WRI Publications Feed: Open Climate Network

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

Maggie Barron — Tue, 14 Dec 2010 12:27:05 -0500

Executive Summary

The 2009 Copenhagen Climate Summit left unresolved major questions about how to fund lowcarbon development in developing countries. In a high-level political declaration—the “Copenhagen Accord”—developed countries agreed to “provide new and additional resources … approaching USD 30 billion for the period 2010–2012” and to a goal of jointly mobilizing USD 100 billion a year by 2020 from both public and private sources, to address the needs of developing countries. As the negotiations on a global climate deal continue, disagreement remains on how much of these funds will come from public or private sources and whether these billions should be delivered through 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.

Although there are many variations in government positions, broadly speaking, developed countries favor a substantial role for existing institutions, such as the multilateral development banks (MDBs) that they have funded and led for the past 60 years. Developing countries prefer new institutions, arguing that existing ones favor the interests of contributor countries and have failed to deliver on promises to support poverty alleviation and sustainable development. The ongoing negotiations on a global climate deal reflect this “northsouth” gulf. Despite these differences, one thing is clear: if the institutional arrangements entrusted with managing new flows of climate finance are to succeed in raising the required resources and in investing these resources effectively, they will need to be perceived as legitimate by both contributors and recipients.

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

Box A. Dimensions of Power, Responsibility, and Accountability in the Design of a Climate Finance Mechanism

Power: The capacity—both formal and informal—to determine outcomes

How will the financial mechanism’s governance structure distribute voice and vote between and among contributors and recipients?
What role will the United Nations Framework Convention on Climate Change’s (UNFCCC) institutions, including the Conference of the Parties, play in guiding the financial mechanism?
To what extent will contributors be able to determine funding priorities by placing conditions on the resource mobilization and allocation process?
How influential will the secretariat and management staff of the financial mechanism be in determining project design and selection?
Will advisory groups, civil society observers, and local communities play a role in determining how the financial mechanism operates?

Responsibility: The exercise of power for its intended purpose

Are the financial mechanism’s standards, program priorities, and eligibility criteria strong enough to ensure its resources are invested fairly and effectively?
How do cost-sharing formulas (e.g., incremental, marginal, transformative costs) allocate responsibilities between contributor and recipient countries, and between the financial mechanisms and recipient countries?
To what extent are national institutions and local civil society entrusted with ensuring the effective design and implementation of investments?

Accountability: The standards and systems that ensure power is exercised responsibly

How does the financial mechanism measure, evaluate, and incentivize results?
Are effective environmental and social safeguards in place to ensure the investments do no harm?
How are fiduciary duties and financial management standards supported and enforced?
Are grievance and inspection mechanisms in place to ensure that standards are followed?

The full report seeks to ground the debate on the future of climate finance in an objective analysis of existing efforts to finance climate mitigation and adaptation in developing countries. The authors step back from the question of which institutions should be entrusted with new flows of climate finance 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 legitimacy: power, responsibility, and accountability (see Box A). While these three dimensions interrelate and overlap, we have found them to provide a useful analytical framework to analyze and guide choices in institutional design.

We review the governance structures, operational procedures, and records to date of 10 international and national financial mechanisms, with reference to these core dimensions of legitimacy, to draw lessons for future institutional arrangements (see Box B). We place special emphasis on the experiences with the Global Environment Facility (GEF), which, in operation since 1994, is the longest serving operating entity of the United Nations Framework Covention on Climate Change (UNFCCC) financial mechanism. In addition to the GEF, we review experiences from the Multilateral Fund for the Implementation of the Montreal Protocol, in operation since 1990, which is often referred to as a model for future funds. The remaining funds reviewed are much newer and yield more insights with regard to design, rather than operation.

