New Finance for Climate Change and the Environment

Fourteen international funding initiatives have been announced over the past 18 months, all of which are aimed at addressing global environmental issues. This sudden proliferation of funds is unprecedented and warrants examination. Clearly, the need to respond to the threat of climate change has become an increasingly important international policy concern, particularly as it has become evident that those most likely to be affected soonest and most severely are the poorest people living in developing countries.

This paper begins by describing the existing architecture with regard to international funding for environmental actions, focusing on two pre-eminent institutions within this architecture: the Global Environment Facility (GEF) and the World Bank. In many respects, the current situation is tending to move the locus for strategy development and funding decisions for climate-related international investments away from the former and toward the latter. One reason for this shift is the limited impact that the existing system has had in addressing climate change issues, and more broadly, its limited success in channeling sufficient funding to address major environmental concerns such as tropical deforestation. The present system has so far failed to deliver transformational change for the global environment.

The desire to achieve more immediate impacts is a major driving force behind the donor countries’ interest in creating new funding mechanisms, as first signaled at the 2005 G-8 Summit meeting in Gleneagles – and likely to be repeated at the 2008 G-8 meeting in Hokkaido Toyako. The document reviews eight new bilateral funds and six multilateral funds established to address the challenges related to climate change. Each of these new funding initiatives is described, focusing on three characteristics: (i) stated objectives; (ii) means of financing and disbursement; and (iii) aspects of fund governance. This latter aspect is a key concern, taking into account the considerable sensitivity associated with the way funds will be controlled and disbursed.

All of the funds aim to help developing countries address the challenges associated with a changing climate. Yet, in most cases, there appears to have been only limited involvement of potential recipient countries in the design of these funds. At the same time, most of the funds have a limited time horizon, with no commitments being made beyond 2012, the anticipated date for entry into effect of a post-Kyoto agreement. This short timescale is significant because it provides an opportunity for ―piloting‖ new approaches rather than establishing any new long-term architecture for global environmental funding. There is therefore an important window of opportunity in which to try out new approaches and methods to secure the necessary financing for actions that respond to a changing climate around the world. Much will depend on how the various key players manage this development phase. Complementarity and synergy among the various initiatives needs to be secured within the United Nations Framework Convention on Climate Change (UNFCCC) framework, underpinned by an understanding between those funding these initiatives and the national governments in countries where activities will be undertaken.

Three new World Bank–managed funds signal an institutional ambition to respond to this challenge. All three funds, however, mirror similar funding schemes managed by the GEF and therefore raise the prospect of duplication of effort. The situation is further complicated by the involvement of bilateral funds in each of these three key areas: supporting low carbon technologies, pursuing climate change adaptation efforts and reducing emissions from deforestation and forest degradation. For example, leveraging finance to encourage the adoption of low carbon technologies is an objective of a number of the funds reviewed. Although there are obvious differences between the activities of the proposed World Bank Clean Technology Fund (CTF) and the GEF’s existing funding for the elimination of barriers to energy-efficient and renewable technologies, it is clear that there is substantial overlap between them as well. For example, activities that are supported by the CTF, as well as the GEF, are providing: (i) positive incentives for the demonstration of low carbon development and mitigation of
greenhouse gas emissions through the public and private sectors; (ii) the diffusion and transfer of clean technologies by funding low carbon programs and projects that are embedded in national plans and strategies to accelerate their implementation; and (iii) promoting realization of environmental and social co-benefits thus demonstrating the potential for low carbon technologies to contribute to sustainable development and the achievement of the Millennium Development Goals. Furthermore, the channeling of funding by donor countries through the CTF might be at the expense of funding the GEF’s climate-related priorities and might have the effect of significantly reducing World Bank participation in the GEF.

As to the future of the GEF, much will depend on how it reacts to this new financial landscape. Responding to new opportunities, however, will require some changes in the organization.

Policy coherence is also badly needed among the new funds and between the globally agreed priorities on climate change and relevant national policy frameworks. The level of alignment with country systems is not yet clear, although much can be learned from the experience with developmentfunding and the implementation of the Paris Declaration on Aid Effectiveness. A significant level of flexibility is needed in these international funds to ensure that their areas of intervention are consistent with nationally defined priorities.

The early stage of development of these new funds means that some questions can only be raised, rather than answered. Whether the pledged financial resources will be additional to existing official development assistance (ODA) commitments is one issue about which civil society has expressed active concern, but as yet, no clear response has been provided.

The international community is therefore clearly at a crossroads with regard to establishing a harmonized financing approach. The proliferation of new funds and funding mechanisms over the past year coupled with the deployment of those funds through certain institutions, notably the World Bank, is bringing about incremental, yet fundamental, change in the existing architecture for global environmental finance. This apparently ad hoc approach in responding to mounting environmental problems has generated real and potential competition among agencies that could lead to less efficient distribution and use of funds.

There are frequent reports that other European governments are preparing to launch additional funds related to climate. Given the already considerable confusion among recently announced funds, these new funding entrants will certainly intensify the lack of cohesion and dysfunction among this patchwork quilt of funding mechanisms. To date, there has been no effort to harmonize the new funds and their respective approaches into a coherent system. As a consequence, international agencies have launched into the quickly changing institutional dynamics seeking to maximize their respective institutional interests, rather than seeking the greatest global benefit. Clearly, out of such a competition, winners and losers will emerge, and without a harmonized financial architecture, the benefits for the global environment will remain suboptimal.

In this context, three clear conclusions stand out:

  • First, every major institution involved in this restructuring of the global financial architecture will undergo fundamental change. Donors must broaden the mandate and strengthen the institutional arrangements of the GEF as the financial mechanism of the UNFCCC, or the facility will be relegated to an insignificant status in the international environmental sphere. The World Bank must dramatically reform its governance systems, its transparency and its internal incentives to meet the international environmental norms that have evolved over the past decades. The many agencies of the United Nations development system must likewise shed their bureaucratic legacies to become more responsive, flexible contributors in response to emerging problems. Changes such as these are inevitable in the coming months and years.
  • Second, the dynamics surrounding these new entrants in the international financial architecture have been limited to interactions among donor countries and to Northern stakeholders since they are not negotiated within the framework of the UNFCCC. This is attributable, to a certain degree, to the lack of information about the proliferation of funds and the potential consequences of this multiplicity of funding mechanisms. Moreover, for lack of a timely policy vehicle or institutional mechanism, voices of the global South seldom have been forcefully heard in the early stages of the public debate. This can be expected to change in the coming months and, as these voices emerge more strongly, public dynamics will undergo considerable change and additional institutional reforms in the emerging architecture will become certain.
  • Third, an overarching process of harmonization is urgently needed. To the degree that individual donors feel that the uniqueness of their funding mechanisms can be protected and rendered operational, the need for harmonization can be ignored for the time being. However, as the publicly announced funds are translated from statements of commitment into operational terms that include geographic priorities, funding processes and qualifying criteria, the overlaps, redundancies, competing views and lack of synergies will become increasingly apparent. A harmonization process initiated sooner rather than later, and supported within the UNFCCC framework, will deliver benefits to donors and recipients alike and significantly increase their combined benefits for the global environment and human enterprise.

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Date of Publication
July, 2008
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