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This paper was produced as a referencepaper to inform the discussion paper“New Mechanisms for FinancingMitigation: Transforming economies sec-tor by sector.” The views expressed inthis paper do not represent the views ofWWF nor the agencies that committedfinancial support to carry out this proj-ect.

Review of the CDM and Other Existing and Proposed Financial Mechanisms to Transfer Funds from North to South for Mitigation and Adaptation Actions

in Developing Countries

Silvia Magnoni

Consultant

Paper prepared for WWF

Macroeconomic for sustainable Development Program Office

January 2009

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An Introduction to the Global Financial Mechanism Supporting Studies Series

Beginning in mid-2008, at the request of several European governments, WWF led an analysis and dialogue on international financing arrangements to address climate change in developing countries. That meant, on the one hand, advancing a technically strong proposal capable of mobilizing the considerable public and private funds that may be needed to attain the below 2 degrees centigrade goal for climate change stabilization and, on the other hand, advancing an equitable proposal that could garner the support of the parties at COP15.

The work approach is designed (a) to bring a bottom-up perspective to the to the current top-down discussion, based on a suit of developing countries’ sectoral studies that focus on what it would actually take to move whole economic sectors towards a low emission trajectory; (b) to focus on the operational requirements of an international financing scheme; (c) to engage leading experts on a critical review of relevant experiences and government proposals; (d) to convene experts and negotiators from South and North to discuss these issues; and (e) to present the project findings to key stakeholders and forums in the run-up to COP15.

The program’s main conclusions and proposals are in the document: “Global Financial Mechanism. The Institutional Architecture for Financing a Global Climate Deal” that can be downloaded from http://www.panda.org/what_we_do/how_we_work/policy/macro_economics/our_solutions/gfm/

In this Supporting Studies Series we are presenting a dozen reports that were used as inputs to the project. All these studies were commissioned to independent experts or institutions. Some are case studies of mitigation opportunities in different sectors of developing countries (e.g. cement and iron & steel in China and Mexico, coal based power generation in India, renewable energy opportunities in Morocco). Others are stock-taking reports focusing on critical issues for the global climate change financing (e.g. mapping new financing options for climate change, a review of sectoral mitigation proposals, a review of proposals to fund technology cooperation, etc.).

Some of the ideas and proposals in these support series have been carried over to the project recommendations and have been summarized in the main document (either as short summaries, theme boxes, or pull quotes). Still, these documents have much more to offer, and for that reason we present them here in full. As usual, opinions in each document are the sole responsibility of its author(s), and should in no way be considered representative of WWF positions.

Authors and titles in this GFM Supporting Studies Series include:

1. Michael Rock; (Bryn Mawr College) Using External Finance to Foster a Technology Transfer-Based CO2 Reduction Strategy in the Cement and Iron and Steel Industries in China

2. Christine Woerlen (Arepo consult, Berlin) ; “Opportunities for renewable energy in Tunisia: A country Study

3. The Energy and Resources Institute (TERI, Delhi) “Strategies to reduce GHG emissions from India’s coal-based power generation”

4. Britt Childs with Casey Freeman (WRI, Washington DC) “Tick Tech Tick Tech: Coming to Agreement on Technology in the Countdown to Copenhagen”

5. Energia, Tecnologia y Educacion, SC (ETE, Mexico DF) “Strategies to reduce Mexico’s cement and iron & steel industry GHG emissions”

6. Charlotte Streck (Climate Focus, Brussels) “Sectoral Transformation Plans as Strategic Planning Tools”

7. Charlotte Streck (Climate Focus, Brussels) “Financing REDD a Review of Selected Policy Proposals

http://www.panda.org/what_we_do/how_we_work/policy/macro_economics/our_solutions/gfm/

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8. Charlotte Streck (Climate Focus, Brussels) “Financing Climate Change: Institutional Aspects of a Post-2012 Framework”

9. Silvia Magnoni “Review of the CDM and Other Existing and Proposed Financial Mechanisms to Transfer Funds from North to South for Mitigation and Adaptation Actions in Developing Countries”

10. Silvia Magnoni “Sectoral approaches to GHG mitigation and the post-2012 climate framework” 11. Weishuang Qu (Millennium Institute, Washington DC) “Using the T21 computing model to

forecast production and emissions in China’s cement and steel sectors” 12. Neil Bird et al (ODI, London) “New financing for climate change. And the environment in the

developing world”

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TABLE OF CONTENTS

EXECUTIVE SUMMARY ................................................................................................................. 8

INTRODUCTION ........................................................................................................................... 9

PART 1: EXISTING CLIMATE-RELATED FUNDS AND FINANCIAL MECHANISMS ............................... 11

Introduction .......................................................................................................................... 11 Objectives.............................................................................................................................. 19 Geographical targeting of funds ............................................................................................. 21 Financing and disbursement ................................................................................................... 21 Governance ........................................................................................................................... 23 Conclusions ........................................................................................................................... 25

PART 2: PROPOSED FINANCIAL MECHANISMS ............................................................................. 26

Introduction .......................................................................................................................... 26 Mexico World Climate Change Fund ....................................................................................... 32 Norway Auctioning System .................................................................................................... 34 G77 and China Enhanced Financial Mechanism ....................................................................... 35 Switzerland Global Carbon Dioxide Tax ................................................................................... 38 Registry of “Nationally Appropriate Mitigation Actions” (NAMAs) ........................................... 39 Other Submissions ................................................................................................................. 41 Conclusions ........................................................................................................................... 42

PART 3: OTHER ENVIRONMENT-RELATED FUNDS ........................................................................ 43

Introduction .......................................................................................................................... 43 Objectives.............................................................................................................................. 49 Financing and disbursement ................................................................................................... 50 Governance ........................................................................................................................... 51 Conclusions ........................................................................................................................... 51

ANALYSIS ................................................................................................................................... 52

CONCLUSIONS ........................................................................................................................... 55

REFERENCES .............................................................................................................................. 57

Appendix I ................................................................................................................................. 59

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LIST OF ACRONYMS

AAUs Assigned amount units

ADB Asian Development Bank

AFB Adaptation Fund Board

APCF Asia Pacific Carbon Fund

AWG-LCA Ad Hoc Working Group on Long-term Cooperative Action under the UNFCCC Convention

CAF Corporación Andina de Fomento

CDM Clean Development Mechanism

CEF Clean Energy Fund (Asian Development Bank)

CEFPF Clean Energy Financing Partnership Facility (Asian Development Bank)

CERs Certified emission reductions

CIF Climate Investment Fund

CMP UNFCCC Conference of the Parties (COP) serving as the Meeting of the Parties

COP UNFCCC Conference of the Parties

CPAs CDM Programme Activities

CPF Carbon Partnership Facility

CTF Clean Technology Fund

DMCs Developing member countries (Asian Development Bank)

DNAs CDM designated national authorities

DOEs CDM designated operational entities

EB CDM Executive Board

EBRD European Bank for Reconstruction and Development

EC European Commission

EIB European Investment Bank

EIF European Investment Fund

ERPAs Emission reduction purchase agreements

ERPFs Emission reduction purchase facilities (International Finance Corporation)

ETF-IW Environmental Transformation Fund – International Window (UK)

ETS Emission-trading scheme

EU European Union

FCPF Forest Carbon Partnership Facility (World Bank)

GCCA Global Climate Change Alliance (of the EC)

GDP Gross domestic product

GEEREF Global Energy Efficiency and Renewable Energy Fund

GEF Global Environment Facility

GET Global Environment Trust Fund

GFIC Global Initiative on Forest and Climate (of the Australian Government)

GHG Greenhouse gas

GNP Gross national product

IFC International Finance Corporation

IMF International Monetary Fund

IPCC Intergovernmental Panel on Climate Change

KfW KfW Bankengruppe

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KP Kyoto Protocol

LAC Latin America and Caribbean Region

LDC Least developed country

LDCF Least Developed Country Fund

MAF Multilateral Adaptation Fund (Switzerland –Global Carbon Dioxide Tax)

MCCF Multilateral Carbon Credit Fund

MDB Multilateral Development Bank

MDG CF MDG Carbon Facility (United Nations Development Programme)

MDGs Millennium development goals

MF Multilateral Fund for the Implementation of the Montreal Protocol

MRV Measurable, reportable, verifiable (emissions reductions)

NAMAs Nationally appropriate mitigation actions

NAPA National adaptation plans of action

NCCF National Climate Change Fund (Switzerland –Global Carbon Dioxide Tax)

NORAD Norwegian Agency for Development Cooperation

ODA Official development assistance

ODS Ozone-depleting substances

OECD Organisation for Economic Co-operation and Development

PEF Poverty and Environment Fund – Asian Development Bank

PLAC Latin America Carbon Program

PoA Program of activities

PPCR Pilot Program for Climate Resilience

RAF Resource Allocation Framework (of the GEF)

REDD Reducing Emissions from Deforestation and Degradation

SCCF Special Climate Change Fund

SCF Strategic Climate Fund

SEF Sustainable Energy Facility (International Finance Corporation)

SFM Sustainable forest management

SME Small and medium-sized enterprises

TF-CC GEF Trust Fund Climate Change

TFA Tropical Forest Account (of the GEF)

UNCBD United Nations Convention on Biological Diversity

UNDP United Nations Development Programme

UNEP United Nations Environment Programme

UNFCCC United Nations Framework Convention on Climate Change

UNIDO United Nations Industrial Development Organization

WB World Bank

WCCF World Climate Change Fund

WEO World Economic Outlook

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EXECUTIVE SUMMARY

The objective of this review of existing and proposed financial mechanisms is to define the potential and shortcomings of the current (or projected) financial regime and put this in relation to the creation of a new improved financing scheme that could transfer sufficient resources from North to South in an efficient, transparent, and participatory way. International climate change negotiations are indeed now working in this direction, and the regular submissions from parties and civil society to the Ad Hoc Working Group on Long-term Cooperative Action (AWG-LCA) reveal the desire of governments and organizations to achieve an innovative climate change agreement that could overcome existing weaknesses in the global financial structure, while providing nations with suitable tools to handle the adverse consequences of climatic modifications.

The starting point is, obviously, the identification of problems and distortions in current funding schemes. In order to understand why results have not been proportional to initial efforts, it is essential to categorize difficulties and troubles, which represent the “working base” for further improvements. The latest submissions to AWG-LCA demonstrate common perceptions in terms of more urgent problems and outline of the improved climate change agreement. Some shared elements among the analyzed proposals show the preferred post-2012 direction: new and additional funding, more involvement and representation of developing countries, open and transparent governance, increased resources for technology transfer and adaptation, a polluter-pays principle, and an enhanced policy-based approach.