We recognize that perceptions of the legitimacy of a financial mechanism are inherently subjective and that this subjectivity is revealed in the very different preferences expressed by contributor and recipient countries. We believe, however, that if governments were to discuss the dimensions of legitimacy more explicitly, the stakes and the trade-offs would become more apparent, and a more shared understanding on how to design a legitimate financial mechanism would emerge. We believe that the failure, thus far, to address the distribution of power, responsibility, and accountability more explicitly has led to a proliferation of financial mechanisms that are underfunded, which in turn leads to calls to create new mechanisms.

We recognize that perceptions of a financial mechanism’s legitimacy will also depend upon an institution’s performance—its demonstrated capacity to commit funding to investments that reduce greenhouse gas emissions and build resilience to climate change. Most of the climate financial mechanisms studied have not been operating at a scale or for a time period that would allow a full assessment of their performance. We nonetheless seek to make recommendations that could improve the design and the performance of new and existing climate financial mechanisms.

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. Most significantly, the power of emerging economies to control climate finance mechanisms will grow, as will their responsibility and accountability for the performance of these institutions. In light of the dramatic changes in global politics and the global economy in past decades, this redistribution seems both long overdue and necessary to provide the basis for a successful global partnership on climate finance.

Conclusions and Recommendations

This is a dynamic time for climate finance, as the international community struggles to craft mechanisms that are perceived to be legitimate by all UNFCCC Parties and that are capable of funding climate-related activities efficiently and at scale. Our analysis of established and new climate financial mechanisms and the current UNFCCC negotiations leads us to conclude the following:

Change is coming. A new global deal on climate finance will likely reinterpret the principles that in the past have guided the design of climate finance mechanisms in a way that significantly redistributes power, responsibility, and accountability between traditional contributor and recipient countries.
A new balance of power, responsibility, and accountability could enhance recipient country ownership. Greater representation of developing countries on the governing bodies of international financial institutions more generally, and climate finance mechanisms more specifically, should help ensure greater emphasis on the national and local “ownership”—and thus the effectiveness—of climate finance investments.
A new understanding of how to balance national interests with global responsibility and accountability is required. This will require assurance that nationally driven investments contribute to global benefits in the form of net emission reductions and that investments protect the most vulnerable countries and communities.
New financial mechanisms—at both the global and the national level—are necessary. If the international community raises the scale of public finance necessary to move developing countries onto a low-carbon, climate-resilient pathway, the capacity and the creativity to spend these resources well will necessitate the creation of one or more new financial mechanisms at the global level and multiple nationallevel institutions.
Existing institutions must also be reformed. The scale of the climate change challenge and of the scale of the funding necessary to respond to that challenge will also necessitate the reform of existing financial institutions, many of which have been supporting fossil fuel–led growth and have yet to mainstream concerns about the impacts of climate change into their strategies.
Current negotiating positions reflect deep historical and ideological divisions—particularly between developed and developing countries—that will need to be overcome by building trust and experimenting with new kinds of relationships. Developed countries have been keen to build on existing financial institutions they have shaped and traditionally controlled. Developing countries are wary of these same institutions, which they see as historically having advanced contributor interests and theories of development, through both the formal and informal exercise of donor power.
At the international level, the choice between reforming traditional development agencies, such as the GEF, U.N. Development Programme (UNDP), the U.N. Environment Programme (UNEP), and MDBs, and creating new financial mechanisms will raise issues of institutional economy and effectiveness. In order to generate a greater sense of trust and ownership, backers of existing agencies may have to accept a degree of duplication of existing capacity through the creation of new mechanisms—particularly where significant gaps in capacity are identified—and to accept strengthened lines of accountability of climate finance mechanisms to the UNFCCC Conference of the Parties (COP). On the other hand, those calling for the creation of new institutions may need to concede that it may waste precious resources to replicate the staff and services provided by existing agencies.
Balancing the roles of international and national institutions will also involve trade-offs. Traditional development agencies have gained the trust of contributors by putting in place systems to both measure and manage impacts of their investments. Developing country recipients, however, have been frustrated by the bureaucracy and the focus on generic rather than country-specific concerns that these systems can generate. Many developing countries will likely struggle to convince contributors that their national institutions have the capacity to manage large-scale development finance without the support of development agencies. Notably, a number of developing countries are taking steps to build and strengthen this capacity and will need support to do so.
Delivering climate finance at scale, at least in the short term, will likely involve multiple mechanisms, both new and reformed. This is true because of the complex politics of the international negotiations and the differing views of legitimacy held by contributors and donors. The urgency and complexity of delivering funds at scale argues for moving forward, at least in the near term, with the institutions that we have, and investing in the strength and quality of COP guidance and national planning processes to ensure coordination and coherence. This experience should then guide the design and operation of the new institutions that will become necessary as the scale of resources grows.
Low-carbon, climate-resilient development is an unexplored frontier for all countries and has potential risks as well as benefits. While high standards will have to be developed and maintained to ensure emissions fall and the vulnerable are protected, climate finance will necessarily entail experiments with new policies and technologies that will need to be watched closely for unintended environmental and social impacts.
Policymakers must agree on ways to diversify the sources of climate finance and to de-link them from the levers of informal power. 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 identify sources of revenue, such as new levies or longterm commitments, that are independent from the discretion of contributor governments.
It is necessary to build the capacity of non-state actors and civil society to monitor climate finance governance. Civil society groups at all levels can and are playing an important role in monitoring and influencing decision-making within climate finance funds. But they need to occupy such spaces more effectively than they have to date by monitoring and engaging in more inclusive decision-making processes with technical rigor and authority. However, “representation” of nonstate actors can be a very difficult issue—civil society is diverse with widely differing views.
Near- and medium-term climate finance should focus on strengthening national institutions. A next generation of climate investments should 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 development agencies provide technical support to national institutions, they should work in closer partnership with national stakeholders. It will be particularly important to engage with stakeholders outside of government, including the private sector, independent research institutions, and civil society. Such collaborations can help ensure climate finance proposals more appropriately reflect national circumstances and priorities.
It is important to draw from the lessons learned from decades of development finance to build national institutions that reflect universally accepted principles of good governance. Traditional finance and development institutions have decades of experience—both good and bad—in translating internationally agreed upon agendas into national and local investments. National institutions should draw from these experiences and be designed and supported to operate in accordance with universal principles of good governance. Strong provisions for accountability should be put in place, including sound fiduciary management, anticorruption measures, and grievance mechanisms and inspection procedures that ensure compliance with environmental and social standards and safeguards.

