In July, French President Emmanuel Macron announced that he would hold a summit in Paris on December 12, 2017, two years after the Paris Agreement on climate change . The summit’s goal, he said, would be “to take further action on climate, notably on the financial front,” and to mobilize public and private finance for projects to implement the Paris Agreement.
The summit comes at a challenging time in climate finance. Under President Donald Trump, the United States is retreating from its position as a leading provider of climate finance. Trump’s budget request for the next fiscal year zeroed out contributions to the Green Climate Fund (GCF) and proposed deep cuts to bilateral development and environmental programming. Congress may restore some of this money, but a significant reduction in U.S. climate finance seems likely.
These losses will reverberate across the system. It’s not just the loss of public dollars, but also of the forgone private dollars they could have mobilized. Fewer emissions will be reduced and fewer people will be protected from the impacts of climate change.
What should the rest of the world do about this, and how can Macron’s summit deliver a meaningful booster shot to the climate finance system?
The summit must include the private sector and feature high-level commitments from major banks and companies, not unlike the UN secretary general’s climate summit in September 2014. But to be credible, it must also offer something significant in terms of public finance. The challenge is that such a public finance commitment must: (1) be meaningful in terms of magnitude, (2) address both mitigation and adaptation, (3) mobilize as much private capital as possible, (4) recognize that new public money is hard to come by on short notice, and (5) be ready in less than nine weeks. This is a tall order. But there is at least one good option.
Infusing New Life into Climate Finance
Drawing on our own research, summarized in our recently-released study on the Future of the Funds, we propose that the Macron summit put a modest but meaningful public finance package on the table. The package would provide selected multilateral climate funds with renewed financial strength, complementing what the GCF is doing and counteracting the impact of Trump’s cuts as we go into the final stretch to 2020. The package would have three components:
- Approve the use of Clean Technology Fund (CTF) reflows – The Clean Technology Fund (CTF) was created in 2008 to provide funding for large-scale climate mitigation. The CTF is best at providing large-scale funding to cut the risk of big transactions in the mitigation space, encouraging private sector involvement. This is why the CTF enjoyed strong support from the Bush administration; then-Treasury Secretary Hank Paulson and Republican Senator Richard Lugar announced U.S. support for it in an op-ed in the Washington Post.
A plan, in the works for some time but not yet approved by the CTF’s governing body, would allow the fund to reuse the money coming back from repayment of the loans it has already made. Reflows are estimated to be around $665 million between fiscal 2018-2022. This revenue stream could be front-loaded by issuing bonds, allowing the CTF to extract more juice out of its existing assets. This would cost donors no new money; all it would take would be a decision by the CTF committee. This measure would provide meaningful financial firepower. If bonds could be issued with CTF reflows as collateral, $1.4-1.6 billion for new projects between fiscal 2018 and 2022 would be unlocked. Moreover, this capital could mobilize very significant co-financing; the CTF has historically mobilized over $9 for each $1 of donor capital.
- Convert CTF debt to equity – While most countries that contributed to the CTF did so with grants, some provided loans. This lowered the amount of risk the fund could take with its money, holding back CTF from some innovative and high-impact ventures. At the Macron summit, the loan providers (Germany, France and Canada) should announce that they are converting their loans, worth around $1.1 billion, into equity, meaning that they would only get money back if CTF investments paid off. This would cost those contributors some money -- they would have to essentially write off part of their loans -- but the overall amounts are modest relative to what these countries provide in climate finance every year. This conversion would make the use-of-reflows decision much easier for a number of technical reasons and would increase the CTF’s assets backing bond issuance by 26 percent.
- New pledges for the Adaptation Fund and LDCF – On the adaptation front, we recommend that at least some countries make new pledges to the Adaptation Fund and the Least Developed Countries Fund (LDCF). These are popular with developing countries, have a solid track record and a pipeline of shovel-ready projects, but are low on funds. During the Paris negotiations, donors pledged $75 million for the Adaptation Fund and $248 million for the LDCF. Similar pledges at the Macron summit would provide a vital injection of funding to meet urgent adaptation needs. Support to the Adaptation Fund would maintain momentum as UNFCCC negotiators continue to iron out the details of the Fund’s future. At the same time, funding for the LDCF goes solely to the poorest countries and is likely to mobilize high levels of co-financing: historically over $4 for every $1 the fund approves.
If heads of state can muster the political will, this package can be put together quickly. The key decisions could be made in under nine weeks, even if the details are worked out after the summit. The fiscal costs are quite modest, but the package would deliver a powerful injection of financial energy to the climate finance system. It is also important to note that U.S. participation is not necessary. If Washington wants to sit on the sidelines, it can do that without preventing others from following through with their own money. And none of this would prejudice a future decision to “sunset” the CTF when the GCF ramps up its delivery capabilities.
The Macron summit offers a key opportunity to reinvigorate the climate finance system during a challenging time. Governments should not let this opportunity slip away.