In view of all these considerations, improvements toward an enhanced financial regime might account for

1. UNFCCC framework: It is clear that the United Nations Framework Convention on Climate Change (UNFCCC) is the most participatory environment for carrying out climate change negotiations. Any new financial scheme outside it would not be perceived by all countries as the outcome of open and transparent talks.

2. New and additional funding: The current available funding is not sufficient for tackling the adverse consequences of climate change on an adequate scale. The latest proposals work in this direction and not only suggest more significant pledges from governments but suggest market-based mechanisms and private sector involvement as possible fundraising areas, as well as advocate for contributions from developing countries (in measure of their capacity).

3. Improved governance: Governance is a critical element in structuring financial funding, and it is fundamental to build a new scheme that takes into account everyone’s interests (both industrialized and nonindustrialized nations). Good governance allows for an equitable and balanced representation of constituencies, provides easier access to funding from developing countries, accelerates procedures, and ensures open and transparent operations. Without these elements, any new financial mechanism may just not make any durable impact in favor of the global environment (and people).

4. Policy-based action: Recent negotiations under the UNFCCC have focused on a gradual shift from project-based activities to programs of action and cooperative sectoral approaches. The latest proposed financial schemes all adopt a programmatic/sectoral perspective to overcome the limits of project-targeted actions, which are not able to reach the scale necessary for effective impacts. On the other hand, programs, broadly defined, could become good vehicles to tackle sector, subsector, or systemwide emissions.

5. Long-term outlook: Given the need for carrying out significant mitigation and adaptation actions, whose impact can create lasting, sustainable benefits, any new financial scheme should work under a long-term perspective, so as to allow for the implementation of

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relevant initiatives that can bring about transformational change. This is particularly important if efforts’ scaling up is put in place through policy-based, programmatic approaches.

With these elements in mind, some directions and suggestions already exist for defining an improved global financial architecture. How it would be structured is still not fully clear because of the many interests and perspectives at play. But the Conference of the Parties (COP) 15 has given the climate change political agenda a high priority, and key agreements and new directions are expected to come out of this meeting.

INTRODUCTION

With the recent increasing awareness of climate change and its potential disruptive effects on ecosystems, the environment, and, as a consequence, the economies of countries, an intense and wide debate at the global level has focused on how important having appropriate access to finances is in prompt and relevant intervention in this field. The consequences of what has been defined by many as the main challenge of the 21st century are felt most strongly by the poorest and least developed nations, which rely on the natural environment for their livelihoods. For these countries in particular, it is much more difficult to tackle global warming at a national level, as any action toward greenhouse gas (GHG) mitigation or – even more relevant for developing countries – adaptation requires well-planned, well-implemented, and well-managed projects, as well as sufficient and secure financing, to develop and run activities that could lead to less GHG-intensive and more sustainable development paths.

Various forms of financial support have been developed with the aim of transferring monetary resources from industrialized nations to poorer countries, while helping to leverage the potentially significant benefits of environmentally friendly technologies for the developing world. Many of the existing funds employ market-based mechanisms to address environmental issues, including the use of mandatory and voluntary emission offsets in the area of climate change. The existence of these instruments is decisively delivering positive benefits to both participants (donors) and recipients (beneficiary countries) of funds: While complying with their quantified emission limitations and (mandatory/voluntary) reduction commitments, the former are transferring critical amounts of money to the latter, with a forward-looking view of achieving sustainable development based on the use of renewable energy. The transfer of environmental technologies and know-how that should come as a by-product of these financial instruments, the diversity in the assistance schemes (grants, concessional loans, etc.), the global coverage and attempted conciliation of national interests, and the linking of financial support to technical assistance and capacity-building programs have made the current financing system a critical and necessary element for developing nations in addressing climate-related issues.

However, the present situation requires further efforts and consistent improvements in the design and implementation of the financial instruments currently in place, as it has become more and more apparent that they are not able to properly tackle the environmental issues that bear most directly on poverty reduction in poor nations. The current financing system is not sufficient to confront a global challenge of the scale of climate change, since the majority of existing funds

1. are insufficient in scope by the amount of money mobilized,

2. are structured around a governance scheme, which limits the inclusion of the perspective of potential recipient countries (if at all considered),

3. are working on a short-term time frame (generally until 2012), consequently cutting out bigger (and longer) projects/interventions that might still contribute to more sustainable paths, and

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4. are not working in synergy with other funds/financial mechanisms, therefore adding further fragmentation and inefficient duplications to the current financing system.

In view of these elements, there is common agreement at the global level on the urgency of creating a more inclusive and predictable mechanism that guarantees financial stability and sustenance, while allowing for direct and immediate actions to counteract climate-related challenges. With the aim of participating in the climate change debate and showing good intentions and commitments, governments and international institutions worldwide have come up with various financial solutions and schemes, without thinking in true global terms and collaborating toward the creation of a multinational, comprehensive strategy that each country could contribute to according to its own possibilities, capacities, and, perhaps, historical responsibilities for global warming. As a consequence, the current financing context presents weaknesses and flaws that make the existing instruments inappropriate tools to deploy in the fight against negative climate change effects.

Market mechanisms and any other forms of economic incentives instead need to be appropriately designed and matched by an adequate regulatory capacity, in order to play a key role in mobilizing financing for development with environmental benefits.

The pressing need for a suitable global financial scheme has led to much fervor in both donor and recipient countries, especially in the view of the upcoming Conference of the Parties (COP) 15 (in Copenhagen in December 2009), which has as its main target the definition of a renewed post-Kyoto Protocol (KP) financial mechanism. Many proposals for innovative market mechanisms under the United Nations Framework Convention on Climate Change (UNFCCC) have been advanced by various governments and country groups as submissions to the Ad Hoc Working Group on Long-term Cooperative Action (AWG-LCA) under the convention.1 Despite the different structures and procedures of the submitted schemes, common determinants can be found in the aims of overcoming the weaknesses and distortions of the current financing system, while supporting systematic programs of investments, expanding the use of risk management products, offering market continuity and predictability, and lowering transaction and implementation costs.

The present paper aims at reviewing the current financial instruments, within and outside the UNFCCC framework, so as to underline strengths and weaknesses and investigate potential improvements toward an enhanced financing system that could be (1) more inclusive of beneficiary countries’ views, (2) more efficient in channelling (significant amounts of) money and technologies from North to South, and (3) more inclined to programmatic or wholesale approaches rather than project-by-project ones. The study also reviews recent proposals (AWG-LCA submissions) for improved funds and financial mechanisms and covers relevant environment-related funds that would complete the overview of the overall financing system targeting climate and environmental issues. The paper is consequently structured into three sections that examine the three categories of funds reported above, followed by a final section of discussion, suggestions, and pertinent conclusions.

1 In this paper, references to “the convention” mean the UNFCCC.

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PART 1: EXISTING CLIMATE-RELATED FUNDS AND FINANCIAL MECHANISMS

Introduction

A broad variety of environmental funds are available at the global level, with different specific purposes, recipient targets, monetary amounts, and operational structures. This ample availability may at first sight indicate that considerable effort is being taken to carry out effective actions for GHG mitigation and adaptation, thanks to an international financing scheme that offers many opportunities to choose from. However, the situation is far more complicated and far less effective. Duplication of efforts, bureaucratic burdens, insufficient funding, and inappropriate governance are some of the most relevant weaknesses of existing funds that need to be addressed in order to improve the financial systems currently in place.

As indicated in Table 1 and 2 below, the existing funds offer different solutions and approaches (i.e., carbon markets, carbon funds, climate financial initiatives) to similar problems and objectives. Overlaps can be easily found, and the financial system’s fragmentation suggests that individual governments and multilateral institutions, in the rush of showing their immediate commitment toward climate change, have preferred to recur to different funds, rather than articulating single actions/initiatives into a global strategic and politically coherent framework. Even the Clean Development Mechanism (CDM), which has a global coverage and should represent an effective, united, UNFCCC-supported mechanism for financing climate-related projects, presents critical weaknesses in its design and implementation procedures (Environmental Defense Fund, 2007).

A common global call (UNFCCC AWG-LCA 2008) recently arose for an enhanced financial mechanism that could achieve more immediate impacts in the mitigation and adaptation areas. Additional goals include concrete transfers of resources and know-how “from North to South,” while promoting programmatic funding modalities and increased volumes of disbursed amounts. This need is particularly felt by the poorer countries that are largely vulnerable to the effects of climate change, which sense that the current financing system – based on governance schemes that have not much included developing countries’ participation – does not address their relevant concerns and urgent needs in an appropriate way.

This section reviews the existing financial mechanisms and carbon funds as reported in the tables below. The first table concentrates on the bigger mechanisms administered by multilateral institutions (e.g., Global Environment Facility, World Bank), while the second table focuses on some existing carbon funds/facilities that operate at a minor scale at the international or regional level.

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Table 1: Existing climate-related funds and financial mechanisms (1)

Questions CDM GEF

TF-CC

GEF

SCCF

GEF

LDCF

GEF

AF

WB

CF

WB

CIFs

Creation and proposal

Based on proposed CDF; included in KP in COP 3, 1997.

Successor of GET, 1994.

COP 7, 2001; operational in 2005.

COP 7, 2001. COP 13, 2007. World Bank, 2000 (Prototype Carbon Fund).

World Bank, 2008.

Fund sources Developed countries and companies, as forms of bilateral models or funds.

Donor countries, every four years.

Donor countries, voluntary contributions on a continuous basis.

Donor countries, voluntary contributions.

Financed with a share of proceeds (2%) from CDM project activities and donor contributions.

OECD countries, private/public partnership.

Contributions from donor countries by MDBs; new and additional to ODA.

Annual and total amounts

In 2007: US$7.4B/yr for primary CDM; US5.4B/yr for secondary purchase transactions. By 2030: US$5B-US$25B/yr (low est.) US$100B/yr (high est.).

US$250M/yr; co-financing leverage of three times.

Total resources so far: US$90.3M, incl. new pledges.

Initial voluntary contributions amount to US$172.84M so far.

2008-2012: US$80M-US$300M/yr.

By 2030: US$100-US$500M/yr (low est.) to US$1B-US$5B/yr (high est.). Predictability.

Total funds pledged so far: US$2.19B. Not predictable. No polluter-pays principle.

Target size US$5-US$10B of total resources.

Purpose of the fund

Sustainable development and compliance with emission limitations.

New and additional financing for development, climate change mitigation, and adaptation. Global environmental benefits.

Support activities and programs complementary to GEF TF-CC, focus on adaptation and technology transfer.

Reduce vulnerability to climate change in LDCs. Support the preparation of NAPAs.

Finance concrete adaptation projects and programs in developing countries that are parties to the Kyoto Protocol.

