Climate Finance Justice

Summary

These issues in climate finance-justice can be considered as being a reflection on the lack of trust between the various players and especially, between developed and developing countries. This mistrust is mainly on three issues that pertain to mitigation finance; the need for a credible and substantial commitments by developed countries on public funding, the place for private funding and its role in climate change mitigation, and the various institutional and governance structures that should be put in place to ensure equity and effectiveness in climate change mitigation. This paper will address these three issues pertaining climate financing, especially the politics involved and this will be done from a climate justice point of view, and offer possible solutions to the three issues.

Introduction

Climate finance has become an integral part in the fight against the anthropogenic climate change and the associated effects among them, global warming, and green house emissions. Since the start of global negotiations on emission reduction timelines, architecture, and commitments, climate finance has been late into the negotiations as an agenda and it has received limited attention (CICERO & CPI 2015). Despite this fact, the assured delivery and the right use of climate-finance resources that are meant for emissions reduction and emissions caps for the realization of climate change adaptation primarily in developing countries is just as vital as agreement on emissions caps. Developed and developing countries have in the past been unable to agree on a comprehensive framework for mitigation and climate adaptation financing, but the 2015 Paris Climate Summit was a landmark with 200 countries signing to the agree financial and support deal (Vaughan 2015). Some of the issues that have been thorny in the topic are whether private finance realized through carbon markets should be included in the climate finance budget, not to mention the level and terms for finance commitments, regulation of the climate financial sources, and governance structures. These issues can be considered as a reflection on the lack of trust between the various players and especially, between developed and developing countries. This mistrust and disagreement is mainly on three issues that pertain to mitigation finance; the need for a credible and substantial commitments by developed countries on public funding, the place for private funding and its role in climate change mitigation, and the various institutional and governance structures that should be put in place to ensure equity and effectiveness in climate change mitigation (Cameron, Shine and Bevins 2013). This paper will address these three issues pertaining climate financing, especially the politics involved and this will be done from a climate justice point of view. This will be done through reference to literature materials on the topic.

Analysis of climate finance-justice issues

First, developing countries have a genuine concern in being skeptical of the assurance made by developed countries with regard to climate change and mitigation financing through public funding arrangements, this is founded on the wary that developing countries have developed through a more than half a century Official Development Assistance (ODA) from their developed partners which is often frustrating (CPI 2014). There is a well known gap between ODA promises and the actual performance. Moreover, the general characteristics of ODA and actual performance are; the definite financial commitments levels are low, a good percentage of the commitments made are not kept, aid delivery is often linked to other politically oriented agendas, and disappearance of financial supporters with the support for the projects initially supported also waning down (Harnisch and Enting 2013).  In addition, developed countries are primarily driven by self-interests in the international front, especially the west, and thus, they are reluctant to sign and commit t large sums of taxpayer money in the international front especially if their countries won’t see strong effective results and self-interests. Moreover, even when developed countries are willing to commit to spending large public money, they are normally seeking to have flexibility especially on future spending levels in terms of experience with the performance of the project, unforeseen future developments, and on competing project priorities (CGDD 2015).

The second issue on climate finance-justice is on the place and role to be played by private finance. Often, developing countries are suspicious, and understand so, of the developed countries use of private finance as a reason to abandon their financial responsibilities. As argued by Ferron & Morel (2014), there is undeniable temptation by developed government leaders to use as much of private financial sources, or use or assign the responsibility to off-balance sheet options the responsibility of financing their international prerogatives, so as to minimize political contention for use of public funds or public finance sources. Even though as argued by Harnisch and Enting (2013), using private fiscal sources in place of public money is a better option, for mitigation of climate change, both private and public financial sources are required. It is vital that a climate change financial framework should adopt this agreement first, and then on the extent and features of developed countries fiscal commitments should be next.

The third issue is on the institutions and governance structures for both public and private finance. The existing multilateral institutions among them, the World Bank, and the Global Environment Facility (GEF), are the creation of and are dominated by donor countries and developing countries therefore seek to have these reformed or replaced with new structures that give them substantial power to determine the operations of these structures and institutions (CPI 2014). The key issues related to this are the ability of developing countries to influence cost sharing, funds allocation, usage of funds, and conditions. In addition, to realize significant results in climate mitigation, it requires overhaul of the top-down structure marked with donor conditions and adoption of a more flexible bottom-up structure that gives developing countries space to develop and implement more locally suited mitigation and adaptation programs (Financing the Future 2015). On the other hand, developed countries are rightly unwilling to provide funds without right controls and governance structures to guarantee positive environmental changes.

