Topic: climate finance, COP-18 Doha

The Japanese Fast-Start Finance Contribution

Sarah Parsons — Wed, 28 Nov 2012 12:42:08 -0500

Executive Summary

Developed country governments have repeatedly committed to provide new and additional finance to help developing countries transition to low-carbon and climate-resilient growth. This assessment considers Japan’s efforts to provide “fast start finance” (FSF) between January 2010 and February 2012 in the context of the pledge by developed countries to mobilize USD 30 billion from 2010 to 2012 under the United Nations Framework Convention on Climate Change (UNFCCC). It is part of a series scrutinizing how developed countries are defining, delivering, and reporting FSF.

Given the size of its economy, Japan has a major role to play in delivering FSF.

Japan’s USD 15 billion FSF commitment is one of the largest amongst developed countries, but it is important to consider the contents of this commitment. Japan has played a significant role in global efforts to finance climate change activities in developing countries, and its FSF commitments accounts for almost half of the FSF that developed countries have pledged for 2010-2012. However, it is essential to better understand the broad range of instruments and activities that the government includes in its FSF, as different governments consider different types of finance to constitute FSF, so self-reported figures are not directly comparable between countries.

Other official flows (OOF) such as export and investment insurance, non-concessional loans, and guarantees make up around 40% of Japan’s total FSF contribution so far, and there is some ambiguity around the role of leveraged private finance. OOF amounts to as much as USD 5.1 billion of the USD 13.2 billion mobilized by 29 February 2012 sincethe announcement of the Hatoyama Initiative in September 2009. This includes USD 3.1 billion of leveraged private finance. While the role of leveraged private finance in the Japanese pledge is ambiguous, as discussed in the section on Methodology, we have included it in the analysis presented in this paper.

Japanese FSF is heavily weighted toward mitigation. About 70 percent of Japanese FSF addresses mitigation objectives. Most mitigation finance, in turn, is financed through loans (both ODA and non-ODA), which constitute about 75 percent of the contribution for infrastructure development projects, such as urban transport projects. There is a more even balance between adaptation and mitigation objectives within the grant portion of the FSF contribution (adaptation: 30 percent, mitigation and REDD+: 27 percent, multiple objectives: 43 percent). A significant share of Japanese FSF addresses one or more non-climate objectives in addition to mitigation or adaptation urban transport projects. Asia receives the most FSF among all regions, irrespective of financial instrument type. It is worth noting that the Japanese FSF includes a number of “clean” fossil fuel power plant construction projects, such as a natural gas combined cycle (NGCC) power plant project in Central Asia. There is a need for greater clarity amongst members of the international community about how support for lower carbon fossil fuel facilities should be treated in the context of climate finance.

On balance, it is not clear that the entirety of the Japanese FSF is “new and additional.” While the FSF contribution reflects some new effort to address climate change, it is unclear that the contribution as a whole can be considered “new and additional.” Since the start of the FSF period, Japan has substantially increased international finance that explicitly targets climate change. Some Japanese agencies have also begun integrating climate change into aspects of development assistance and development finance. Applying five different criteria proposed by experts and practitioners, however, the results indicate that at least a portion of the Japanese FSF spend is not new and additional. A significant share of Japanese FSF reflects pre-existing pledges to development assistance initiatives to scale up climate change related finance such as those articulated in the Japan Cool Earth Partnership of 2008. Furthermore, Japan’s FSF cannot be seen as additional to its existing commitments to scale up development finance to 0.7 percent of its GNI.

FSF reporting follows Japan’s standard processes for reporting on conventional development assistance, whose transparency can be strengthened to meet new needs associated with FSF. There is room for improvement in terms of the transparency, accountability and credibility of Japanese FSF. Some of the identified issues may be attributable to the fact that Japanese FSF contains a large number of projects supported by a variety of channeling institutions. This has made it difficult for the government to present a clear overview of Japanese FSF.