Purchase of project-based GHG emissions reductions in developing countries and countries in transition.

Creation of targeted programs on climate change, transfer, and deployment of clean technologies.

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Governance Authority of CMP having guidance over CDM. Aim of accessible and universal governance.

Criticism for lack of transparency, unpredictability of EB decisions, and right of recourse. Not easily accessible.

Representative - GEF Council (16 from developing countries, 14 from developed countries, and two from countries with transitional economies). Decisions by consensus. Still, weak role from developing countries.

Administered by GEF, accountable to the COP and subject to its guidance.

Criticism in terms of lack of predictability of resources.

Appropriate, with funding for adaptation in the form of grants.

Administered by GEF, accountable to the COP and subject to its guidance. Accessible: better access to GEF resources from LDCs - project cycle streamlined and no need to demonstrate global environmental benefits.

The AFB works under the authority and guidance of the CMP. Transparent. Representative/AFB, consisting of 16 members and 16 alternates, in representation of diverse constituencies (majority from LDCs). Appropriate: grants.

Managed by the WB, there are governance issues related to lack of transparency in practice, representation, accessibility, and conflicts of interest with traditional lending from WB Group.

A Trust Fund Committee oversees the operations. Representative: It consists of eight representatives from donor countries and eight representatives from eligible recipient countries. Decision making by consensus.

Relation to UNFCCC framework

One of the flexible mechanisms of the Kyoto Protocol.

Financial mechanism of the UNFCCC.

Special fund within UNFCCC, managed by the GEF, accountable to COP.

Special fund within UNFCCC, managed by the GEF, accountable to COP.

Established under the KP of the UNFCCC, the AF acts under guidance of the CMP.

The WB Carbon Fund Unit oversees project-based transactions of CDM and JI carbon market.

Actions to address climate change should be guided by the principles of the UNFCCC.

Management Administered by CMP and EB. Implemented through DNAs and DOEs.

GEF Secretariat for project and programs implementation; GEF agencies for managing projects;

NGOs to assist project operations.

Administered by the GEF separately from the GEF Trust Fund, with its own operational rules and procedures.

Administered by the GEF separately from the GEF Trust Fund, with its own operations and administrative costs.

Administered by the AFB, serviced by a secretariat (GEF) and a trustee (WB) on an interim basis, to be reviewed after three years.

Trust funds administered by the World Bank, which oversees the management of the funds.

To be governed by a Trust Fund Committee, subcommittees (for SCF), and serviced by an MDB committee, an administrative unit, and a trustee.

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Criteria to allocate funds

Sustainability; additionality compared to business as usual; financial additionality; real, measurable reductions; feasibility. No equal distribution.

Developing countries and economies in transition.

Projects must reflect national/regional priorities and improve global environment.

All non-Annex I countries are eligible. Country-driven project; transparency; scientific merit and financial sustainability. Focus on equity and sustainable development.

All least developed countries that have prepared NAPAs are eligible. Focus on equity and sustainable development. Prioritization of most vulnerable countries.

Vulnerable developing countries parties to the KP. Allocation as for vulnerability; balanced access to the fund; maximizing multi-/cross-sectoral benefits. Equity in distribution.

In general, consistency with national sustainable development priorities and, under CDM rules, real, measurable, verifiable, and “additional.”

Based on ODA eligibility and an active MDB country program. Investment criteria focused on the potential for GHG reductions for CTF. For PPCR-SCF, priority given to vulnerable LDCs.

Programmatic and sectoral approach

GHG reductions are also achieved through CPAs, project activities under a PoA.

Endorses programmatic perspective.

Support to both activities and programs.

Envisioned programmatic approach, through the identification of priority actions within NAPAs.

Finances both projects and programs.

The new initiatives (FCPF and CPF) involve incentive programs and programmatic approaches, respectively.

Creation of programs is supported in CIF. PPCR-SCF provides programmatic finance for country-led development plans.

Time frame Until 2012. Fourth replenishment: 2006/2010.

Programming and needs defined until 2009 and on a three-year time frame.

Programming and needs defined until 2009 and on a three-year time frame.

Until 2012. Funds can purchase carbon until 2015.

Clauses for termination of operations based on new UNFCCC financial architecture.

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GHG emissions reduction accounting

CERs as the difference between baselines and actual emissions.

GHG emissions life-cycle analysis (direct and indirect emissions reductions).

N/A (adaptation measures).



Linked to the CDM project-based, baseline emission-related methodologies.

CTF: methodology to be developed to encompass direct and potential projects’ emissions savings.

Performance 551 MtCO2e for finalized primary CDM transactions in 2007. 1192M CERs expected from existing projects (2008/2012).

Exceeded GHG reduction targets set by 3

rd

Replenishment ($92B, >200m tonnes). No adequacy in funding.

N/A

Projects in pipeline still have to be operatively implemented.

As of May 2008, 32 NAPAs have been completed, and 10 have been approved for LDCF funding.

N/A

Not fully operational. Performance linked to the ability of monetizing CERs. New and additional.

102 ERPAs signed. 207 million tCO2e committed in signed ERPAs with options on several million tonnes.

Still to be fully implemented.

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Table 2: Existing climate-related funds and financial mechanisms (2)

Questions IFC ERPFs UNDP MDG CF APCF EIB-KfW MCCF PLAC


IFC and the Dutch government, early 2000s.

UNDP in partnership with Fortis Bank, 2007.

ADB, 2007. EIB and KfW, 2007. EIB and EBRD, 2006. Corporacion Andina de Fomento, 1999.

Fund sources Dutch government. The MDG CF does not provide underlying finance to its projects.

Contributions from governments. Acceptance of participation closed on 30 June 2007.

Commitments initially provided equally by EIB and KfW. Participant companies make contributions of at least €500,000.

Contributions from six countries and six companies.

Dutch government.


US$135M until 2012. Not a fund, but the facility can help leverage carbon finance through UNDP and Fortis.

US$151.8M as total commitments.

€100M of total commitments.

Total resources: €150M for the Project Carbon Fund and €40M for the Green Carbon Fund (government-government trade in AAUs).

Total resources: €45M.

Purpose of the fund

Purchase of carbon credits for the benefit of the Dutch government under KP.

Broadening access to carbon finance for developing countries and promoting pro-MDGs emission reduction projects.

Increase clean energy projects in DMCs, capitalize increased investments and provide additional source of finance to developing countries.

Purchase program for project-based emission certificates under KP; focus on compliance for European SMEs.

Expand the supply of carbon credits in Central Europe and Central Asia; carbon purchase for participants’ compliance.

Consolidation of carbon markets and adoption of clean tech in LAC region, support national climate change institutions, and buy CERs.

Governance The governance structure of the CDM market applies to projects producing CERs against KP compliance, then

Accessible to a broad base of poor countries.

For each emission reduction project, the facility’s services are

The Board of Directors consists of donor countries. Developing countries not involved in the decision-making process. Weak

Initiative under EIB and KfW. No involvement of development countries in decision making. Weak representation and transparency.

Initiative under EIB-EBRD and carbon managers. No involvement of development countries in decision

Representation: CAF’s shareholders are countries from the Andean and non-Andean region. CAF governance is based

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purchased by the IFC on behalf of the Dutch government. Weak representation.

governed by a number of contractual arrangements. Weak representation.

representation and transparency.

making. Weak representation and transparency.

on high-level political representation at the Board.


The IFC bridges compliance buyers with project developers under the CDM KP scheme.

The MDG CF operates within the framework of the CDM (and JI).

Operates within the framework of the CDM. It provides up-front co-financing to CDM projects in ADB’s DMCs for future delivery of CERs.

Operates within the framework of the (JI and) CDM.

Operates within the framework of the (JI and) CDM. Possibility of government-to-government trade in AAUs under Article 17 of KP.

Operates within the framework of the (JI and) CDM.

Management The IFC facilitates access to carbon markets and manages carbon funds on behalf of the Dutch government.

UNDP and Fortis as managers of the facility. Project proponents should contact UNDP for first information.

Managed by ADB on behalf of fund participants. ADB is the trustee of the APCF.

EIB and KfW jointly oversee fund management activities.

Intermediate structure involving three independent private sector companies (the “carbon managers”), which do negotiating, contracting, and monitoring of transactions.

Managed by CAF, as part of its specialised environmental programs.


The main criteria include location, likely project closing, amount of credits, environmental and social impacts, host country approval, and independent verifications’ results.

Open to emission reduction projects in developing countries (CDM projects) that have ratified the Kyoto Protocol (JI also accepted). Priority for underrepresented countries in carbon markets.

Be located in a DMC that is a CDM-eligible country; be financially supported by ADB; generate permanent CERs (no reforestation).

Project-based carbon credits may be acquired from projects in any EIB country of operation that has ratified the KP and where the credits are eligible under the EU-ETS.

Project-based carbon credits may be acquired from projects financed by the EIB or EBRD in any country that has ratified the KP. Other criteria include project viability and sustainability, integrity, and

The fund is destined exclusively for purchase of CERs. Criteria include commercial viability, sustainable development, investment risk, and qualification under the CDM process.

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corporate governance.


No. Project based only.

Time frame Through to 2012. 2008–2012. Until 2012. However, there is an intention to create a post-2012 carbon fund.

The option to acquire post-2012 carbon credits is offered only in certain cases.

Until 2012.


CDM baseline emission reduction accounting methodology.

Performance IFC has concluded 12 transactions to purchase emissions reductions from more than 40 projects. IFC will guarantee delivery of 1.75 million credits from CDM projects.

No information available. Being a recent fund, there are no concluded projects yet.

The potential carbon value in ADB’s project pipeline is estimated to be about 42 to 63 million tCO2e to the end of 2012. It is estimated that over 80 projects in the ADB pipeline have potential carbon credit content.

Purchase target of 9 million tonnes CO2e per year (incl. post-Kyoto purchase).

Estimates around 10 million tonnes of carbon.

CAF facilitates the purchase of up to 10 Mt of emission reductions from Latin American and Caribbean countries.

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Objectives

The CDM, as one of the flexible mechanisms of the KP, was established in order to (Article 12, KP)

assist parties not included in Annex I in achieving sustainable development and in contributing to the ultimate objective of the convention, and

assist parties included in Annex I in achieving compliance with their quantified emission limitation and reduction commitments under Article 3.

The twofold targets describe the intentional inclusive nature of the mechanism, which is supposed to help both industrialized and developing countries in contributing to GHG mitigation and, ultimately, sustainable development. A subtarget of the CDM is the transfer of environmental technology and know-how: Through the implementation of projects in developing countries, the mechanism should contribute to capacity building in the recipient countries and the spread of environmentally friendly technologies in place of traditional ones.

