Countdown to Copenhagen: Scaling Up Climate Change Finance

Nations can meet the challenge of financing climate mitigation and adaptation by adopting the following principles and operational guidelines.

Why Climate Finance Matters at Copenhagen

Climate change threatens devastating global impacts that will undermine the progress of development in many countries. In order to keep global temperature rise below 2 degrees, and prevent worst impacts of climate change, an international agreement in Copenhagen must facilitate a rapid transition by the world’s economies to a low carbon future.

This scenario requires governments to commit to massive investments in cleaner, safer, renewable energy technologies that will ensure climate resilient development in the future.

In line with the principle of “common but differentiated responsibility” and “respective capabilities” enshrined in the UN Framework Convention on Climate Change (UNFCCC), developed countries have the main responsibility to provide the financial, technical and policy support to enable developing countries to make this transition.

Recognizing this, a critical building block of the Bali Action Plan is the enhanced delivery of commitments on finance, technology, and capacity building.

Proposals for Generating International Finance

In order to meet the huge challenge of generating and mobilizing billions of dollars annually, countries have put forward a variety of proposals within the negotiations to mobilize financial flows. The biggest bloc of countries at the negotiating table, the G77 and China, have tabled a proposal that Annex II Parties (select developed countries) contribute 0.5 to 1% of GNP, totaling an estimated $150-300 billion dollars a year. Money would flow from developed to developing countries for mitigation, adaptation, technology transfer and capacity building programs.

Other countries and blocs, including the EU, the Alliance of Small Island States, the Least Developed Countries (LDCs), Mexico, Norway, Switzerland, and Korea have proposed raising finance through a variety of specific mechanisms. These suggestions include “green funds” with contributions according to the principle of common but differentiated responsibility; auctioning of allowances related to international carbon emissions trading; passenger or fuel levies charged on maritime and aviation transport; and a country-based levy on emissions of fossil fuels, with the least developed countries exempted.

Whichever of these proposals are taken up, some key questions will remain for negotiators:

• Will the governance of finance generated through a Copenhagen agreement be centralized or decentralized?
• Will it rely on new or existing institutions?
• Will it be directly accessible to developing countries or provided via intermediaries?
• What type of governance structure will be most fair and effective?

The principles and operational guidelines outlined below are intended to help policymakers answer these questions as they seek to design a post-2012 international framework for climate funding.

Principles for an International Financial Framework

The Copenhagen climate agreement must create new bodies to organize and manage financial flows, entrust existing institutions with this mandate, or most likely, find a way to combine both approaches. Meeting the challenge of scaling up climate finance in a way that is socially, economically and environmentally sustainable will require institutional arrangements that earn the confidence of investors, host governments, markets and the communities most affected by these investments.

To achieve this, the institutional architecture should be guided by these key principles:

• Efficiency: channels adequate, stable and predictable resources quickly to projects, programs and plans enabling maximum, low cost impact.
• Effectiveness: contributes to global climate objectives and meets the implementation requirements of developing and developed partner countries.
• Fairness: recognizes particular countries’ historical responsibility and current capacity to contribute more to help others, especially the most vulnerable, to meet the costs of addressing climate change.
• Flexibility: facilitates a wide variety of financial instruments such as public and private sector funds, loan guarantees, venture capital and private equity funds, grants, and innovative uses of carbon finance.
• Adaptability: Responds to each country’s unique circumstances, including national priorities and domestic market conditions.
• Verification: Supports the use of metrics for reporting and assessing implementation.
• Transparency: Ensures that all information relating to its operations and decisions are made public, and encourages stakeholder participation at all levels of decision making.

Operational Issues

To ensure the above principles are made operational the new financial mechanism should:

• Address the major financing gaps in the development of new and the deployment of existing clean energy technologies.
• Promote the maximum mobilization of private financing.
• Promote the adoption of national and local policy reforms that lead to greenhouse gas emission reductions.
• Ensure that the finance provided to support developing country climate mitigation actions (NAMAs) is subject to monitoring, reporting and verification.
• Promote harmonization of, and incentives for, funding flows outside the UNFCCC, via a reporting framework that ensures such flows are measurable, reportable and verifiable (MRV).
• Incentivize early action and the development and scale up of developing country mitigation actions.
• Promote innovative coalitions across public and private sectors.
• Tap diverse financial capabilities, including in-depth knowledge of financing arrangements, including grants, carbon finance, concessional loans, leasing and insurance.
• Employ mechanisms that encourage stakeholder involvement and access to information.
• Manage processes that allow for both direct access to funds – through national agencies of host governments – and indirect access to funds via financial intermediaries and implementing agencies.

Conclusion

The international community’s response to the economic crisis via stimulus investment of trillions of dollars demonstrates how, with political will, governments can expeditiously mobilize investments for dealing with global challenges at the scale required. Climate change is a global challenge on an even larger scale. To successfully negotiate a fair, robust and effective global agreement by Copenhagen, governments must focus urgently on clarifying the questions, and addressing the principles and operational issues highlighted above.

It is also important to maximize progress on finance in complementary forums such as the meetings of the G8, the G-20, the Major Economies Forum and regional processes.