The largest issue is that the information on FSF is disaggregated, although project-level information provided by the implementing agencies is detailed. Most of the climate finance projects could not be easily identified without extensive key word research on the websites of implementing agencies. This study identified about 250 likely FSF projects, amounting to USD 11.7 billion or nearly 90 percent of the amount committed by 29 February 2012. At the same time, about 500 FSF projects – most of which are of relatively low monetary value – could not be independently identified.

The Japanese government has already taken steps to strengthen the transparency of Japanese FSF, such as adding information about channeling institutions to the list of FSF projects included in its second submission to the UNFCCC. However, additional information would facilitate an informed discussion of the adequacy of FSF efforts. The following practices would further strengthen the transparency of Japanese climate finance reporting:

Provide a complete list of the projects that have been supported through the Japan FSF spend. Specify the climate finance projects that constitute aggregated numbers in the official documentation;
Include hyperlinks to the relevant webpages that describe the projects that have been supported through FSF in this proposed project list, as this would substantially enhance stakeholder access to information on the FSF contribution and understanding of its objectives;
Compile all information on its climate finance contributions in one easily accessible format, and support access to supporting information on the individual projects that constitute the FSF spend;
Explain the eligibility criteria for the ODA and OOF flows that have been counted towards the FSF contribution;
Work in cooperation with other contributor countries and multilateral institutions to strengthen and harmonize bilateral and multilateral reporting on climate finance.

Climate Finance

Christine Potochny — Mon, 05 Nov 2012 13:55:16 -0500

Facts and Figures: The Scale of Needed Investment

Developing countries will require new investments of up to $300 billion annually by 2020—growing up to $500 billion annually by 2030—to adequately limit their growing greenhouse gas emissions.
These countries will also require several hundred billion additional dollars to protect themselves from the worsening physical and economic impacts of greenhouse gases already in the atmosphere.
About $900 billion per year between now and 2050 will be needed to address investments in global energy supply and demand technologies (in addition to the roughly $2.6 trillion in annual investments to occur in a “business as usual” scenario.
While developed countries have committed to channeling US$100 billion (from public and private sources) annually by 2020 to developing countries for climate mitigation and adaptation activities, this level of investment is far from what is required.

Global Investment for a Resilient Low-Carbon Economy

Stabilizing the global climate is one of the most urgent challenges in coming decades. Our warming world affects all people and ecosystems, particularly the poor who already suffer disproportionately from climate-change impacts. Major financial investments – from both public and private sources and guided by smart and equitable policies - are required to transition the world’s economy to a low-carbon path, reduce greenhouse gas concentrations to safe levels, and build the resilience of vulnerable countries to climate change.

WRI is addressing how these massive investments toward a low-carbon and resilient economy – which we refer to as climate finance –can be realized.

In developing countries, climate change investment needs are significant. Direct government funding is scarce. And the billions of dollars committed to be marshaled by industrialized countries remain inadequate to the magnitude of the challenge of stabilizing a steep trajectory of greenhouse gases. Additional financial investment should be accompanied by rules, regulations, fiscal incentives and effective markets at international, national, and sub-national levels to shift current and projected “business-as-usual” investments, and mobilize resources at the scale required.

WRI’s Vision of Success

Public and private actors—development financing institutions, governments, and private sector investors, including financiers and project developers—significantly shift and scale-up their investments in sustainable, low-carbon and climate-resilient development. These investments will create new markets, address long-term opportunities and risks arising from climate change, promote wider socio-economic benefits, and minimize social and environmental harm.

WRI Strategy

WRI focuses on climate finance broadly defined, not just international public climate finance but both public and private flows including domestic (within developing countries) and international (to developing countries) finance that support climate-related goals.

WRI focuses its expertise on the technical and institutional aspects of three major questions:

How to SHIFT finance from high carbon to low carbon and climate resilient investments (mainstreaming);
How to LEVERAGE private flows using public climate finance (domestic and international) and
How to ASSESS the impact or effectiveness of climate finance, whether positive or negative.

WRI is pursuing national, international and private sector strategies.