Despite complex procedural hindrances in the project life-cycle management, the CDM has proved to be a successful tool, with a market of 551 MtCO2e (metric tonnes of carbon dioxide equivalent) for finalized primary CDM transactions in 2007 (Capoor and Ambrosi 2008), equaling US$7,426 million of capital flows.

However, the CDM’s ability to achieve the settled objectives is hampered by many aspects:

1. The additionality (compared to business as usual) of projects is rather difficult to prove with a high degree of accuracy. There are too many factors and side effects to be considered, which can never be assessed or measured. The CDM’s project-level crediting and the extensive requirements that must be met to prove real and additional reductions (and therefore concrete mitigation actions) represent a significant limitation for the mechanism.

2. The geographical distribution of projects suggests that the target for “sustainable development” is likely to refer to some countries/regions only among non-Annex I nations (Fenhann et al. 2008). Investments in the CDM tend to concentrate on a small number of developing countries – usually the richer among them (e.g., China, India) – that already attract the largest share of foreign direct investments. It seems too costly for small countries to participate.

3. The “sustainability” target appears more rhetorical than operational. The CDM has the explicit objective of promoting sustainable development (in the Kyoto Protocol this target is, in fact, stated before the target of reducing greenhouse gas emissions). This implies that environmental, social, and economic aspects all have to be considered. However, it seems that so far the mechanism has been predominantly driven by economic interests above all. There are no economic incentives that give any importance to the other aspects.

Carbon markets are also the central arena for the various World Bank (WB) carbon funds that were established in order to purchase project-based GHG emission reductions (including Reducing Emissions from Deforestation and Degradation, land use, and forestry projects) in developing countries and countries in transition. Overall, 207 million tCO2e has been committed in signed emission reduction purchase agreements, with options on several million tonnes, from the year 2000 (operational year of the Prototype Carbon Fund) till now. However, less than 10 percent of money spent so far is going to new renewable energy, with only one fund, the Community Development Carbon Fund, focusing on funding local sustainable energy projects. Further, less than 10 percent is linked to funds going to community development (Capoor and Ambrosi 2008).

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With the recent introduction of the Climate Investment Fund, the WB has developed a specific focus on the deployment, diffusion, and transfer of clean technologies and has started offering financing for climate-change-related targeted programs, while including adaptation in the targets scope.

Another institution that has recently increased its interest in adaptation financing is the Global Environment Facility (GEF). The GEF Trust Fund has been created to provide new and additional financing for projects and programs that would address development needs and at the same time protect the global environment (climate change mitigation and adaptation). The GEF’s main potential impact is its contribution to catalyzing the sustainable transformation of markets and programs such that GHG emissions are reduced or avoided in the long term. According to the GEF III “Overall Performance Studies” (2005), in the climate change area, the GEF portfolio has performed satisfactorily (given its limited resources), exceeding its interim GHG emission reduction targets set by the Third Replenishment Agreement (200 metric tonnes) in an increasingly cost-effective manner. For closed projects with data, estimated avoided direct and indirect emissions amounted to 224 million tonnes of CO2 at an incremental cost of US$194 million (GEF 2005). The particularity of the GEF funding is that on the recipient side, the funds can only be used for projects that give global environmental benefits. This is the GEF’s major limitation and has caused opposition from third world governments and nongovernmental organizations (NGOs), as it leaves out many of the problems directly faced by the South, such as desertification, soil erosion, and the dumping of toxic products.

With the creation in 2001 of the Special Climate Change Fund and the Least Developed Countries Fund, as well as the establishment of an Adaptation Fund at the climate meeting in Bali, the GEF has put much emphasis on the need to implement adaptation measures in developing country parties to the KP.

Many carbon funds and carbon facilities have also been implemented by other multilateral institutions acting at global (International Finance Corporation [IFC], United Nations Development Programme [UNDP]) and regional levels (Asian Development Bank [ADB], European Investment Bank, European Bank for Reconstruction and Development [EBRD], Corporación Andina de Fomento [CAF]). These funds purchase carbon credits under the international emission reduction transfer rules of the KP, with the objectives of

assisting funds’ participants in satisfying their legally binding emission reduction commitments under the KP

broadening access to carbon finance by enabling a wider range of developing countries to participate

strengthening the use of renewable and alternative energy technologies

Regional organizations’ carbon funds, for their part, specifically focus on expanding the supply of carbon credits in Central Europe and Central Asia (EBRD), the Asia-Pacific (ADB), and the Latin America and Caribbean (LAC) region (CAF). The international offer consists also of carbon facilities (as the one launched by the UNDP) that do not provide underlying finance to projects but can help leverage carbon finance (through technical assistance and financial networking). These funds have contributed at different levels to the purchase of emission reduction credits, with a potential carbon value of 42 to 63 MtCO2e to the end of 2012 by the Asia Pacific Carbon Fund, an annual purchase target of 9 MtCO2e (including post-Kyoto purchase) for the European Investment Bank-KfW Bankengruppe (EIB-KfW) Carbon Fund, and over 17 MtCO2e from projects currently in the evaluation portfolio for the Latin America Carbon Program (PLAC).

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Geographical targeting of funds

The reviewed funds can be categorized into two main geographical categories: international funds and geo-focused ones.

The former category consists of the CDM, WB and GEF funds, as well as the IFC and UNDP Carbon Facility. These instruments endorse a global perspective and have (or should have) a balanced geographical representation of both donors and recipient countries. However, notwithstanding the intent of opening the funds to any country, some inequitable distribution in the funds’ allocation or in the contributions from participating donors can be spotted. As already mentioned, the growing CDM market shows an inclination toward a concentration of projects in a group of host countries (China, India, Mexico, Brazil), with smaller countries finding themselves excluded from the list of most popular “destinations.” The GEF Special Climate Change Fund (SCCF) is a good example of imbalances in both participants’ contributions and project implementation countries: Not only do the contributions come mainly from European countries, but, despite the fact that the SCCF targets all non-Annex I countries, funding has so far primarily been directed to low-income countries in Africa, Asia, and Latin America. The traditional carbon finance role played by the WB is also characterized by definite funds (Danish Carbon Fund, Italian Carbon Fund, etc.) created on purpose for purchasing project-based greenhouse gas emission reductions in developing countries and countries with economies in transition on behalf of the specific contributor.

For the remaining carbon funds, which are geo-focused, similar tendencies can be found: The IFC buys solely on behalf of the Dutch government; the Asia Pacific Carbon Fund (APCF) receives contributions from European countries only and targets developing member countries (DMCs) as host countries. The EIB-KfW buys credits on behalf of European Union (EU) companies and intermediaries, without specific “host country” preference, while the Multilateral Carbon Credit Fund (MCCF) specifically targets credit supply in Central Europe and Central Asia. The PLAC Purchase Facility, finally, operates on behalf of the Dutch government, specifically targeting carbon credits generated in the LAC region.

Financing and disbursement

A high degree of variety in the monetary amounts making up climate-related funds can be found at all levels (global or geo-focused funds). Particularly relevant are differences from what the literature suggests as recommended mitigation costs for GHG stabilization, as well as for adaptation investments.

The Intergovernmental Panel on Climate Change report (IPCC 2007) suggests values of US$108 billion to US$1,350 billion annual mitigation costs, amounting to 0.2 percent to 2.5 percent of current world GDP (IPCC 2007) – which is around US$54 trillion – by 20302 (World Economic Outlook 2008). Similarly, the Stern Review estimates annual costs of cutting total GHG to a 550 ppm level at an average of approximately 1 percent of current GDP3 (about US$540 billion) (Stern 2006). Further, the McKinsey Global Institute (2008) uses cost curve analysis to estimate that it is possible to stabilize global greenhouse gas concentrations at 450 ppm to 500 ppm CO2e with macroeconomic costs in the order of 0.6 percent to 1.4 percent of global GDP by 2030 (US$324 billion to US$756 billion). As far as adaptation is concerned, recent estimates from the UNDP suggests US$86 billion to US$109 billion per year by 2015

2 For a median stabilization level of 535-590 ppm CO2e.

3 Under an assumption of GDP growth at a 2.5 percent rate.

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for adaptation activities in developing countries, while the UNFCCC envisages a cost of adaptation of US$28 billion to US$67 billion per year by 2030.4 This amount is expected to rise to US$44 billion to US$166 billion per year if global adaptation activities (not restricted to developing countries) are considered (Agrawala et al. 2008).

By analyzing the summary tables (tables 1 and 2), it is clear that the current amount of financing is not matching the required investments as suggested by the literature, neither for mitigation nor for adaptation. The amounts spent on GHG stabilization and adaptation measures are not comparable to the far bigger recommended figures, and most of the reviewed funds handle limited financial amounts to cover multiple years of operation. The WB valued the global carbon market at US$64 billion in 2007 (Capoor and Ambrosi 2008). This is certainly a considerable figure, but it also includes domestic/regional emission-trading schemes (e.g., EU-ETS, New South Wales, Chicago Climate Exchange) that do not have a link with the global trading market5 and, consequently, do not contribute to technology transfers and “green projects” implementation in developing countries. In 2007 such schemes accounted for US$50.4 billion out of the US$64 billion – with a key role played by the EU-ETS (US$50 billion) – therefore, only minor amounts were left for project-based mechanisms involving developing countries.

The CDM is currently the biggest financial mechanism. In 2007, an active CDM market registered capital flows as high as US$7,426 million for primary CDM transactions and US$5,451 million for secondary purchase transactions (Capoor and Ambrosi 2008). After the EU-ETS, this is the second largest segment of the global carbon market. Analysts estimate global CDM trading to reach US$5 billion to US$25 billion per year under low estimates and some US$100 billion per year by 2030 under a high estimate of compliance demand (UNFCCC 2007). Approximately 50 percent represents capital invested in unilateral projects by host country project proponents. Renewable energy and energy efficiency projects account for 90 percent of the overall investment. Fund disbursement is based on precise criteria for both the host country (it has to have ratified the KP, has to have identified a national CDM authority, and is not to be listed in Annex B of the KP) and for projects themselves (they should generate sustainable, additional, measurable, real, and feasible emissions reductions).

All the other funds examined in tables 1 and 2 show different monetary amounts, but they are all smaller figures than the CDM’s. The eligibility requirements for funds disbursement are also variable, with a combination of host country criteria and project-related ones. Many of the existing carbon funds purchase certified emission reductions (CERs), therefore their selected projects are subjected to both the fund’s specific eligibility criteria and the CDM regulatory framework. Again, the additionality aspect is a critical one: While it is fundamental that credited emissions would not have occurred “in the absence of the certified project activity,” it is also true that it is difficult to prove the additionality of CO2 reductions. In this respect, the WB puts this criterion under a twofold analysis:

Barrier analysis: The project faces barriers that prevent its implementation, such as commercial finance and technology.