Guidelines for Reporting Information on Public Climate Finance

Maggie Barron — Fri, 03 Dec 2010 14:06:40 -0500

Executive Summary

Reporting and reviewing financial information has become an increasingly urgent issue in the international climate negotiations. In the Copenhagen Accord, which resulted from the United Nations Climate Change Convention in Copenhagen in 2009, developed countries pledged to provide USD$30 billion for the period of 2010-2012 and $100 billion per year by 2020 for climate adaptation and mitigation in developing countries. Developing countries want assurances that developed countries are fulfilling their climate finance pledges. To address this need, the Bali Action Plan (2007) mandates that support from developed countries for developing country Nationally Appropriate Mitigation Actions be “measurable, reportable and verifiable.” The Copenhagen Accord, building on these provisions, calls for “financing by developed countries [to] be measured, reported and verified in accordance with existing and any further guidelines adopted by the Conference of the Parties,” and that accounting of such finance is “rigorous, robust and transparent.” However, countries have yet to agree on next steps for tracking progress against climate finance pledges under a post-2012 international climate regime and what, if any, common reporting format will be required.

Current United Nations Framework Convention on Climate Change (UNFCCC) reporting guidelines are neither transparent nor comprehensive, and efforts by multilateral and bilateral development finance institutions to fill this gap are emerging but have so far remained limited in scope. As a result, existing data collection systems provide only limited information on the levels of financing, what financing is used for and which countries are benefiting. They do not provide information on whether funds are new and additional. The result is a lack of coordination among donor countries to ensure that funding efforts address needs in a balanced and thorough way that avoids duplication. This also generates a lack of trust between developed and developing countries that hinders progress in the negotiations for a post-2012 international treaty to address climate change.