National Strategy: Strengthen institutions for effective climate finance mobilization, management and monitoring

SHIFT

Facilitate building national public institutions and capacity to access, manage, program, deploy and monitor climate finance in an effective and transparent manner.
Empower non-governmental institutions and actors to engage and participate in climate finance processes in order to ensure more effective outcomes.
Related projects: Open Climate Network, Electricity Governance Iniative, Measurement & Performance Tracking in Developing Countries.

LEVERAGE

Ensure development financing institutions and finance ministries catalyze a shift in public and private investments toward climate-friendly development through the strategic use of international climate finance.

ASSESS

Help create efficient and accountable financial systems. WRI aims to help national governments and their domestic stakeholders develop systems through which they can wisely generate, access, disperse, and track finances for adaptation.
Related work: Vulnerability & Adaptation
Maximize the impact and effectiveness of climate finance by aligning national mechanisms for receiving, allocating and disbursing international climate finance with the country’s planning, budgeting, programming and monitoring procedures and systems.
Related project: Open Climate Network
Related publication: Summary of Developed Country ‘Fast-Start’ Climate Finance Pledges

International Strategy: Build a robust, effective and equitable climate finance architecture

SHIFT

Promote more effective and legitimate governance of international climate finance by bringing to bear developing country expertise and experience to inform discussions on governance and operation of international climate finance.
Related project: International Financial Flows & the Environment (IFFE).
Related blog posts: the Green Climate Fund.
Ensure mainstreaming climate change in international development finance by encouraging public international financial institutions to adopt and implement ambitious, internationally recognized standards. Such a significant investment shift will support low‐carbon and climate‐resilient development, while ensuring high environmental and social standards.
Related project: International Financial Flows & the Environment (IFFE)
Related publications:

ASSESS

Create an enabling environment for investment by ensuring that international climate finance includes long-term support for conducive policy environments and addresses non-financial barriers to investment. WRI has developed a framework to guide governments and their international partners in selecting pre-investment activities to support and inform the providers of public international climate finance.

Private Sector Strategy: Leverage private sector flows from public climate finance

Related project: Climate Finance & the Private Sector

SHIFT

Provide robust research and analysis to determine what tools and approaches are the most effective at leveraging private climate investment, including detailed mapping of financing instruments used by public and private institutions to finance climate-relevant projects.
Related publications:
Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Capital
Public Financing Instruments to Leverage Private Capital for Climate-Relevant Investment: Focus on Multilateral Agencies

LEVERAGE

Help leaders in the public sector seize the opportunity to leverage private investment in a low-carbon future. The public sector can expand its role in effectively unlocking private investment by reducing risk, directing investment and maximizing public and private benefit through the appropriate mix of policies and finance.
Related resources:
Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Capital
Climate Finance and the Private Sector brochure

ASSESS

Mobilize WRI’s strong external ties with private sector financial institutions to bring a private sector perspective to climate finance, and help translate the complex languages of private sector investors and public sector policy makers.

Monitoring the Receipt of International Climate Finance by Developing Countries

Sarah Parsons — Fri, 07 Sep 2012 10:19:30 -0400

Executive Summary

The 2010 Cancun Agreements and 2011 Durban Outcome call for developing countries to register, monitor, and report on support received, and for developed countries to improve their reporting by using more complete climate finance reporting guidelines. Doing so will enable information on climate change finance from developed countries to be matched with information from developing countries. The lack of detailed guidance makes it difficult for developing countries to decide how to respond to calls to report climate finance received.