Investment analysis: The project is economically or financially less attractive than other alternatives (relatively simple for projects that generate no financial or economic benefit other than the sale of emission reductions).

Most of the analyzed carbon funds include in their criteria the temporal generation of credits. The IFC emission reduction purchase facilities (ERPFs), for example, require projects to reach financial

4 Different estimates are explained by different methodologies used in accounting for adaptation costs.

5 In phase II of the EU-ETS (2008-2012), linking with the KP international emission-trading mechanism is

operational.

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closing in the short term, with credits generated by 2012. Similarly, nearly all the analyzed funds encompass an initial pipeline of projects generating carbon credits during the first Kyoto commitment period, 2008–2012, without offering options for projects generating credits after 2012. This does not apply, for instance, to the WB Carbon Finance Funds, which, unlike most ERPAs that expire in 2012, can purchase carbon until 2015. Similarly, the MCCF offers the option to acquire post-2012 carbon credits under specific conditions only.

Within the most traditional “donor-beneficiary” assistance path, the GEF has lately increased its funds, specifically targeting adaptation. However, the freshly raised sums fall significantly short of the amounts needed to cover the costs of adaptation, and they are based on nonmandatory developed country payments, which do not guarantee predictability and long-term sustainability.

Governance

The governance of carbon funds is a critical element to guarantee a suitable participation of beneficiary countries in the financial mechanism not only as recipients but as active actors in the decision-making process and institutional involvement. As they are the beneficiaries of the funds, and they host the actual implementation of the emissions reduction projects, it is appropriate to have recipient countries equitably represented at the decision level, instead of being simple subjects of an overall mechanism directed by industrialized donor countries.

A key example in this respect is the CDM governance system. Given the guidance of the Conference of the Parties serving as the Meeting of the Parties (CMP) over the CDM, the mechanism aims at being open and universal, with clear procedures for implementation, reporting, and compliance. Nonetheless, the mechanism’s governance and institutional performance have received much criticism from market participants because of

lack of transparency of the Executive Board (EB) decisions, “closed-door” EB meetings, and missing communications among CDM authorities and project participants,

unpredictability of EB decisions and actions: (i) lack of institutional memory and rotation of EB members, (ii) insufficient technical expertise, and (iii) politically motivated conflict-of-interest issues among EB members,

time-consuming, risky, and inefficient CDM project cycles,

inequitable geographical distribution of projects, in which small countries have difficulties in meeting transaction and administrative costs, and

no right of recourse against EB decisions by project participants: private entities do not have access to a body of constitutional and administrative rights when interacting with the board.

In this sense, a revision of the CDM governance could be beneficial in order to improve the transparency of the mechanism, develop a truly balanced and equitable representation of interests, and make it more adept at addressing the developing countries’ sustainable development challenges (as stated by Article 12 of the Kyoto Protocol).

The matter of governance is also critical for the GEF. When creating the new adaptation funds (SCCF, Least Developed Country Fund [LDCF], and Adaptation Fund [AF]), there were pressing needs in defining an open and universal governance, where developing countries’ needs could be fully encompassed. Being administered by the GEF, the SCCF and LDCF rely on GEF governance but have introduced relevant programming innovations, easing the governance process and improving

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transparency and access to GEF resources by developing countries (e.g., project cycle streamlined, no need to demonstrate global environmental benefits). The GEF’s main governing body is the GEF Council. It is composed of 32 members (16 from developing countries, 14 from developed countries, and two from countries with transitional economies) that make decisions by consensus. If consensus is not achieved, then any council member can request a formal vote. In this case, a measure cannot be passed unless there is a double majority, based on both individual country votes and votes weighted by donation levels. This means that GEF Council members from countries that make the largest contributions carry the most clout (Streck 2001) and that the five largest donor countries essentially have veto power. This governance structure has raised concerns in terms of representation, particularly from the developing country Group of 77, and has eroded its political acceptability. Despite this, the GEF has a unique open-door policy toward nongovernmental organizations and representatives of civil society. The GEF Assembly is another governing body of the GEF, which is made up of all the countries that are members of the GEF. It meets once every four years to review the GEF’s policies and operations. The independent Evaluation Office conducts reviews of the GEF’s work and publishes lessons learned so that the GEF’s effectiveness and governance can be enhanced.

The LDCF and SCCF were designed to be potentially more flexible, accessible, appropriate, and democratic than the GEF Trust Fund. However, despite developing countries’ reservations, the COP 9 brought these funds under the responsibility of the GEF. Even with continuing difficulties in accessing GEF funds, developing country parties went along with the decision because of a desire for quick progress on achieving funding for concrete adaptation projects. Once again, the power balance within the LDCF and SCCF favored the major donors. The Adaptation Fund has also made governance a key element of the new financial mechanism and has come up with an Adaptation Fund Board consisting of 16 members and 16 alternates, in representation of different constituencies (majority of members/alternates from developing countries and designated representation from the two main recipient interest groups, the group of least developed countries [LDCs] and the Alliance of Small Island States). The AF was created with the purpose of offering a transparent and appropriate funding mechanism for adaptation. The fund appears to meet these criteria, although its lengthy procedures might make it difficult to access.

The newly proposed Climate Investment Funds (CIFs) from the World Bank also focus on the governance issue, and they are set to operate in accordance with the operational principle of full transparency and representation. Both the Clean Technology Fund (CTF) and Strategic Climate Fund (SCF) are overseen by a Trust Fund Committee that consists of

(a) eight representatives from donor countries identified through a consultation among such donors and eight representatives from eligible recipient countries identified through a consultation among interested recipient countries,

(b) a senior (nonvoting) representative of the World Bank, recognizing its role as the overall coordinator of the CIF partnership, and

(c) a (nonvoting) representative of the Multilateral Development Bank (MDB) partners, to be identified by the MDB Committee and chosen on the basis of rotation among the MDB partners.

Decision making will be by consensus of the voting members of the Trust Fund Committee.

The openness of the decision-making process is enhanced by inviting as observers representatives of the GEF, UNDP, United Nations Environment Programme [UNEP], and UNFCCC. The Trust Fund Committee may also invite representatives of other organizations with a mandate to address climate change. After having worked for many years on carbon finance partnerships, which have mostly pursued the interests of participating donor countries, the World Bank is now moving to develop new

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funds that should, at least on paper, guarantee greater involvement from developing countries, under an overall framework of enhanced transparency and appropriateness and more equitable political representation.

The remaining carbon funds analyzed, as depicted in the summary table (table 2), present themselves as closed initiatives arranged by multilateral institutions in partnerships with various donor countries. The supervisory control is handled by the administrative bodies in collaboration with the giving countries, and no relevant representation and involvement of project host countries in the decision-making process are foreseen. Not being a traditional fund, and consequently having no donors to depend upon, the UNDP MDG Carbon Facility is probably the only scheme that tries to broadly incorporate LDCs’ interests into the global carbon market,6 although it does this through an initiative that sees UNDP and Fortis as predominantly (and exclusively) having the institutional role.

Conclusions

The review of the current financing regime shows the presence of various initiatives, operating as fragmented programs with some overlaps in purposes and geographical coverage (see table 3). Such fragmentation brings about poor synergies among the different funds despite the fact that they are all in some way related to the broader UNFCCC framework. The reviewed carbon programs tend, in fact, to link them to the global Clean Development Mechanism and/or to being operated under the guidance and authority of the CMP. Even when the relationship with the UNFCCC is not clear, as in the case of the WB CIFs, the financing activities have to be guided by the principles of the UNFCCC. This link with the UNFCCC (more or less direct, according to the financial scheme) puts all funds’ operations (apart from some exceptions, as discussed in the “Financing and disbursement” section above) under a short-term perspective, with emissions reduction projects having to generate credits by 2012. This implies a close contingency upon the post-Kyoto arrangements and the overall post-2012 UNFCCC financial system.

If using the sectoral approach lens, the review of the current financing schemes reveals an increased tendency toward accessibility, with a gradual shift from a project-based focus to broader sectoral and policy programs. If this is not an option in smaller carbon funds yet, it has become a more tangential possibility for bigger carbon initiatives (WB, GEF, CDM). With the introduction of national plans, priority actions, sectoral programs, and the like, the financial system is slowly moving from an individual project target to a wider perspective that considers projects as single steps for the implementation of broader programs and policies – at national, subnational, and sectoral levels.

There is therefore a lot of promise in developing more structured and well-functioning carbon programs based on wholesale/programmatic approaches, although such development has to be coupled with an appropriate revision of the governance systems, so as to avoid unnecessarily dooming to failure elements of the revised/new funds that are worthy of success if governance shortcomings are not speedily rectified.

6 By promoting MDG-related carbon finance, the Carbon Facility supports projects that should deliver real,

sustainable benefits to the environment and broader human development.

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Table 3: Existing climate-related funds and financial mechanisms: Main characteristics

Objectives Many common targets: sustainable development, compliance for emissions reduction, climate change mitigation, and adaptation, technology transfer, and national programs on climate change. Funds overlap in the pursuance of similar objectives. Objectives are also dependent on donors’ interests and on their preference for using one or the other institution/mechanism for where to devolve their contributions (e.g., EU companies have more familiarity with EU institutions, like EIB, and certainty about their efforts in pursuing EU interests). Recent increased focus on adaptation measures that have so far lagged behind mitigation actions.

Geography Mix of global (CDM) and regional (EIB, ADB, EBRD) carbon funds, although international, global funds have so far been dominated by large developing countries for credits registration. Within the buyers category, significant role played by EU actors (governments and companies). Need for further complementarities between global and geo-focused funds.

Financing Small amounts, compared with what would be necessary for GHG stabilization. Financial fragmentation: small amounts in many financing schemes.

Each fund has own specific criteria.

Governance Aims toward transparent, open, and universal governance, but so far

weak representation of developing countries

overrepresentation of donors’ interests

Need for more equitable balance of interests, increased developing countries involvement, appropriateness and for improved accessibility of funds from developing countries, avoiding mediation by secondary institutions, such as MDBs and other agencies.

Actors Many actors in the carbon market: MDBs, brokers/consultants, developers, Departments of Energy, private banks, NGOs, insurance companies, national authorities.

Prices Wide range of prices in different carbon markets. Price drivers: investment risk profile, track record of project participants, overall project quality, host country support, sustainable development benefits, transaction costs allocation.