Therefore, for public climate financing to be evaluated and flow effectively and efficiently, it is critical that data on climate finance are reported using a common reporting system as well as reviewed. Depending on the level of detail required by a reporting system, the reported data should help determine how Parties are meeting their financial commitments, improve understanding of sectoral and technological investment trends, and lead to assessments of the effectiveness of different forms of financing.

The goal of this paper is to help Parties to the UNFCCC develop robust reporting processes for climate finance, starting with a decision in Cancun that addresses the measurement, reporting, and verification (MRV) of finance. The paper discusses:

The characteristics and principles of an improved reporting system for climate finance.
How and what kind of financial data are currently collected and reported by the UNFCCC, the OECD DAC, private organizations, and multilateral development banks (MDBs).
Options to improve on current reporting systems, including a proposed reporting format.
The potential implications and operational consequences of an improved reporting system for the review process, institutional structures, and fast-start climate finance.

This paper aims to inform not only the nature of the text to be adopted by the Conference of the Parties at COP-16, but will also be pertinent over the next two years as improved reporting guidelines are drafted, agreed to, and implemented.

Key Observations and Recommendations

An ideal reporting process for climate finance should ensure that reporting by developed countries is complete, transparent, comparable, accurate, and efficient. However, current reporting of public sector financing for climate change projects by bilateral and multilateral institutions do not completely fulfill these principles. Consequently, Parties to the Convention should at COP-16:

Request the SBSTA to revise the guidelines for the reporting of information in national communications by Annex I Parties to the Convention, part II: UNFCCC reporting guidelines on national communications (Decision 4/CP.5), including the development of reporting formats for finance, with a view to adoption of the enhanced reporting guidelines by COP-17.

The process of revising the guidelines should be informed by the insights and experiences of the Multilateral Development Banks (MDBs), bilateral financing institutions (BFIs), the OECD DAC, and experts from developed and developing countries.

Parties could significantly improve the transparency of financing by adopting a standardized financial reporting format with common definitions and methodologies to quantify climate finance. However, in launching an effort to either revise or initiate a new means to collect financing data, Parties to the Convention will need to determine the kinds of data they want a climate finance reporting system to provide. This will determine the extensiveness of any expanded data collection effort and its likely cost.

Improved climate finance data alone will not be able to shed light on whether or not funds for climate change are new and additional to official development assistance, a topic on which there are widely divergent political views. Better data would eventually allow Parties to determine from a technical standpoint whether there has been an increase or decrease in climate finance over time. However, judging newness and additionality is a subsequent and separate step which necessitates a political agreement on methodologies and a reliance on other data sources outside of the UNFCCC. A transparent reporting process can nevertheless help inform this discussion and build trust and understanding between developed and developing countries.

Parties should consider implementing a more robust process to review reported data. This could include launching voluntary pilot projects to establish how reviews could be successfully conducted, using independent, non-political technical financial experts, formally establishing clear rules and guidelines for civil society participation in the review process, and improving record keeping so that data between countries can be compared.

A revised reporting system will likely require the redesign of existing databases and search engines. If Parties wish to have a centralized data system, they will need to decide where such a system should be located and will need to develop new procedures for collecting and processing financial data.

The introduction of an improved reporting system will take time to implement. It will thus not satisfy the need for more transparency in the short-term, and in particular for fast-start funding under the Copenhagen Accord. It is important to ensure that financial support to developing countries is accounted for in a clear and transparent manner during the fast-start period through existing reporting systems and through short-term multilateral efforts and efforts on the part of donor countries. Lessons learned from this experience could shape the implementation of new reporting and review systems in the longer term.
With the exception of financing for renewable energy, there are limited data on how much financing is currently being provided by the private sector through channels such as venture capital funds, bank loans or equity finance. Further research is needed to track private sector funds for climate change, including the amount of private sector funds leveraged with public funds.

