Power, Responsibility, and Accountability: Re-Thinking the Legitimacy of Institutions for Climate Finance

As the December deadline looms to conclude a new agreement under the UN Framework Convention on Climate Change (UNFCCC), negotiators have yet to agree on how to finance cuts in greenhouse gas (GHG) emissions while meeting the energy needs of developing countries. If a global deal is to be struck, many estimate that developed countries will need to commit tens of billions of dollars of public money to support developing country efforts. With little money on the table, disagreement remains on whether these billions should be entrusted to new or existing institutions. There is also heated debate over whether a single centralized institution or a decentralized approach that coordinates international, regional and national institutions would be more effective.

Broadly speaking, industrialized nations want to continue to rely on existing institutions they have funded and led for the past 60 years. Developing countries prefer new institutions, arguing that existing ones favor donor interests, and have failed to deliver on promises to support poverty alleviation and development. Delegations‟ proposals to the UNFCCC reflect this gulf. If the institutional arrangements entrusted with managing new flows of climate finance are to succeed in raising these resources and in investing them well, they will need to be perceived as legitimate by both contributors and recipients.

Institutional Arrangements for Climate Finance: Power, Responsibility, and Accountability

This Working Paper seeks to ground the debate on climate finance in an objective analysis of ongoing efforts to finance mitigation and adaptation in developing countries. The authors step back from the question of “which institution?” should be entrusted with these funds to examine instead how governments can design a climate financial mechanism in a way that is widely perceived as legitimate. We identify three crucial dimensions of institutional legitimacy: power, responsibility and accountability. (See Box A)

We review the governance structures, operational procedures, and records to date of 10 international and national finance institutions, with reference to these core dimensions of legitimacy, to draw lessons for future institutional arrangements. We place special emphasis on the experiences thus far with the Global Environment Facility (GEF) which, since 1994 has served as the operating entity of the financial mechanism of the UNFCCC.

We conclude that a new global deal on climate finance is likely to significantly redistribute power, responsibility and accountability between traditional contributor and recipient countries. In light of the dramatic changes in global politics and the global economy in the past decades, this redistribution seems both long overdue and necessary to provide the basis for a successful global partnership on climate finance.

Building Legitimate Institutions for Climate Finance: Conclusions and Recommendations

Balancing Power:

Formal distribution of power within the governing body of any financial mechanism will color perceptions of its legitimacy. Funds recently established under the Kyoto Protocol and under the World Bank, establish separate governing committees which reflect a more balanced governance structure with equal votes and representation of contributor and recipient countries. However, these funds continue to rely on the existing institutions – so called “Implementing Agencies” such as the World Bank, UN Development Programme and the UN Environment Programme - for financial and project management. As long as the underlying power structures of these institutions remain unchanged, they will continue to reinforce existing relationships between contributors, financial institutions and recipients.

Developing countries can, through their majority representation in the COP to a climate agreement, seek to exercise power over climate financial mechanisms. But the experience of the GEF has shown that the legal and institutional means of exercising this power are limited, and developing countries and other observers continue to view the GEF as unaccountable to the COP.

Formal grants of power have generally been neutralized by other ways in which contributors exercise influence. Contributor countries continue to dominate the processes of replenishment, resource allocation and project cycle management by imposing conditionalities and standards. As long as climate financial mechanisms are dependent on voluntary contributions raised by the parliaments and finance ministries of one set of countries, and channeled to finance activities in another set of countries, donor influence is likely to check the formal power of recipients.

The economic and policy conditionalities that donors have attached to their financing in the past have been neither popular with recipient countries, nor entirely effective in achieving their objectives. But priorities and standards attached to donor resource mobilization have provided a means of prioritizing scarce development financing, and of promoting environmental and social safeguards. It is unclear how developing countries, when they are given greater power, will exercise this power responsibly without deploying similar tools.

Recommendations: If existing institutions are to meet evolving standards of legitimacy, then their fundamental governance structures, as well as their operational procedures, will need to be reformed to give greater voice to developing country recipients. If formal grants of power are to lead to the effective exercise of that power, the international community must also make greater efforts to de-link the source of finance from the exercise of informal power by donors, by adopting new levies – such as the levy on Clean Development Mechanism (CDM) projects.

Taking Responsibility:

There is a growing consensus that, to be successful, efforts to address climate change must effectively reflect national priorities and circumstances. As developing countries gain more power in the governance of financial institutions, they should be natural champions of “nationally owned” and “country driven” programming. These countries are increasingly keen to have “direct access” to climate finance through their own national institutions, by-passing traditional Implementing Agencies. Arrangements for “direct access” to finance should be supported by nationally derived and owned low GHG emissions development strategies and national adaptation programs. If these strategies and programs contain measurable, reportable and verifiable (MRV) actions, they should provide a more legitimate basis for allocating resources between countries as well as for designing programs within countries.

The Montreal Protocol Fund, Clean Technology Fund, and Forest Carbon Partnership Facility experiences suggest that countries are ready to embed proposed projects and programs in broader national planning processes, if it leads to more sustained support. But a national plan is a far easier thing to develop than “national ownership”. Too many past efforts at national planning have been rushed, and completed with limited stakeholder engagement. Going forward, the processes by which these plans are developed, and the institutions involved, will influence whether they adequately reflect and respond to national circumstances.

Recommendations: A next generation of climate finance needs to promote the responsibility of recipient countries, by strengthening the national institutions that will implement mitigation and adaptation activities, and by ensuring their transparency and accountability to citizens within countries, as well as to the international community. While it is important that Implementing Agencies provide technical support to national institutions, they should rely less on external consultants and work in closer partnership with national stakeholders. Collaborations with local independent research institutions and civil society can be particularly important to make sure climate finance proposals appropriately reflect national circumstances and priorities.

Ensuring Accountability:

If done properly, shifts of power and responsibility to developing countries, through greater voice in decision-making and “direct access” to funds, will entail greater accountability for the consequences of investment.

Many developing countries are already building the capacity of their national financial institutions to support climate friendly development. Countries including Mexico, India and Brazil have set up units within national development finance institutions that are already supporting investments in renewable energy, energy efficiency, and sustainable forest management. The trend toward greater reliance on national Implementing Agencies raises both opportunities and challenges. Recent experiments to set up national funds in developing countries to finance climate change programs have taken some significant steps to ensure good financial management of funds. Little emphasis has been placed to date on their overarching institutional accountability, or the systems in place to maximize environmental and social benefits and minimize unintended harm.

Direct access to funding for developing countries whose national institutions can demonstrate they meet fiduciary standards, and national systems for measuring, reporting and verifying funded actions are two new dimensions of a more reciprocal relationship and deeper partnership between contributors and recipients. Together, these reflect an agreement on the conditions necessary to empower developing countries to shape their own climate policies.

Recommendations: National implementing institutions that take on a greater role in climate finance need to demonstrate the capacity to be held accountable, both nationally and internationally for the results of their investments. We suggest the following standards of good governance for national implementing institutions, building on the standards to which conventional Implementing Agencies are being held accountable. First, their governance structures should be inclusive and transparent. Second, their responsibilities should be clearly articulated, and they must have the technical capacity to develop ambitious and effective programs in partnership with local stakeholders, particularly citizens and other potential program beneficiaries. It will also be essential to have strong provisions for accountability in place, including to ensure compliance with international good practice for fiduciary management, robust anti-corruption measures, and to manage potential environmental and social impacts. If these standards can be met, then national institutions may hold significant promise for climate finance.