PART 2: PROPOSED FINANCIAL MECHANISMS

Introduction

There is continuous debate at the international level along the road to Copenhagen’s COP 15, where agreement on a follow-up to the Kyoto Protocol is to be achieved in late 2009. As asserted by UNFCCC Executive Secretary Yvo de Boer, as the Bonn Climate Change Talks opened on June 2008, “The world is expecting a Copenhagen deal to reach the goal set by science without harming the economy. Parties will need to make real progress towards this goal.”7 A critical element, in this respect, is represented by the restructuring of the global environmental financial engineering, in a way that

7 UNFCCC, Bonn Climate Change Talks, 2008, Press Service.

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generates sufficient financial resources in global markets, unleashes the potential of environmental technology, and allows developing countries to act, for both mitigation and adaptation.

As seen in Part 1, the current financial system presents important challenges and bottlenecks that make it insufficient to sustain the scale of global actions needed to address climate change. The considerable variety of existing specific funds, the small and unpredictable available funds in place, the lack of fully participatory governance, and the short-term operational perspective of the current financing mechanism call for developing a stronger and more homogeneous, programmatic, and constant source of financing.

In view of these considerations, and as a result of the fresh increased political understanding of climate change issues among governments, the global financing system has lately been under close scrutiny by both stakeholders and observers, and diverse proposals for improvements and changes to the UNFCCC and Kyoto Protocol structure have recently been advanced as a way to transform criticism into concrete action.

This section reviews the most relevant financial mechanisms newly proposed by governments as submissions to Ad Hoc Working Group on Long-term Cooperative Action:

o Mexico World Climate Change Fund

o Norway auctioning system

o G77 and China enhanced financial mechanism

o Switzerland global carbon dioxide tax

o Registry of “nationally appropriate mitigation actions” (NAMAs)

What is remarkable in these proposals’ submission process is the active role of developing countries in putting forward concrete suggestions for a new UNFCCC financial architecture. This is the first time in recent years that so many developing countries and their groupings have presented such tangible and systemic proposals on the convention’s financial mechanism. Despite the different approaches, all such proposals have the common basis of a strengthened, truly global financial system, with ample resources for targeting technology transfers and adaptation/mitigation activities in a genuinely participatory way.

The present section describes the five proposals one by one, analyzing their main features and innovative characteristics. A summary table (see table 4) can help in comparing the most relevant elements of the schemes, when available. A complete review of the funds is not possible, as many aspects still have to be decided at UNFCCC international negotiations.

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Table 4: Proposed climate-related funds and financial mechanisms

Questions Mexico – World

Climate Change Fund Norway – Auctioning

System

G77 and China – Enhanced Financial

Mechanism

Switzerland – Global Carbon Dioxide Tax

South Korea – Registry of NAMAs


Mexico, UNFCCC discussions 2008.

Norwegian minister of finance, COP 13, 2007.

Philippines, on behalf of the G77 and China at AWG-LCA talks in Accra, 2008. Endorsed by other countries as recent submissions to AWG-LCA negotiations.

Swiss Delegation, Nairobi, 2006; Bali 2007 and as AWG-LCA submission in October 2008.

South Korea, Bonn Climate Change Talks, 2008.

Endorsed by South Africa as recent submission to the AWG-LCA talks.

Fund sources All countries, in strict accordance with the principle of common but differentiated responsibilities. Contributions shall be agreed to multilaterally. New and additional.

Through auctioning a share of assigned amount units of all parties and putting relative revenues in a fund. New and additional. Polluter pays.

Public sector contributions through implementation by developed countries (Annex II) of their commitments under Article 4.3 of the UNFCCC. Polluter pays. New and additional, over ODAs.

Through a global CO2-

based levy, part of which revenues is allocated to a multilateral fund (Multilateral Adaptation Fund).

South Korea – Giving price to carbon. Carbon credits to be provided for NAMAs by developing countries under the Bali Action Plan.

South Africa – Support comes from developed countries in various forms.


US$10B/yr. Relative adequacy.

N/A

The percentage or the number of allowances auctioned should be set to generate the amount of funding needed for the purpose in question.

Proposed 0.5% to 1% of the annual gross national product (GNP) of Annex 1 parties. Predictability of amounts. Appropriate: grants-based (especially adaptation), allowing for

The revenue is to be raised according to the “polluter pays” principle via a uniform global levy on carbon of US$2/tCO2 on all fossil fuel emissions. Expected total amounts to

No estimations currently available. Adequacy?

No predictability: voluntary actions from developing countries.

New and additional.

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concessional loans when appropriate.

US$48.5B/yr.

Purpose of the fund

To expand the scale of global mitigation and adaptation efforts (programmatic, sectoral, or subnational activities) and enable the participation of all countries; to promote technology transfer.

Auctioning of allowances as a source of revenue for different kinds of financial needs under the convention, from adaptation to technology development to efforts against deforestation.

Recognizing and promoting engagement at the country level. It pursues: accessibility, coverage of full and incremental costs, predictability of funds for technology transfer.

Creation of a global burden-sharing system, legally binding, to address the challenges of financing climate change policy. Adaptation as main target.

To recognize domestic actions for mitigation taken by developing countries as international actions for mitigation.

Governance The fund depends on an Executive Council constituted by all participant countries (contributing and beneficiaries). LDCs have the same representation as developing countries. Transparency mentioned.

To be elaborated:

- Equitable and balanced representation of all countries

- Public transparency

- Appropriate: grants vs. loans

- Developing countries ownership

- UNFCCC vs. World Bank?

Equity, recipient country involvement, and direct access to funds. Operations under the authority of the COP. Board with equitable and balanced representation. Accessible: project to program approach, country driven.

The proposal calls for the design of a legally clearly defined governance framework, with a straightforward structure that allows for transparency, representation, and accessibility.

Governance system still not defined. Developing countries to play an active role. The registration of domestic actions is voluntary. Actions that can be registered in the Registry of NAMAs are also voluntary.


Under the UNFCCC umbrella, the fund aims at complementing KP activities. Authority of COP: the Executive Council reports

Authority of COP: mechanism to be incorporated under the convention.

Under the UNFCCC umbrella, the mechanism operates under the authority and guidance of the COP and builds on existing

Operating under the UNFCCC umbrella, further consultations have to be carried out to defined MAF role compared to the AF, as

Carbon credit for NAMA’s can be established under UNFCCC as the technology transfer mechanism for the Bali

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annually to COP. activities within the convention.

well as the WB CIFs. Action Plan.

Management Administration by an existing multilateral institution (to be defined).

Establishment of a fund whose operations are tendered to a financial institution with a relevant geographical basis.

The COP decides on policies and eligibility criteria for funding. It appoints a board, assisted by a secretariat. A Multilateral Climate Technology Fund and other specialized funds to be created and administered by trustee/s.

The MAF shall be able to operate efficiently and complimentarily to other similar facilities: make use of existing institutions (AF, GEF, WB CIFs) to avoid a proliferation of entities. Administrative framework to be further elaborated.

N/A

To be elaborated during COP 15 negotiations. Market distribution based on economic capacity and current CO2 emissions.


Mitigation activities to be supported should yield real, measurable, reportable, and verifiable results. Appropriate: developing countries would be able to access amounts larger than their own contributions.

To be elaborated. Eligible actions: activities along the technology cycle; research and commercialization of new technologies; capacity building; procurement of low-emission technologies; patents. Sustainability.

Appropriate: disbursement is related to need. Prioritisation of most vulnerable: only middle-income and low-income countries can receive financing from MAF. Specific criteria and procedures for disbursement to be designed.

N/A

To be elaborated during COP 15 negotiations.


Eligible actions range from the project scale to the program, subsector, complete sector, or subnational entity scale.

Wholesale approach can be pursued through auctioning revenues.

Shift from project-based to programmatic approach to help optimize and scale up implementation.

Wholesale approach possible through NCCFs (National Climate Change Funds for domestic policies).

Domestic actions could comprise individual mitigation actions, sets of actions (e.g., in national action plans), or programmes.

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Time frame Underpinning for the post-2012 climate regime, but there is a need to restructure the current financial structures.

Linked to post-Kyoto agreements. A global cap-and-trade system in a post-2012 regime is a prerequisite for the auctioning system.

Within the post-Kyoto agreements.

Post-Kyoto suggested mechanism that can be sustainably implemented in complementation to other mechanisms.

To be framed within a post-2012 climate regime.


Emission reductions to be real and MRV. This will require adopting baselines developed on the basis of regular emissions inventories.

N/A

Strictly related to the amount of allowances auctioned.

N/A N/A To be further elaborated but likely to build on CDM practices. Carbon credits to be provided only to MRV mitigations.

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Mexico World Climate Change Fund

The Mexican proposal for a World Climate Change Fund was advanced at the UNFCCC Bangkok Climate Change Talks in 2008.

The main rationale behind the new fund was an increased awareness of the necessity of adopting mitigation and adaptation measures to tackle climate change (and energy security), coupled by some levels of skepticism regarding the effectiveness of the climate change response of the current financial schemes. The latter issue is particularly high on the political agendas of many Northern and Southern countries, as they give attention to the recent scientific research revealing the insufficiency of the existing financial options (UNFCCC 2007; Parry et al. 2005; Stern 2006). Mexico, in particular, has been very proactive in advancing a fund proposal that draws on previous experiences and relevant matters in the current financial architecture: atomization of efforts, overlapping of actions, increased bureaucracies, and reduced effectiveness. The World Climate Change Fund (WCCF), as presented at UNFCCC and G8 talks, is particularly tackling the challenges of financial insufficiency and fragmentation, by pooling resources that would

• foster programmatic, sectoral, or subnational activities in developing countries,

• support adaptation to adverse effects of climate change,

• promote low-carbon technology transfer and diffusion, and

• underpin a new post-2012 climate change regime.

The first objective is highly endorsed in the fund, which would support mitigation activities that would bridge the gap between the project scale currently covered by the CDM of the Kyoto Protocol and the whole-economy scale. The newly created fund would therefore be an optimal financial source to expand the scale of global mitigation efforts and implement actions under a programmatic and wholesale approach. The fund will be built as a nonsubstitutive but complementary scheme to the Kyoto Protocol, to ensure the full, sustained, and effective implementation of the convention. Although the fungibility of the WCCF with other units, such as those deriving from the KP mechanisms, deserves further analysis, achieving this fungibility would be the basis for the private sector’s willingness to contribute to the WCCF and would establish a constructive linkage between the fund and cap-and-trade schemes. For sustainability’s sake, it is indeed necessary to provide an opportunity for the private sector’s participation in the fund and allow the articulation of this scheme with other ones based on cap-and-trade systems.

The innovative aspect of the Mexican proposal lies in the fundraising issue. Contributions are expected from all countries – both developed and developing – in strict accordance with the principle of common but differentiated responsibilities. Contributions shall be agreed to multilaterally and could be determined by differentiated criteria, such as

greenhouse gas emissions – polluter pays,

population,

gross domestic product,

equity,

efficiency, and

payment capacity.