First International GHG Protocol-based Programs Workshop Report: Key Challenges and Recommendations

Maggie Barron — Mon, 29 Nov 2010 15:46:22 -0500

Introduction

Corporate GHG inventory programs have played a significant role in encouraging and enabling businesses and other organizations to respond to climate change. By developing and disseminating standards and tools to formulate inventories that are consistent with international best practices, these programs have laid a foundation of technical and institutional capacity to measure and manage GHG emissions. In so doing, they have also promoted transparency and access to information by making GHG data publicly available in GHG registries and mobilized coalitions of private sector actors to engage constructively on the climate issue.

This progress notwithstanding, new developments are driving the need for GHG accounting programs to evolve more efficiently, more effectively, and at a greater scale. On the business side, there is a trend toward managing GHG emissions along the value chain. Companies are looking up and down the supply chain and throughout the product life-cycle for GHG management opportunities. Identifying these opportunities requires exponentially more extensive GHG data than is now readily available. Further, climate policy is becoming a reality not only in industrialized countries, but also in growing numbers of developing countries around the world. Most major emerging economies have adopted voluntary national GHG mitigation targets and are exploring portfolios of policies and measures to achieve them. International negotiations have emphasized the need for mitigation to be measurable, reportable, and verifiable, which has called new attention to the importance of GHG accounting. These trends point to the need for greatly enhanced GHG accounting capacity and tools at a global scale. Existing GHG inventory programs have a tremendous potential to inform a global strategy for building this capacity.

In March 2010, the World Resources Institute (WRI) convened a two-day meeting of approximately 50 experts from more than ten GHG inventory programs around the world to share lessons learned and discuss opportunities for collaboration. The event was organized around six major themes: accounting and quantification, reporting and public disclosure, quality assurance, training and capacity building, going beyond the inventory, and the relationship between voluntary programs and climate change policy. Participants generated several recommendations for advancing work in these areas (see Appendix 1).

While the discussion and suggestions covered a wide range of topics, taken together, they point to a need to develop future work in three areas: (1) dramatically increasing the scale of corporate GHG accounting capacity in terms of geography, sector, and scope; (2) moving companies and governments along the path from GHG measurement to GHG management; and (3) enhancing the coordination between programs on a range of issues as GHG accounting practice becomes more widespread and complex.

Summary of UNFCCC Submissions

Tue, 23 Nov 2010 15:30:57 -0500

The following is a summary of Party submissions to the AWG-LCA from April 2010 through November 2010 (it does not include country submissions on the Copenhagen Accord). These tables summarize various aspects of Party submissions and categorize them into two main sections. Section I captures proposals on the transparency and review of actions and Section II outlines views on the MRV, governance and sources of finance. The dates in parentheses indicate the date of the submissions reviewed by the authors. The final page lists the acronyms used in the tables. Please note that these tables represent WRI’s interpretation of a selection of Party submissions, and do not necessarily reflect the complete views of the Parties.

Comparability of Annex I Emission Reduction Pledges

Tim Herzog — Mon, 01 Feb 2010 16:13:59 -0500

Significant commitments to reduce developed country greenhouse gas emissions (GHGs) will be central to the realization of the Copenhagen Accord.

As negotiated in December 2009, the Copenhagen Accord provides a mandate for Annex I Parties that choose to associate themselves with the Accord to register their emission reduction pledges by 31 January 2010. Many pledges have already been put forward by major industrialized countries and economic blocs. These include the European Union (EU), Japan, Canada, and Australia, and the US.

In this analysis, we assess Annex I pledges under the Copenhagen Accord, as well as pledges by Parties that have yet to associate themselves with the Accord (namely Belarus and Ukraine). We do so with the expectation that these countries will associate themselves with the Accord in the near future.

This Working Paper presents a comparative analysis of these pledges, which was performed with two key aims:

To enable negotiators from all countries to compare the emission reduction outcomes that would result from industrialized countries’ pledges; and
To facilitate efforts to aggregate emission reduction pledges in order to calculate the global impact on the atmosphere.