This paper explores the challenges faced by three Asian countries, that is, Indonesia, the Philippines, and Vietnam in monitoring finance for climate change. Challenges faced in the three focus countries can be grouped into five categories, and are summarized as follows:

Definitions and Criteria: Countries and donor institutions use a variety of definitions and criteria in identifying climate finance and distinguishing it from other development finance. For the three focus countries, no formal climate finance marker system or definitive guidance exists to help address this definitional issue.
Classifications and Indicators: Sector and activity type classifications also vary widely among donor and recipient institutions, and often do not lend themselves well to climate finance. For example, in the Philippines, there is no energy-specific classification in its current official development assistance (ODA) monitoring system.
Financial Instruments: The type of financial instrument monitored can carry both political implications as well as technical challenges. From a political standpoint, many developing countries and NGOs hold that climate finance—especially adaptation finance—should be delivered primarily in the form of grants. From a technical standpoint, all three countries expressed challenges in monitoring grants, while their loan monitoring systems are fairly developed.
Source: Private finance could potentially play a very important role in international climate finance and its monitoring may be something developing countries could explore for domestic purposes. However, domestic private finance monitoring efforts in the focus countries are often not coordinated with ODA monitoring efforts, nor do they include climate-specific information.
Institutional Arrangements: In the three focus countries, institutional responsibility for the coordination of national climate finance and development of monitoring systems is generally fragmented. Institutional platforms and databases for gathering data on climate finance in particular do not exist. Countries have two options, that is to either modify existing systems or to develop standalone/complementary standardized climate data systems for climate finance.

Despite significant challenges in building their capacity to monitor the receipt of climate change finance, government officials consulted in all three countries expressed an interest in doing so. Such efforts would require several steps, including, for example:

Developing the institutional arrangements and technical platforms necessary to monitor climate finance received. This may include the formation of an interministerial working group on climate finance with an agenda item dedicated to monitoring climate finance, and a complementary (stand-alone) management information system.
Agreeing on and adopting climate finance-specific definitions, criteria, and classifications.
Agreeing on the scope of information to be tracked (type of financial instrument, private versus public, etc.).

Such efforts should be complemented and furthered by support at the international level, both in the form of consistent yet flexible guidance that takes into account the domestic challenges outlined in this paper, as well as financial and capacity building support from developed countries.

Moving the Fulcrum: A Primer on Public Climate Financing Instruments Used to Leverage Private Capital

Christine Potochny — Wed, 25 Jul 2012 15:11:56 -0400

Executive Summary

The Problem: Projected climate change mitigation investment needs in developing countries–including for low-carbon sectors–are significant, growing, and may not be met. Experts estimate new investments of up to $300 billion annually by 2020, growing up to $500 billion annually by 2030, are required to mitigate developing countries’ greenhouse gas emissions to levels in line with global targets. While industrialized nations have committed to mobilizing new funds of $100 billion annually by 2020 to meet these needs, this level of funding is far from what is required.

One Solution: Redirect the private sector’s growing investment in developing countries to help fill the growing climate finance gap. McKinsey estimates that the financial stock—that is, the total value of outstanding stocks and bonds—of developing countries grew by $11 trillion in 2011. By intervening to improve the investment attractiveness of climate change-relevant markets, the public sector has a significant opportunity to harness and redirect these significant private sector capital flows away from fossil fuel-driven sectors and toward low-carbon development.

The Challenge: Mobilizing private sector investment will require better targeted public support that improves the risk-reward calculus of lowcarbon markets. The private sector seeks markets that exhibit (i) attractive returns relative to associated risks over an appropriate investment timeframe (“attractive risk-reward calculus”) as well as (ii) adequate size, liquidity, and transparency. These conditions are often absent in developing countries due to the nascent natures of both low-carbon and financial markets in these geographies.

Recommendation: To improve the risk-reward calculus of investments—arguably the most fundamental barrier to leveraging private capital—the public sector can complement support for low-carbon policies with direct finance that manages the following risks:

Political and macroeconomic risks. Political risk guarantees, interest-rate/currency exchange products, and local currency loans can help investors and project developers financially manage political (for example, political instability) and/or macroeconomic (for example, exchange rate volatility) risks. As these financing instruments are not easily accessible in poorer countries, by providing these instruments, the public sector can catalyze low-carbon investment in geographies where access to finance is most challenging.
Low-carbon market risks, including policy, technology, and operational risks. These risks, which range from unexpected policy changes to technology failures, can affect both new and mature low-carbon markets. In newer low-carbon markets, public financing instruments like first-loss equity and debt investments and concessional loans can be instrumental in encouraging early investment. Projects in more established low-carbon markets—like solar, wind, and energy efficiency—can benefit from flexible loans, partial risk and credit guarantees, and risk sharing facilities.

