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Following the Money in an International Climate Agreement

Athena Ballesteros explains how international climate finance could make or break a deal in Copenhagen.

WRI has released a new paper on climate finance. What is climate finance and why is it important in climate negotiations?

In order to avoid the worst impacts of climate change, the world will have to act quickly and at scale. Developing countries have indicated their readiness to act, alongside the industrialized nations. But to do so, they will need significant financial support. Such assistance is necessary to help developing countries deal with climate change by: adapting to its destructive impacts, such as stronger storms, droughts, and sea level rises; reducing greenhouse gases by switching to cleaner fuels and energy sources; and building capacity so that they have the expertise and institutions to make the necessary changes.

This support will come in a range of forms – private investment and carbon markets, but also public finance. Though there is increasing agreement about the amount of finance required to satisfactorily tackle climate change, there is still no consensus on how this money will be actually be delivered.

Traditionally, aid has been managed by existing institutions like the World Bank, which in turn have been controlled by the developed, donor countries. The climate issue is different. It is not only about giving aid but also about jointly solving a common problem. Therefore, a new global agreement on climate finance is likely to significantly redistribute power, responsibility, and accountability between traditional donor and recipient countries. This is both long overdue and necessary.

Why is climate finance being described as a deal breaker in Copenhagen?

Climate finance is one of the most contentious issues in the ongoing negotiations among the 192 member countries of the UN Framework Convention on Climate Change (UNFCCC). Whichever finance mechanism they choose will mobilize and then allocate funds, prepare and approve projects, provide technical advice, set standards for performance, and then monitor projects to ensure that they are held accountable. It is a huge task, so it is no wonder that its design and governance has been a sticking point in the negotiations between developed and developing countries.

The key point of contention is whether this job should be done by existing institutions, which are traditionally dominated by developed countries, or by creating reformed or new institutions that would provide a greater voice for developing countries. There is also heated debate over whether money should be administered and distributed by one large, centralized institution, or through a decentralized approach, one that would incorporate international, regional, and national institutions.

How does a new publication from WRI inform the negotiations?

Power, Responsibility, and Accountability: Rethinking the Legitimacy of Institutions of Climate Finance is meant to draw lessons for negotiators. We reviewed the governance structures, operational procedures, and records of 11 international and national climate funds to see what has been most effective to date. This is the first publication to move beyond the issue of “which institution will we use?” and explore an equally important issue: “what will it take for these institutions to have legitimacy?”

What do you mean by “legitimacy?”

No matter what institutions are eventually charged with managing these new flows of climate finance, they will only be successful if both donor and recipient countries see them as legitimate. The key elements we identified as required for legitimacy are power, responsibility, and accountability.

  • Power: To be legitimate, the distribution of power within the governing body of the financial institution has to be balanced. We examined whether developed and developing countries have an equal say in how existing funds are managed and operated. Looking ahead, if existing institutions are to meet evolving standards of legitimacy, then their fundamental governance structures, operational procedures, and institutional capacities will need to be reformed.

  • Responsibility: Efforts to address climate change must be “country-driven” and reflect national priorities and circumstances in order to be successful, rather than being mandated by donor countries. Direct access to climate funds is important in enabling developing countries to take direct responsibility at the country level without having to rely on implementing agencies such as the World Bank or the UN Development Program (UNDP), or having to navigate layers of donor conditionality.

  • Accountability: Strong provisions for accountability are needed to ensure that money is managed well, to promote good governance, and to manage potential environmental and social impacts. If done well, the institutional re-designs that shift power and responsibility towards developing countries will also entail more accountability for how the money is spent.

Can existing institutions follow this framework for legitimacy?

Our research finds that relying on existing institutions could work if significant reforms are put in place. For example, if the World Bank wants to continue to play a role, it needs to demonstrate to both member countries and civil society that it is willing to embrace fundamental changes in its governance structures and operational procedures in order to give greater voice to developing countries. This would include (through the guidance and authority of the Parties to the UNFCCC) taking advice from civil society, technical experts, and the private sector.

To be viewed as legitimate, the Bank’s “business as usual” practices – including its support for fossil fuel projects in developing countries, and its minimal attention to climate change and low-carbon development strategies – will need to change.

What are some of the critical elements of a climate finance agreement in Copenhagen?

First, we need an agreement on a fund that can put money towards a range of urgent purposes, such as adaptation to the impacts of climate change, technology transfer, and greenhouse gas reduction measures, including reducing emissions from deforestation and forest degradation (REDD). In addition, a climate fund must be able to trigger new, additional and predictable climate funding from many other sources, including the private sector, carbon markets, and national public and private finance sources.

The fund must have a governing body that will oversee its operations under the guidance and authority of the Conference of the Parties (COP) to the UNFCCC, with equitable and balanced representation from both developed and developing countries, and with input from civil society and technical experts.

The international community must also de-link the source of finance from the power and influence traditionally exerted by donor countries, for example by adopting new levies such as those on Clean Development Mechanism (CDM) projects. Also essential is agreement to scale up existing climate financing. Yvo de Boer, UNFCCC chief, recently estimated that funding needed “both to curb emissions and help people adapt to changes such as droughts or floods could total $250 billion per year in 2020.” Whatever financing is agreed in Copenhagen should include immediate mobilization of at least 10 billion dollars. This ‘start-up’ fund is urgently needed to help the poorest countries to build capacity to design and implement adaptation and low carbon development plans.

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