The absence of details regarding some countries’ mechanisms to achieve emission reductions present hurdles to measuring comparability. Countries will need to clarify how they plan to fulfill their pledges, especially with regard to the use of international offsets and inclusion of land use, land use change, forestry (LULUCF) emissions and reductions, if aggregate effort and comparability are to be effectively measured.

Nevertheless, this analysis provides a preliminary picture of where the world is post Copenhagen. Our key conclusions and recommendations are listed below. Most importantly, we found that while developed country emission reduction pledges could have an important and potentially substantial impact, they will not be enough to meet even the lower range of emission reductions required for stabilizing concentrations of CO2e at 450 ppm and certainly fall very short of goals to reduce concentrations below that level.

Key Findings

Conclusion: Existing pledges by developed countries, when added together, could represent a substantial effort for reducing Annex I emissions by 2020 – a 12 to 19% reduction of emissions below 1990 levels depending on the assumptions made about the details of the pledges. But they still fall far short of the range of emission reductions – 25 to 40% – that the IPCC notes would be necessary for stabilizing concentrations of CO2e at 450 ppm, a level associated with a 26 to 78% risk of overshooting a 2ºC goal (Meinshausen 2005). If the pledges are not ratcheted up even beyond the highest pledges, this analysis shows that the additional reductions required between 2020 and 2050 would be significant, with emissions dropping roughly 2.5% annually to reach a goal of 80% below 1990 levels by mid-century.

Recommendation: Developed countries should implement emission cuts consistent with the higher ranges of their pledges. Second, while the Copenhagen Accord has provided for a periodic science review, if global emission pathways continue to misalign themselves with the science, the review process should mandate more ambitious commitments as the science dictates.

Conclusion: In assessing comparability, the choice of metrics can have profound implications on a given country’s ambition.

Recommendation: There is no single perfect way to assess comparability. Factors such as population growth and the use of offsets (as well as their integrity) will impact the effort and environmental effectiveness of a target. While comparability is best assessed by considering multiple dimensions of a target as we do here, we need to bear in mind that absolute emission reductions are ultimately what matters for reducing our impact on the climate.

Conclusion: In our analysis, we make the assumption that emission reductions achieved via international offsets contained in pledges will be real and additional. These assumptions make an enormous difference for the scale of some country’s emission reductions, such as that of the United States. Therefore, if international emission reductions play a major role in national targets, and they prove not to be real and additional, then some pledges, such as that in the emerging US bill, will fall far short of how they appear at face value.

Recommendation: The implementation of high regulatory standards and the design of robust accounting rules are critical to ensuring that emission reductions are real and additional.

Conclusion: This analysis demonstrated the importance of resolving how LULUCF emissions are to be estimated before final commitments are determined. Emissions from the land use sector can vary significantly from year to year and the choice of including them, as well as the choice of a base year, can make a significant difference in defining the stringency of a given country’s target. For example, when Canada’s pledge is calculated below a 1990 base year and LULUCF is included, the pledge allows for significant emissions growth.

Recommendation: High and uniform standards for estimating and accounting for land use emissions will be essential if targets set by developed countries are to deliver the ambition and impacts that they claim. If LULUCF emissions are excluded in pledges, it will be necessary to examine the net impact of pledges as well as emissions and sinks from LULUCF in order to provide an accurate measurement relevant to the state of the global climate.

Conclusion: In this analysis, we assume consistent emissions measurement and accounting rules. The Copenhagen Accord calls for accounting for targets that is “rigorous, robust and transparent.” If accounting is not also consistent (e.g. if US domestic legislation accounts for emissions from domestic agriculture in a manner that differs from that used by other Parties), comparability exercises will be more difficult and contentious. Furthermore, it will be difficult to assess effort.

Recommendation: Parties should agree to rigorous and consistent estimation and accounting methodologies.