Given the varied investment conditions across developing countries and their respective low-carbon markets, each market will require a unique combination of finance and policy support to scale-up private sector investment. Future WRI publications, drawing on private sector perspectives, will delve deeper into how public climate finance providers—whether governments, development finance institutions, or export-credit/aid agencies—can tailor direct finance to scale-up private sector investment in different markets.

The U.S. Fast-Start Finance Contribution

Kevin Lustig — Thu, 17 May 2012 11:54:20 -0400

Executive Summary

OpenClimateNetwork.org

Visit openclimatenetwork.org for the latest analysis, project info, expert perspectives and more.

Developed country governments have repeatedly committed to provide new and additional finance to help developing countries transition to low-carbon and climate-resilient growth. This assessment considers U.S. efforts to provide “fast start finance” (FSF) in fiscal years 2010 and 2011 in the context of the pledge by developed countries to mobilize $30 billion1 from 2010 to 2012 under the United Nations Framework Convention on Climate Change (UNFCCC). It is part of a series scrutinizing how developed countries are defining, delivering, and reporting FSF.

Given the size of its economy and its historic responsibility as a top emitter of greenhouse gases, the United States has a major role to play in delivering FSF. Key characteristics of the U.S. FSF contribution are quantified in Figure 1.

The U.S. FSF contribution of $5.1B reflects a positive effort made in challenging political and economic circumstances, but there is more to be done. Congress and key agencies have increased funding for climate change objectives relative to the pre-FSF period, and have begun to integrate climate considerations into ongoing portfolios. The global economic recession and the resulting pressure to cut spending, however, combined with an active subset of policy-makers who oppose U.S. action on climate change, have impeded further increases to climate finance.

The US does not count private finance toward its FSF contribution, but it does count non-grant instruments as well as development assistance. Loans, loan guarantees, and insurance constitute one-third of the U.S. contribution; grants and related instruments (including contracts and grant contributions to multilateral climate funds) account for the rest. Only a minority of the funds examined – 40% for adaptation and 29% for mitigation – support projects that clearly target climate change as a principal objective, although the remainder can in most cases still be expected to deliver climate benefits. (A greater share may principally target climate change, but adequate information was not available to support this conclusion.)

While the FSF contribution reflects some new effort to address climate change, it is unclear that the contribution as a whole can be considered “new and additional.” Since the start of the FSF period, the United States has substantially increased international finance that explicitly targets climate change. Some U.S. government agencies have also begun integrating climate change into aspects of development assistance and development finance. The United States is also counting as FSF projects and programs that it was funding – and that were likely delivering climate benefits – prior to the FSF period. Furthermore, the United States has distanced itself from targets and timetables to increase development assistance, and climate finance appears to be increasing at a significantly faster rate than development assistance.

There is a need for additional transparency and harmonization in reporting. The United States has made significant efforts over the past several years to improve monitoring and reporting on climate finance, as well as on foreign assistance. However, there is room for improvement.

We recommend that the United States:

Publish the criteria it uses to program and identify FSF.
Publish a detailed list of the projects and programs that constitute FSF, including, for each project, the amount, the administering agency, the financial instrument, the recipient country (where relevant) and institution, whether it is supported by core or non-core climate finance, and, to the extent feasible,information on disbursement status.
Identify and explain any discrepancies between such a project list and the total reported FSF sum, and explain how non-grant instruments are counted.
Provide complete information on U.S. FSF in a single document, so that users can avoid the need to download and reconcile over 240 documents to access this information.
Harmonize reporting between the FSF reports and the Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC) by ensuring that relevant FSF projects are tagged with the appropriate DAC Rio Markers and using consistent project titles between the two reporting systems.
Work in cooperation with other contributor countries and multilateral institutions to strengthen and harmonize bilateral and multilateral reporting on climate finance.

