Are we nearly there? Building future climate finance architecture

Meeting Hosted by the Climate Finance Working Group of Bond's Development and Environment Group

8 September 2009 | Event

Representatives from UK NGOs met with officials from DFID, DECC and Treasury to discuss climate finance issues using “Are we Nearly There? Bridging UK supported funds and a post 2012 climate architecture”, a report prepared by members of Bond’s Development and Environment Group and the Bretton Woods Project as a point of departure.

The event gathered approximately 40 people to talk over key findings of the report and maintain dialogue between civil society and government related to governance and architecture of climate finance, concerns and recommendations for the way forward.

Civil society concerns

Civil society highlighted that the UK has provided some important leadership and has taken steps through the PM’s initiative such as announcing that climate finance should be additional to 0.7% for aid and calling for greater commitment to climate finance.

Nonetheless civil society concerns remain that climate pilots are not setting the right precedents and will not take us towards a desired and equitable post 2012 climate finance architecture. Among the most salient concerns expressed by civil society participants regarding the current pilots, and general principles for the future architecture were:

  • The provision of loans, even if highly concessional, particularly for adaptation funding goes against the notion that climate finance is a restitution payment.
  • The northern countries’ repeated support for using existing financial mechanisms and institutions, such as the World Bank, has caused concern amongst civil society about whether this indicates a move away from the sunset clause which phases out the Climate Investment Funds, and towards Climate Investment Funds housed at the World Bank post 2012 rather than invest in the UNFCCC.
  • Carbon off-setting should not be a primary source of finance and for some should play no role what so-ever.
  • Public money should be channelled into starting up renewable energy initiatives since the seed money to make it viable is not likely to come from the private sector. Additionally public finance should not support coal and continued fossil fuel/ carbon intensive development models. NGOs had concerns about the Clean Technology Fund guidelines allowing for the funding of the additional costs of ultra-supercritical, CCS-ready coal-fired plants.
  • The World Bank in its current format is the wrong institution for climate finance due to overall imbalances in governance between North and South in the institution, creating a lack of trust with developing countries and the fact that the Bank has large fossil fuel investments which continue to be increased and factored heavily into proposals for the Bank’s energy investment strategy for the next 10 years.
  • The Partnership Forum has not been very effective in enabling civil society engagement in the Climate Investment Funds. The UK has advocated for making this process work better.

A further presentation highlighted possibilities for further development of a future post-2012 architecture highlighting trade offs between the various characteristics of finance:

  • Coordination-vs.- consolidation (Coordination among different institutions as opposed to consolidating financing into a single institution under the UN)
  • Centralized-vs.- decentralized
  • Devolved control (to developing countries)-vs.- retained control

Any combination of these characteristics would work and has been embodied in different government proposals. However, they will have significantly different political outcomes and appeals to various groups.

HMG response to some of the concerns raised

With respect to loans for climate change, it was argued that if loans were proven to be technically effective, then it was their effectiveness which should be the criterion used to judge them.

Furthermore, in discussions related to technology, HMG argued that coal is a reality for energy security reasons for major developing countries. It will be part of the future energy mix so this needs to be addressed. The World Bank responds to country proposals for energy investment, one cannot dictate “no coal” to developing countries, this is a sovereignty issue and not negotiable.

The CTF requires ultra-supercritical CCS-ready coal power stations, this was agreed by developed and developing countries on the trust fund committee. It is a very demanding standard and no money has gone to coal yet. The UK has proposed very stringent stretch targets which require MDB’s to increase the proportion of their clean energy lending.

UK priorities and lessons learned

Government highlighted financing priorities and the UK role along with the opportunity that the Climate Investment Funds have provided for garnering lessons to apply to a post 2012 finance mechanism. HMG participants in the event emphasized needing to find a middle ground between the recipients controlling finance and donors dictating how finance is used. This highlights the need for an “adult relationship” between donors and recipient countries. The UK has proposed “the compact approach”. Its key features are:

  • Finance at scale
  • Ambitious, credible, country-owned national plans
  • High-level body
  • Thematic bodies
  • National allocation frameworks

Participants further emphasized that:

  • Climate change architecture must agree the scale of the challenge, shared goals and actions
  • Finance should be above existing ODA commitments and ODA itself should be ‘climate-proofed’.
  • Any agreement on climate may shift focus first on the functions that need to be provided, than on the means of delivering these functions. Existing institutions should be considered on the basis of how best impact can be delivered.
  • There must be an expanded and enhanced global carbon market
  • The CIFs demonstrate the UK’s Compact Approach in which northern and southern countries can discuss strategy and then move on to a programmatic approach.

There is a strong desire to apply lessons from the Climate Investment Funds within HMG and the World Bank. These include positive and negative lessons, which from preliminary government analyses include key lessons:

  • Importance of balanced representation: equitable governance structures, power devolved to the national level, a country-led process, and the principle of direct budget access.
  • Importance of broad stakeholder involvement: the MDBs, UNFCCC, UNDP and UNEP; NGO and private sector representatives have ‘active observer’ status; consultation needs to start as early as possible.
  • Importance of efficient decision-making: CIFs committees make decisions by consensus, separation of political and technical bodies according to theircompetence has worked well.
  • Importance of credible allocation criteria: Robust, transparent criteria agreed by all from the beginning are essential e.g. PPCR Expert Group, the absence of these for the CTF has been a challenge.
  • Importance of programmatic national plans: integrate mitigation and adaptation action into development. Significant development for some donors to move away from projectised spending. This needs to be mainstreamed into MDB lending as well.
  • Importance of delivery at scale and speed: countries producing plans rapidly and structures being set up in a matter of months due to political momentum, a light-touch and programmatic approach. However, there is a risk that increased speed is at the expense of civil society consultation.
  • Importance of leverage and financial mechanisms: public funds being carefully designed and flexible to lever maximum private finance co-financing, it can be challenging to cater to the national government and private sector requirements.
  • Importance of MRV frameworks: considerable work is needed to ensure that multi-donor mechanisms adopt simple, robust and high quality performance frameworks which combine climate change and development objectives and are built into the country plan at the beginning.

Following presentations, discussion revolved around concerns about the phasing-out of the Climate Investment Funds, how to move toward low-carbon development models, civil society participation and how to generate the finance needed for meeting the scale of the challenge ahead. Furthermore, there were discussions about comparing similar patterns from when the Global Environmental Facility was developed that are currently being replicated and could be learned from.

Overall, participants from both civil society and government agreed that there is room for further engagement toward an agreement in Copenhagen and in defining further details regarding operationalisation and implementation that will follow the international negotiations. HMG urged increased engagement by civil society in learning lessons for the future climate change architecture and highlighted that CSOs have a real opportunity to influence if they engage where real impact can be achieved.