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3 Lessons for Long-Term Climate Finance

Developed countries pledged to deliver US$ 100 billion per year by 2020 to help developing nations mitigate and adapt to the impacts of climate change. Mobilizing this finance —and securing more climate finance in the future—are two topics high on the COP 19 agenda this week.

But to understand where the climate finance agenda is likely to go, it is first necessary to grasp where it stands today. To that end, Overseas Development Institute, WRI, and IGES – in partnership with the Open Climate Network – have conducted the first in-depth examination of Fast Start Finance (FSF), the period from 2010-2012 in which developed nations pledged to deliver US$ 30 billion in climate finance. As of September 2013, countries reported providing $35 billion in public FSF from 2010 through 2012, exceeding their pledge. Just five countries – Germany, Japan, Norway, the United Kingdom and the United States— provided US$ 27 billion of this finance.

5 Key Features of Fast Start Finance

Our analysis came to five conclusions about the FSF period, including:

  1. Countries chose what type of funding to “count” as climate finance. They’ve taken divergent approaches. For example, Japan and the United States included non-grant public finance as FSF, while the other top contributors did not. As a result, the largest share of FSF – 48 percent – was provided as loans (recorded at face value), and 40 percent was provided as grants. While responding to climate change as an investment challenge will require many different forms of public finance, each plays a particular role, and these may not be substitutable.

  2. Mitigation got the lion’s share. One desired outcome of the FSF period was to increase funding to help developing countries adapt to climate change. While adaptation finance increased in absolute terms to $5 billion, mitigation (including initiatives to address emissions from deforestation) received more than four times this amount ($22 billion). This gap in part reflects the fact that loans, guarantees, and other instruments that leverage additional finance were used almost exclusively for mitigation. However, some developing countries are highly vulnerable to the impacts of climate change and are hungry for adaptation support.

  3. Not all of this funding was new or additional. While the UNFCCC stated that funding must be “new and additional” to be considered FSF, our analysis found that in many cases, programs that were funded prior to the FSF period were included. There is significant overlap between climate finance and development finance. Development and climate change are integrally linked, and developed countries counted more than 80 percent of FSF as official development assistance (ODA). The growing use of ODA for climate purposes does not yet appear to have affected the geographic distribution of ODA.

  4. FSF does not appear to have focused strongly on emission reductions or vulnerability. The distribution of FSF was not strongly correlated either with the vulnerability of recipient countries to the impacts of climate change, or with their GHG emissions. This raises questions about how well FSF was targeted. Tensions between ODA and climate finance may emerge if either were more precisely targeted. Many countries are trying to spend ODA in poor countries, with a focus on poverty reduction. This emphasis may make it difficult to continue to rely heavily on ODA for mitigation, which may be less directly linked to poverty reduction and will be most needed in middle-income countries where GHG emissions are growing rapidly.

  5. Most finance did not go directly to developing countries’ governments. Only 35 percent went directly to recipient country governments. The majority of finance was directed through international climate funds, multilateral development banks, and UN agencies, as well as private companies and NGOs, which then work with developing countries on climate-related initiatives. This may help explain why some developing countries have said that they did not see the results of FSF, even though developed countries report providing large sums. Limitations in current reporting practices may have compounded these misunderstandings

3 Lessons for Long-Term Finance

It’s still too early to assess how well finance has been used during the FSF period—continued analysis will be essential to understand what makes for an effective use of climate finance. But the FSF period offers three important lessons for the delivery of long-term finance.

  • First, there are opportunities to better target climate finance to address emissions growth and vulnerability in developing countries. But to make good use of available finance, developing countries will also need to take the initiative to implement sound strategies for using this finance. They will need to align their policy, regulatory, and governance arrangements with climate-compatible development. For example, countries could reduce subsidies for fossil fuels, or adopt renewable energy targets to promote investment in wind and solar power.

  • Second, better transparency on the delivery and use of finance in both developed and developing countries is needed. This will provide mutual accountability, supporting a shared understanding of the extent to which developed countries are meeting their commitments and whether funding is being used effectively. Many countries improved their reporting during the FSF period. It remains to be seen whether these good practices will continue. There are already tools to help countries report on projects that they supported -- for example through the adoption of the International Aid Transparency Initiative standards -- and which could be tailored to facilitate transparency on climate finance. Multilateral climate funds such as the CIF and GEF have already adopted the standard.

  • Finally, finance targets cannot be ends in and of themselves. These targets need to be met in a spirit that is true to the ultimate objective of using available public climate finance and policy tools to direct investment towards climate-compatible development. Research shows that limiting global warming to 2 degrees C will require shifting $5.7 trillion away from business-as-usual activities and toward sustainable development projects. Thus, climate considerations need to be incorporated into mainstream investment decisions and into all development assistance initiatives. Going forward, it will be important to find ways to mobilize finance consistent with internationally agreed upon principles within the context of diverse political and social circumstances at the national level.

The FSF period yielded valuable lessons. Now we need to learn from them as we mobilize finance to effectively meet the scale of the climate change challenge.

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