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World Bank manoeuvres to influence climate finance debates

21 November 2011

As the next round of global climate negotiations approaches, the World Bank advocates the use of private sector finance for climate change adaptation and mitigation, and pushes multilateral development banks as delivery mechanisms.

An early October report on mobilising climate finance was coordinated and produced for the G20 by the World Bank in the run up to the United Nations Framework Convention on Climate Change (UNFCCC) negotiations, which begin in late November in Durban, South Africa. The G20 had previously avoided taking an active role, as developing country members were concerned doing so could undermine the UN process. The report, Mobilising climate finance, highlights the importance of eliminating fossil-fuel subsidies and of implementing a carbon tax on aviation and shipping, which have long been demanded by civil society groups. It also advocates controversial measures to boost ailing carbon markets (see Update 78). It argues that meeting the UNFCCC-agreed goal of mobilising $100 billion a year of climate finance will not be achievable through public budgetary allocations. It states that “the dominant scale of global private capital markets and growing fiscal challenges in many developed economies also suggest that the large financial flows required for climate stabilisation and adaptation will, in the long run, be mainly private in composition.”

This is in sharp contrast to a late August UN note commenting on a draft of the paper, which says that “many developing countries have struggled to benefit from private flows or participate in market-based sources”. In a recommendation that went unheeded, it says that “the G20 paper can benefit from giving due weight to direct budget contributions, as well as including additional sources, such as a financial transaction tax or SDRs [special drawing rights, the IMF-managed international reserve asset, see Update 65].”

Enter private finance

The reports’ discussion of public climate finance centres on its use to leverage large amounts of private lending, with a whole section part-authored by the Bank’s private sector arm, the International Finance Corporation (IFC). It emphasises the role multilateral development banks (MDBs) can play in this process. “Multilateral development banks (MDBs) are themselves an institutional device to help mobilise private savings for development purposes”. It uses the example of the Bank-housed Climate Investment Funds (CIFs) to illustrate the potential for MDB-operated pooled financing arrangements to use a variety of financial instruments to leverage private finance. The IFC plays a prominent role at the CIFs, implementing a range of private sector projects, often through financial intermediaries (see Update 77,76, 75, 73, 68).

However, a September 2011 report by Swiss NGO the Berne Declaration argues that the leveraging potential of CIFs has been overestimated. The report examines the Clean Technology Fund (CTF, one of the CIFs) in Turkey. The CTF programme in Turkey is implemented by financial intermediaries, in this case two national banks. It finds that in the energy efficiency sector the CTF largely achieved its official objectives of removing first-mover hurdles and stimulating private investment. However, it questions the impact on hydropower, which “is already marketable and we have not found evidence that the comparatively large portion of CTF money invested in hydropower has had a positive spill-over effect and leveraged investment into other renewable energies. In addition, there are serious concerns about the environmental and social risks of hydropower projects … Despite the highly concessional CTF incentive, only five wind energy projects and one geo-thermal power project were supported, compared with 26 energy efficiency and 30 hydro-power projects.”

The UN note observes that MDB-leveraged private finance “is relatively constrained in its flexibility, and is typically used in financial instruments and investments. Climate finance from public sources, on the other hand, has the maximum flexibility and can be utilised in a range of ways, from public policy to investments.”

The Green Climate Fund

The design document for the new Green Climate Fund (GCF) (see Update 77, 76, 75), put together by a transitional committee of 40 countries, will go to Durban for approval without all committee members approving the final plan. In what has been branded by many as a failure, the committee did not reach consensus on the final text, with the USA, followed by Saudi Arabia, outright rejecting the document. It was claimed by many observers that the USA blocked consensus in order to use the fund as a bargaining chip at the summit in Durban.

The US cited concerns over many issues, including the authority of the UNFCCC over the GCF. This included a stipulation that the UNFCCC should choose the host country for the GCF. The UK also disapproved of this measure. Suspicions linger that the US is resistant to this plan because it would make it difficult, if the GCF was based in developing country, for them to insist the Bank be its secretariat. Another US red flag was the proposal that the GCF should have its own legal personality. Liane Schalatek, of the German political foundation Heinrich Böll, notes that this stance is based on “the implication that ultimately the status needed could also be derived through an existing international entity like the World Bank; a clear no-go from the developing country side.”

The Bank has already been announced as interim trustee of the GCF, but developing countries and civil society groups have been actively resisting any expansion of this role. Laurence Graff, head of the international and inter-institutional relations unit at the European Commission, told the press in November that “the issue is indeed whether the fund should be allowed to carry out its own projects without resorting to the World Bank. That is still open (to discussion).”

In October the Nepalese Campaign for Climate Justice Network (CCJN) demonstrated outside the Bank offices in Kathmandu against a role for the Bank in the GCF. “The World Bank, responsible for increasing vulnerabilities of developing countries, should not be given the right to channel funds from the Green Climate Fund”, said CCJN member Sarba Raj Khadka.

Many developing countries also raised concerns over the design document, although without blocking it, including on the inclusion of a proposal for the GCF to include a private sector facility. Several developed countries in committee negotiations emphasised the potential for the facility to leverage large amounts of private finance. The final text referenced a facility with the ability to “directly and indirectly finance private sector mitigation and adaptation facilities”. As Schalatek notes, this was “a bitter pill for most developing countries to swallow”, many of whom have maintained that the GCF should be mainly financed through new and additional public contributions from developed countries.

Civil society groups have also been warning of the dangers of a facility premised on private finance. Lidy Nacpil of international network Climate Justice Now! said in September that “The proposal for a private sector window in the GCF is worryingly reminiscent of the [IFC], which performs poorly in relation to the Bank’s stated mission of alleviating poverty and promoting sustainable development in developing countries. Alarmingly, almost two-thirds of IFC investments in low-income countries go to companies based in the richest countries.”

Nacpil also echoed many civil society groups’ concerns over the environmental and social impacts of financial intermediary projects (see Update 76, 74): “the over-emphasis on leveraging private investment could lead to a fund that depends heavily on financial intermediaries. As demonstrated by the IFC, the financial sector’s desire for less disclosure, less liability, and less accountability for environmental and social outcomes will pose a significant challenge for global efforts to promote sustainable development and climate stabilisation.”