The expansion of contributions to all countries consents to incorporate in the donors’ list those nations that are not considered “developed countries” (e.g., Qatar, UAE) but whose economy and GDP might still allow for relevant payments. In addition, by including non-Annex I nations in the donors’ list, the scheme aims at putting developing countries in a stronger position for making their interests heard on the international financial assistance scene, therefore departing from the

33

traditional “donation/development assistance” model. Still, parties may opt out from participating in the scheme without any penalization, a friendly clause for LDCs8 that feel they are unable to meet such monetary commitments. By involving all countries in the contribution process, the Mexican proposal estimates to mobilize no less than US$10 billion per year – a relevant amount but still not relevant in terms of what literature suggests as optimal annual disbursement for GHG mitigation and adaptation (page 16).

The regular contributions from all countries will guarantee predictability of funds, allowing for stable and continuous resources. All contributions received by the fund should be subjected to a double levy – whose amount needs to be determined multilaterally – and will flow into both an Adaptation Fund and a Clean Technology Fund. These funds will gather financial sums in support of vulnerability and technology transfer.

All countries could benefit from the fund. However, developed countries would have access only to a portion of their own contributions. Developing countries would, in contrast, be able to access amounts larger than their own contributions, so as to receive positive incentives to widen their mitigation efforts. Eligible actions range from the project scale to the program, subsector, complete sector, or subnational entity scale, and they should yield real, measurable, reportable, and verifiable mitigation results. Additionality will not need to be proved, since the fund is not a compensatory mechanism to offset emissions. Each beneficiary of the fund would specify the extent of its own mitigation commitment with respect to the selected program, sector, or subnational entity and use the financing for expanding, not replacing, this commitment.

The governance scheme of the fund will be open to all countries. The fund will operate under an inclusive and transparent governance regime and will depend on an Executive Council, constituted by all participant countries (contributing and beneficiaries). Developing countries will have the same representation and voice as developing countries. The mechanism will be administered by an already existing financial institution (not identified yet), so as to avoid duplication of structures and increased international bureaucracy. The regime will be fully verifiable, with activities subject to independent supervising to guarantee transparency and efficacy of actions.

As shown in table 5, the Mexican proposal does have good and significant aspects in its design (i.e., participatory approach, predictability of funds, programmatic approach), but there are still some unclear points or suboptimal elements (i.e., criteria for fund allocation, linking to existing schemes) that create doubts and need further elaboration during the next UNFCCC negotiations. Certainly, the noteworthy aspect of this proposal is to have established an overall framework in which all countries share – even if at different extents – emissions responsibilities and are ready to take on an active role in financially contributing to and concretely implementing actions or programs at a larger and more effective scale.

8 In this study, “developing countries” and “LDCs” are used interchangeably.

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Table 5: Mexico World Climate Change Fund: Strengths and weaknesses

MEXICO WORLD CLIMATE CHANGE FUND

STRENGTHS WEAKNESSES9

Programmatic/wholesale/sectoral approach Contributions from poor countries

Scalable and transcending ODA No clear linking with other funds

Increased access to financial and technological resources

Voluntary based –no commitments

Representative – broad participation Relevant financial amount, but still limited resources for global climate change mitigation/adaptation

Expansion of the global mitigation scale Not strong involvement of the private sector

Not necessary to demonstrate additionality

Relative adequacy –strong financial underpinning for the new climate regime

Scaling up of mitigation efforts

Equitable distribution and prioritization to LDCs

Norway Auctioning System

In the post-2012 regime, an interesting proposal has been advanced by the Norwegian government, which can play a crucial role in the definition of the new framework of post-Kyoto flexible mechanisms.

Norway’s proposal for an auctioning system was first introduced in Bali (2007) by the Norwegian minister of finance, Kristin Halvorsen, with the idea of improving the global carbon markets via the introduction of an allowance auctioning arrangement. The objective of this mechanism is to use allowances auctioning as a source of revenue for different kinds of financial needs under the convention, from adaptation to technology deployment to efforts against deforestation.

By auctioning a share of assigned amount units (AAUs) of all parties, and putting relative revenues in a fund, the global financing architecture will benefit from additional monetary flows, to be used on adaptation actions or other specified purposes, such as technology development or the pursuit of climate-related policies/programs.

Such a proposal derives from Norway’s experience in domestic emissions trading: In the Norwegian ETS for 2008-2012, nearly half of the domestic allowances are sold through auctions or other means at market conditions. If translated in global terms, a small portion of permits could be withheld from the national quota allocation and auctioned by the appropriate international institution. The resulting revenue could then be placed in a fund with specific climate-change-related targets. In more quantitative terms, these allowances on the auctioning market could be predefined

9 The identification of weaknesses is slightly difficult, as many of the proposed mechanisms are not fully

developed. The identified weaknesses in the tables in this section are those that can be easily spotted in draft proposals – in consideration also of gained experience with existing mechanisms – or that come from doubts and uncertainty about how the scheme will be developed, implemented, and managed.

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by (1) a number of allowances, (2) a fixed percentage of the total amount, or (3) a predefined revenue requirement.

How to distribute the initial amount of “auctionable” allowances is not a straightforward task. Many studies have been carried out, with views ranging from free distribution to auctioning preference (Batten et al. 2008; Goulder 2007). From stakeholders’ perspectives, auctioning could bring both benefits and disadvantages, but, besides these aspects, auctioning of emission quotas does represent a possible source of revenue. The initial distribution of allowances may become, in fact, a means of transfers from richer to emerging economies by generous allocation – thereby enabling developing countries to take on actions and programs.

It goes without saying that such a proposal is inherently dependent on the permanence of a global cap-and-trade system in a post-2012 regime: This is an essential prerequisite for the auctioning system to be introduced as a new element of the renovated UNFCCC financial architecture. The precise structure of the system still has to be determined, and a range of issues has to be discussed in the UNFCCC arena, so as to profile such a proposal in terms of

establishment of the fund,

operations management (suggested is a financial institution with relevant geographical basis),

governance of the fund (equitable and balanced representation of all countries, developing countries ownership, public transparency),

funding and/or lending products (grants vs. loans), and

political framework (should the fund be placed under the UNFCCC, WB, or …?).

As a result of its genuinely international character, auctioning of allowances has the potential of overcoming domestic revenue problems. Auctioning consequently is one particularly promising option to generate adequate, predictable, and sustainable financial resources.

Table 6: Norway auctioning system: Strengths and weaknesses

NORWAY AUCTIONING SYSTEM

STRENGTHS WEAKNESSES

Linked to carbon trade: creates incentives for reducing emissions

Political hindrances: strong domestic opposition from “grandfathered” lobby groups

Avoidance of grandfathering of permits (more effective cap and trade)

Increased complexity and transaction costs in the system

Polluter pays: delivery of carbon price signals to private sector

The mechanism can “water down” emission reduction commitments

Predictability

International level (vs. domestic level) sourcing: adequacy, reliability, and sustainability

G77 and China Enhanced Financial Mechanism

The proposal advanced by the Group of 77 and China for a renovated financial mechanism under the UNFCCC framework was presented by Philippines at the AWG-LCA talks in Accra, Ghana,

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in August 2008. This proposal has also been recently endorsed by other countries (e.g., India, Antigua and Barbuda) in their latest submissions to AWG-LCA negotiations.

The main objective behind the creation of this financial mechanism is to (1) increase access of developing countries to money for mitigation and adaptation activities, (2) raise the level of representation of poorer countries in the decision-making process, and, overall, (3) create an improved financial architecture that could better match the real climate needs of developing nations. As a consequence, the new financing scheme strongly recognizes, promotes, and strengthens engagement at the country level, to ensure a country-driven, programmatic approach and direct access to funding. In more detail, it aims to pursue

1. accessibility, affordability, appropriateness, and adaptability of technologies for developing countries,

2. coverage of full costs and full incremental costs (Article 4.3 convention),

3. adequacy and predictability of funds for technology transfer, and

4. removal of barriers for technology development and transfer.

This mechanism shall strictly operate under the UNFCCC umbrella, upon guidance of the COP, as this is perceived as the most appropriate arena for discussing climate-change-related financial matters in a truly participatory and transparent mode. In this respect, the proposal advises the adoption of five fundamental principles for a clear and efficient system of governance for the renovated financial architecture:

1. be underpinned by the principle of equity and common but differentiated responsibilities,

2. operate under the authority and governance of the Conference of the Parties,

3. have an equitable and geographically balanced representation of all parties,

4. enable direct access to funding by recipient countries, and

5. ensure recipient country involvement during all stages of identification, definition, and implementation (demand driven).

The Conference of the Parties is the main governing authority that decides on policies, program priorities, and eligibility criteria for funding. It appoints a board, which shall reflect an equitable and balanced representation of all parties. The board decides on and periodically reviews funding allocated to adaptation or mitigation, taking into account historical imbalances and the urgency of funding for adaptation.

The proposal for an enhanced financial scheme is also enriched by the creation of a Multilateral Climate Technology Fund that is purposely developed to finance efforts related to technology development/transfer. This main fund might be coupled by other specialized funds within the mechanism, which will be established to address specific needs. The Multilateral Climate Technology Fund and the other funds will be administered by a trustee (or trustees) selected via open bidding and advised by an expert group, which could also be supported by technical panels addressing specific issues. These funds represent the core of the G77 and Chinese proposal, which robustly promotes technology deployment and transfers as a key element for helping LDCs achieve a more sustainable (and low-carbon) development.

The main source of funding will be the public sector through implementation by developed countries (Annex II) of their commitments under Article 4.3 of the convention. Stress is put on the “additionality” of funding, which has to be new and over and above ODA. According to the proposal, any funding pledged outside the convention shall not be considered as fulfilment by developed countries of commitments under Article 4.3 or commitments to provide measurable, reportable, and verifiable finance, technology, and capacity building as required by the Bali Action Plan. While

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the additionality element is certainly helpful for increasing the global amount of monetary resources, the gap is still wide between available resources and necessary resources for immediate and targeted GHG mitigation and adaptation activities (see page 16). Nonetheless, the existence of assessed contributions from Annex II parties, regularly reviewed by the board, ensures predictability and stability of funding.

The proposal recommends 0.5 percent to 1 percent of the annual GNP of Annex 1 parties as an appropriate and reasonable amount to devote to the new financing scheme. Further, in order to facilitate LDCs’ access to and usability of resources, monetary support shall be mainly grant based (especially for adaptation), without prejudice to concessional loan arrangements.

The Multilateral Climate Technology Fund and/or specialized funds within the enhanced mechanism will target such actions as

1. activities along the technology cycle,

2. research, development, and commercialization of new and emerging technologies for mitigation and adaptation,

3. capacity building,

4. procurement of low-GHG-emission technologies, and

5. patents.