Discussion

Allocations from government budgets are the primary source of the domestic and international public fiscal flow needs for running the climate mitigation agenda. The tax base of a country forms the bulk of the revenues for government budgets and can only be expended through the introduction of new taxes, levies, and other charges. For the purpose of domestic public finance, countries can allocate their budgets to the respective ministries and public institutions responsible for the implementation of public programs and delivery of mitigation services across the range of sectors related to climate change through policies and/or economic structures with the objective of addressing investor needs (World Bank 2015). In addition, country budgets, especially developed countries, are central for the funding of international climate mitigation and adoption initiatives through multilateral agencies and funds, finance institutions, bilateral agencies and funds, or Official Development Assistance (ODA). Governments can provide ODA in the form of concessional loans, grants, or equity (World Bank 2015).

The amount of public finance required from governments should then be determined from climate protection objectives. The 2015 UN Climate change Conference at Paris agreed on the global mean temperatures not to rise more than 1.5⁰C (Vaughan 2015). For the realization of this objective, global emissions should peak by 2020 and then, fall by 50% from the 1990 emissions levels by 2050 (Bhowmik 2013). This projection requires developed countries to cut their emissions by 25-40 percent by 2020 and by 80 percent by 2050 (Bhowmik 2013; CPI 2014). The reduction level of emissions and the costs involved in turn determine the level of financing needed to mitigation and adoption activities. In developing countries, mitigation actions will require about 55-80 billion Euros of financial from the developed countries on an annual basis up to 2020 and an additional 10-20 billion Euros annually for adaptation (World Bank 2015).

Both private and public finance from developed countries to developing countries can and will be needed for mitigation and adaptation projects. Private finance can be in the form of credit offsets in developed country emissions trading systems (ETS). Through purchase of offsets to realize domestic emissions cut targets, emitters in developed countries will end up financing emission reduction activities in developing countries. This strategy works better from the perspective of developed countries in dealing with the possible politics of using funds from the public coffers (Bhowmik 2013), as the transfer will be like expenditure of societal resources as ODA or other public financing systems. Despite the vital role of private financing for mitigation and adaptation actions both locally and international, it cannot be enough and thus, public financing and other multilateral sources will be needed to close the gap, which based on estimates is about 10-70 billion Euros annually (Financing the Future 2015; World Bank 2015). Based on project catalysts, this additional amount can be raised through various private channels among them international transport levies, concessional debt, public fiscal revenues, and the rest from income from actions of local emissions allowances (World Bank 2015).

After a consensus on both public and private finance from developed countries to developing countries, the next issue is to ensure that developed countries actually deliver as per the commitments. One of the strategies to ensure this is through accounting for public mitigation and adaptation finance commitments (Bhowmik 2013). According to Financing the Future (2015), financing from public sources can take a variety of forms among them direct bilateral and/or multilateral ODA finance flows, technological transfer arrangements, loan guarantees, and concessional debt. To achieve effective accountability, it is essential that robust monitoring and reporting and verification mechanisms be put in place to determine the relationship between support provided and the emissions reduction levels expected (CGDD 2015).

Because eventually private financing is an integral part of funds from developed countries to developing countries, and even within countries, expectedly there can be significant challenges in accounting for privately sourced funds, especially ex ante (CGDD 2015). In case awarding of offset credits is subject to monitoring, reporting, and verification, then levels of emissions reduction can be done ex post. It is expected that ex ante emissions reduction estimation will be more challenging primarily because of the dollar amount that has been invested for a certain level of reduction will vary from time to time and within domestic ETS offset credit programs.  The amount of private financing used in mitigation activities will also be affected by regulations in developing countries pertaining offset credit programs. Moreover, in case leveraging measures are being used, it would be expected that these will further complicate accountability of private funding of mitigation and adaptation actions (Morel, Zhou, Cochran and Spencer 2015; CGDD 2015). These can however be solved through the established of a global climate registry for estimation of ex ante amounts of either public and private financing as well as their ex post performance in resource flow and mitigation realized.