The UK Fast-Start Finance Contribution

Kevin Lustig — Thu, 17 May 2012 11:21:25 -0400

Executive Summary

OpenClimateNetwork.org

Visit openclimatenetwork.org for the latest analysis, project info, expert perspectives and more.

Developed country governments have repeatedly committed to provide new and additional finance to help developing countries transition to low-carbon and climate-resilient growth. This assessment considers UK efforts to provide “fast start finance” (FSF) in 2010/11 and 2011/12 in the context of the pledge by developed countries to mobilise funds approaching USD 30 billion from 2010 to 2012 under the United Nations Framework Convention on Climate Change (UNFCCC). It is part of a series of studies scrutinising how developed countries are defining, delivering, and reporting FSF.

The UK has a major role to play in delivering FSF. It is one of the richer economies in the developed world. Like other developed countries, it bears historic responsibility for contributing to the global accumulation of greenhouse gases. Key characteristics of the UK FSF contribution are quantified in Figure 1.

The UK has made a substantial effort to mobilise climate finance. Finance has been channelled through the Environmental Transformation Fund in 2010/11 and through the International Climate Fund (ICF) in 2011/12. GBP 1.06 billion had been spent and committed as of November 2011. It has also committed climate finance beyond the FSF period through the International Climate Fund (ICF), which will spend GBP 2.9 billion between April 2011 and March 2015.

The majority of UK finance is spent by multilateral institutions, in the form of capital contributions. UK contributions of GBP 715 million to the Climate Investment Funds (CIFs) administered by the World Bank in partnership with Regional Development Banks constitute the largest share of its FSF.

*The UK does not count private finance toward its FSF contribution, but it does count non-grant instruments as well as development assistance.** The majority of the projects supported do seem to have climate change as a principal objective.

While the FSF contribution reflects some new effort to address climate change, it is unclear that the contribution as a whole can be considered “new and additional.” Since the start of the FSF period, the UK has substantially increased international finance that explicitly targets climate change. The UK is also counting as FSF projects and programmes that it was funding – and that were likely delivering climate benefits – prior to the FSF period. Much of the funding counted was pledged prior to the FSF period, notably the contributions to the CIFs and Congo Basin Forest Fund. Climate finance appears to be increasing at a significantly faster rate than development assistance.

The UK is relatively transparent about its FSF spend, but more can be done. The UK discloses a list of projects and programmes to which FSF has been directed to interested stakeholders, and to the European Commission (EC) on an annual basis. The UK’s adoption of new transparency standards for its administrative processes is substantially strengthening its performance in this regard. Specifically, it participates in the International Aid Transparency Initiative (IATI) for its official development assistance (ODA) spending. In this context, government departments are now required to disclose the business case for all projects that receive public support. A business case presents the key components and purpose of the programme, and how it contributes to the achievement of relevant government UK strategic objectives. This includes relatively comprehensive information on the institutions receiving funding and implementing projects.

There is a need to improve access to information in practice. The commitment to disclose business cases was made in January 2011 and has not been applied retroactively. In practice, few business cases have yet been made available. We do note some discrepancies between aggregate and project-level reporting, although we recognise that the project list is a snapshot at a given moment in time of the collection of FSF recipients. As new systems to improve reporting and disclosure on the status of programmes funded by the UK government are implemented, we should expect to see higher levels of transparency realised in practice.

We recommend that the UK:

Disclose underpinning project-level spending information alongside aggregate reporting
Ensure that project lists consistently specify the recipient institution for finance to reduce discrepancies and enhance transparency
Work in cooperation with other donors and multilateral institutions to strengthen and harmonise reporting on climate finance, particularly with regards to the status of disbursement
Ensure that business cases for approved projects are publicly disclosed in a timely manner by all ICF implementing departments

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.