed dramatically.

But although there have been some changes to the lists over the years, securing agreement is difficult because it requires consensus.

China, Singapore and South Korea are all still classed as developing countries, while Turkey counts as developed.



Asked by Emerging Markets at a press conference on Saturday whether the meeting had helped to reassure developing nations about the developed world’s commitment to climate finance, Michel Sapin, French finance minister, said: “The OECD methodology to assess the current climate financing has not been questioned. I have noted a great concern of course regarding possible cuts in development financing, which would be transformed into financing against climate change. Of course, such concern has been voiced.

“But I think there is no opposition between these two elements, this is the argument we have been developing. Both are priorities regarding the selection of projects. What I can say is that there has been a positive and considerable increase in mutual understanding during this meeting.”

Nevertheless, forbearance will be required from the developing countries.

Bob Ward at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, chaired by Lord Nicholas Stern, told Emerging Markets’ sister publication GlobalCapital recently that countries’ pledges to cut emissions so far implied that the world would be emitting 55bn-60bn tonnes of CO2 by 2030, up from 50bn now. “A path that would give us a 50-50 chance of avoiding 2°C warming would need to be around 35bn tonnes by 2030, and below 20bn by 2050,” Ward said.

If there is a deal in Paris, it looks set to put the world on a path to warming of 3°C to 4°C.

Jean-Paul Adam, the Seychelles’ minster of finance, trade and the blue economy, said this week: “There is a very big risk that when we add up the contributions we will probably not meet the target of 2°, which is the essential number. But there is no way that developed countries can expect island states to sign up to any agreement that locks in more than two degrees, because that is essentially saying that we accept that certain islands are sunk.”

But Adam added: “If we cannot reach the target in Paris, it does not mean the end of the road. Rather, it should mean we redouble the efforts to achieve the targets. I’m always optimistic, and the level of engagement is much higher than it has been at any point in the past. The fact we’ve had had such high profile announcements from the US, China, EU are steps in right direction. There is a spur to action, and a real understanding in developing countries such as China that they are already being affected by climate change. If we build on the political momentum that exists now it is feasible.”

Asked what his country’s needs were, Maalia Toafa, finance minister of Tuvalu, said: “Primary one is to save Tuvalu and save the people of Tuvalu. Our people don’t want to leave Tuvalu. That is the primary objective and in the government we have to come up with a way to save the country.”


Some commitments on climate finance


Annual payments

                            Present figure  2020 promise

France                  $3.3bn             $5.6bn

Germany             $2.2bn             $4.5bn

UK                      $1.3bn             $2.7bn

ADB                    $3bn                $6bn

AfDB                  $1.7bn             $5bn

IADB                  14% of financing     25%-30%

EIB                      at least 25% of financing (implying c$22bn), but much of this may be spent in EU, not developing countries

World Bank Gp   $10.3bn           $16bn

EBRD                  $3bn                c$4bn


Non-annual payments

US                       $3bn pledge to Green Climate Fund

China                   Rmb20bn ($3.2bn) to set up China South-South Climate Cooperation Fund


Sources: World Resources Institute, others

  • By Thierry Ogier, Lucien Chauvin, Oliver West, Jon Hay
  • 11 Oct 2015

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