Governance of climate change mitigation institutions is essential not only for ensuring efficiency and effectiveness in meeting the set objectives, but also for ensuring the various players are well represented and participate fully in the governance structures. Developing countries require that the existing governance structures be modified to do away with the firm control by developed countries and give developing countries greater role in the governance of public and private funds and in determining how such are used (Cochran, Eschalier and Deheza 2015). In order to realize the significant changes in developmental pathways required globally to achieve climate protection goals, it is important that developing countries be accorded the flexibility, initiative say, and the incentive they need to develop and run programs that are considered right for furthering their developmental agendas (GILCF 2015; Cochran et al. 2015). Moreover, success in mitigation and adaptation requires a shift away from the past and current methods that has lead to dramatic carbon emissions, and adoption of new and, climate-friendly patterns, and wide spread use of new and innovative technologies and strategies, among them being according developing countries the flexibility they require.  Authorities in developing countries will need innovation and leadership responsibilities at all levels in the international decisions-making framework and a bottom-up approach to allow for across board contributions.

Conclusions

Climate change is currently a key global subject with emissions reduction of all, both developing and developed countries being the priority. To this end, financial support is required to drive the protection programs which brings to the fore, three issues; the fact that developing countries need more credible and substantial commitments by developed countries on public funding, the role and place for private funding in climate change mitigation, and modification or overhaul of institutional and governance structures to ensure equity and effectiveness in climate change mitigation. The amount of public finance required from governments should then be determined from climate protection objectives. Country budgets are central for the funding of international climate mitigation and adoption initiatives through multilateral agencies and funds, finance institutions, bilateral agencies and funds, or Official Development Assistance (ODA). Governments can provide ODA in the form of concessional loans, grants, or equity. Both private and public finance from developed countries to developing countries can and will be needed for mitigation and adaptation projects. Both public and private finance plays a role in financing mitigation programs, and private finance is to be in the form of offsetting credits, thus part of a country’s contribution. Lastly, success in mitigation and adaptation requires a shift away from the past and current methods that has lead to dramatic carbon emissions, and adoption of new and, climate-friendly patterns, and wide spread use of new and innovative technologies and strategies, among them being according developing countries the flexibility they require.

References

1. Bhowmik D, 2013, Key Features and Dimensions of Climate Finance, International Journal of Scientific and Research Publications, Volume 3, Issue 4.
2. Cameron E, Shine T, and Bevins W, 2013, Climate Justice: Equity and Justice Informing a New Climate Agreement, Working Paper, World Resources Institute, Washington DC and Mary Robinson Foundation
3. Center for International Climate and Environmental Research (CICERO) & Climate Policy Initiative (CPI), 2015, Background Report on Long-Term Climate Finance, A report for the G7.
4. Center on Globalization and Sustainable Development (CGDD), 2015, A Proposal to Finance Low-Carbon Investment in Europe, Etudes & Documents n°121, Department of the Commissioner General for Sustainable Development.
5. Climate Policy Initiative (CPI), 2014, Global Landscape of Climate Finance, Climate Policy Initiative.
6. Cochran I, Eschalier C, and Deheza M, 2015, Mainstreaming Low-Carbon Climate-Resilient Growth Pathways into Investment Decision-Making – Lessons from Development Financial Institutions on Approaches and Tools. APREC – CDC Climat Recherche, AFD.
7. Ferron C, & Morel R, 2014, Smart Unconventional Monetary (SUMO) Policies: Giving Impetus to Green Investment, CDC Climat Recherche.
8. Financing the Future, 2015, Shifting Private Finance towards Climate-Friendly Investments, A Report for EU DG Climate.
9. Global Innovation Lab for Climate Finance (GILCF), 2015, The Global Innovation Lab for Climate Finance: Phase 3 Instrument Reports
10. Harnisch J, and Enting K, 2013, Country risk levels and cost of political risk of international greenhouse gas mitigation projects, Greenhouse Gas Measurement and Management 3, 55–63. Doi: 10.1080/20430779.2013.815088
11. Morel R, Zhou S, Cochran I, and Spencer T, 2015, Mainstreaming Climate Change in the Financial Sector and Its Governance – Part II: Identifying Opportunity Windows. Working Paper. CDC Climat Recherche & IDDRI.
12. Vaughan A, 12 December 2015, Paris climate deal: key points at a glance, the Guardian. Retrieved from http://www.theguardian.com/environment/2015/dec/12/paris-climate-deal-key-points on 21 February 2016
13. World Bank, 2015, Decarbonizing Development: Three Steps to a Zero-Carbon Future
14. WRI, 2015, Getting to $100 billion: Climate finance scenarios and projections to 2020