A technology action plan will guide the works of the Executive Board, with the identification of clear actions and dates for the first three years (and updates for successive three-year periods).

Finally, by acting within the convention framework and building on the experience of other relevant funds –e.g., the Montreal Protocol Multilateral Fund – the enhanced mechanism seems to promote coherence by integrating and expanding ongoing activities, thereby enhancing the delivery of the convention obligations on technology, finance transfer, and capacity building. Out of this, the proposed financial scheme shows its potential for facilitating linkages between various funding sources and funds, to promote access to a variety of available sources and reduce fragmentation.

Table 7: G77 and China enhanced financial mechanism: Strengths and Weaknesses

G77 AND CHINA ENHANCED FINANCIAL MECHANISM


Accessible: country-driven, programmatic/sectoral approach

For the moment, not clear how interrelationships between existing mechanisms and the new one will play

Linking to existing funds and financing schemes Burden of financial responsibility on developed countries only

Increased, additional funding, above ODA; polluter pays

No contributions from economies in transition or non-Annex I countries, whose GDP might nonetheless allow for important donations

Predictability, stability, and timeliness of funding Not strong involvement of private sector

Focus on technology transfer for sustainability

Building on existing convention infrastructure

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Switzerland Global Carbon Dioxide Tax

Among the various proposals for enhanced financial mechanisms, the Swiss one aims not at defining a new overall structure for the post-2012 financing architecture, but at identifying a flexible solution for increased climate change financing at the international level that could be integrated with and complemented by other proposals under the UNFCCC.

The rationale of this proposal comes from an evaluation of the carbon markets. According to the Stern Review climate change has been a consistent global market failure. To face this issue, and correct the market failure, economic theory suggests the introduction of an optimal carbon price that creates a concrete and appropriate cost of emissions, in favor of suitable mitigation and adaptation strategies (Stern 2006). Nonetheless, carbon taxes and emissions-trading systems, the way they are implemented in various countries and regions worldwide, show variability in carbon prices and are, in general, not efficiently working to achieve an “optimal” carbon price (Hope 2008). By proposing a CO2-based levy, Switzerland is offering an alternative means, by promoting a low-level financing tax, whose revenues are used for actions on behalf of the public good – mitigation and adaptation activities. The existence of a global CO2-based levy will generate financial flows, part of which revenues is meant to be allocated to a multilateral fund (Multilateral Adaptation Fund [MAF]). The remaining revenues generated in each country, and not channelled into the MAF, flows into a National Climate Change Fund (NCCF) for financing domestic climate change policies.

Through NCCFs at the country level, the Swiss proposal supports the adoption of a programmatic, policy-based approach to move away from the traditional focus on project units. The overall mechanism rests on the principle of “common but differentiated responsibilities” – countries with high per capita income contribute a greater share of the revenues of the levy than countries with lower income – and on the “polluter pays” principle, all nations assume a fair share of their responsibilities for the climate change problem. On this basis, industrialized nations bear the highest share of contributions to the fund, with 76 percent of total inflows. The burden sharing is therefore accompanied by differentiated responsibilities, with developed countries needing to contribute 60 percent of their tax revenues to the MAF, middle-income countries 30 percent, and low-income countries only15 percent.

In more quantitative terms, the fund revenues are collected via a uniform global levy on carbon of US$2 per tCO2 on all fossil fuel emissions. A basic tax exemption of 1.5t CO2e per inhabitant is introduced in favor of poorer countries with irrelevant emissions, which consequently are not asked to contribute to the fund. Of the total revenue collection, US$18.4 billion shall be allocated annually to the MAF (in different shares according to the economic situation of the countries: US$15.2 billion from industrialized ones, US$3.2 billion from medium-/low-income countries). According to calculations included in the Swiss proposal, total amounts raised through the mechanism stand at US$48.5 billion yearly worldwide (with 2010 as the base year), which, per se, represents a good amount of resources to complement ODA, the carbon market credit selling revenues, and other of the existing funds, inside or outside the UNFCCC (e.g., GEF AF, WB CIFs). If, as seen at page 16, the UNFCCC suggested that financial flows for adaptation in developing countries range from US$28 billion to US$67 billion per year by 2030, the Swiss fundraising estimates shed positive light on a mechanism that, by providing sufficient financial support, represents a good basis for real, sustainable environmental impact.

Such a global burden-sharing system, legally binding for all nations, is aimed at addressing the challenges of financing climate change policy and measures. Adaptation is identified as the main target. In this respect, the MAF funding can be spent on two pillars: prevention of disasters and insurance (climate impact response). Funds will be disbursed to middle-income and low-income countries only, which are most in need of implementing climate resistance actions at the domestic level.

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The governance and administrative structures of the mechanism still have to be defined, but the proposal calls for the design of a legally clearly defined governance framework, based on the principle of different shares of responsibilities and different economic capacities to contribute to the climate change issue. Furthermore, the MAF shall be able to operate efficiently with and complementarily to other similar facilities, making use of existing institutions (GEF, WB) to avoid a proliferation of entities.

Many aspects of this financing scheme are still under elaboration, and some criticism has to be overcome around the adoption of carbon taxes at a global level and the level at which they need to be collected,10 but the Switzerland-proposed mechanism encompasses certain good elements – as shown in table 8 – that make it an interesting scheme to put under review.

Table 8: Switzerland global carbon dioxide Tax: Strengths and weaknesses

SWITZERLAND GLOBAL CARBON DIOXIDE TAX


Flexibility and complementarity with the existing financing architecture (or new proposals)

Governance system to be transparent and efficient, to ensure money is disbursed for appropriate uses

Global reach according to “polluter pays” principle

How to collect the CO2-based levy and at which level (import, producer, consumer)?

Global solidarity: common but differentiated responsibilities

NCCFs as complementary vehicles to adaptation/mitigation disbursement through implementing agencies (like GEF)

Distribution based on equity and prioritization of the most vulnerable countries

Potential for programmatic, policy-based approach

Positive economic effects from adaptation programs in developing and least developed countries

Registry of “Nationally Appropriate Mitigation Actions” (NAMAs)

As part of the Bali Action Plan, developing countries are expected to develop nationally appropriate mitigation actions (NAMAs), an ensemble of policies, legal requirements, and measures that integrate climate consideration into specific national sustainable development policies. These policy-based instruments reflect the need for differentiated interventions among countries toward mitigation, in consideration of their current emissions and degree of social and economic development.

10

In this respect, the Swiss proposal suggests the upstream approach (import and production level) as the most efficient one, as only a small number of subjects need to be levied. Still, this is something that has to be studied carefully and administered in a transparent way, if market diversions are not to be introduced in the system.

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The proposal tabled by the government of South Korea at the 2008 Bonn Climate Change Talks and recently supported by South Africa, in its AWG-LCA submission, considers NAMAs not as mere domestic actions, but as mitigation actions of developing countries to be recognized internationally, so as to give broader recognition to the mitigation efforts taken by Southern countries.

Such efforts could comprise individual mitigation actions, sets of actions (e.g., in national action plans), or programs. Actions will be registered in the Registry of NAMAs, purposely created for collecting existing implemented measures.

Carbon credits will be provided for mitigation undertaken through nationally appropriate actions by developing countries under the Bali Action Plan, and revenues for the sales of such credits will channel financial resources and technologies necessary for NAMAs of developing countries. For instance, a certain share of proceeds can be allocated to the Adaptation Fund and Strategic Climate Fund.

South Africa expands the focus on the carbon market and suggests multiple sources of funding (not restricted to carbon credits only) from developed countries (technical assistance, financing, technology). Regarding the financing part, South Africa suggests that this can take the form of public funding, the carbon market, market-linked sources of funding (revenues from allowances auctioning), market finance (loans, venture capital), and others.

The link with the carbon market guarantees an adequate involvement of the private sector and improves the commercial viability of the taken mitigation actions. It is fundamental, though, that the involvement of the private sector does not imply a more passive role from governments. In order to avoid this, it is primary that a continuous relationship among the private sector and private sector is maintained. Public finance is still needed, especially for poorer countries, for which mere public sector finance could be scarce and/or not sufficient for meeting their real climate change needs.

The system allows wide participation and proactiveness from LDCs: They are the ones that take an active role in implementing actions, while pursuing low-carbon development, and registering them at the international level. The inclusion of domestic actions at the Registry of NAMAs is voluntary and nonbinding, and it is up to developing country parties to decide which and how many actions to register. As a matter of fact, what is suggested by South Korea is in full implementation of Article 12.4, which already provides that “developing country Parties may, on a voluntary basis, propose projects for financing, including specific technologies, materials, equipment, techniques or practices that would be needed to implement such projects, along with, if possible, an estimate of all incremental costs, of the reductions of emissions and increments of removals of greenhouse gases, as well as an estimate of the consequent benefits.” The South African proposal adds more to the scheme in terms of LDCs’ ownership, by introducing a verification process that could be done by national entities themselves working under international guidelines. In addition, the developed country parties shall provide new and additional financial resources to meet the agreed full costs of verification. The details of verification will likely depend on whether the mitigation action is undertaken unilaterally or with international support (for technology, finance, and capacity building).

More details have still to be discussed, particularly in terms of governance and management of the system. South Africa’s recent submission works in this direction, by introducing more elements to the instrument: Its proposal encompasses the creation of a “toolbox” of actions from which developing countries could choose (e.g., programmatic CDM, REDD), as well as a facilitative mechanism to further develop in-country capacity in developing countries to implement mitigation and adaptation actions.

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The proposed financing scheme is intended to fit under the umbrella of the UNFCCC: While the Kyoto Protocol’s CDM is mainly a compliance mechanism for Annex I countries, carbon credit for NAMAs could be established under UNFCCC as the technology transfer mechanism for the Bali Action Plan. In this respect, the UNFCCC Secretariat could be in charge of opening the Registry for mitigation action by developing countries. The Registry of NAMAs could serve as a basis of the institutional framework for recognizing domestic actions of developing countries as international mitigation actions in the post-2012 climate regime.

The final purpose of a Registry of NAMAs, the way South Korea has tabled it, is to establish a truly global trading system, which further engages developing countries in the international carbon market. A relevant involvement of developing countries is quite necessary, particularly in view of the fact that their share of energy-related carbon emissions is expected to rise to 70 percent by 2030 in the absence of appropriate policies (IEA 2006). By establishing a global trading system that fully includes developing countries, the global mitigation cost could be significantly reduced by 70 percent (Stern 2008).

Table 9: Registry of NAMAs: Strengths and weaknesses

REGISTRY OF NAMAs


Strong engagement of the private sector Private sector vs. government?

Commercial viability of mitigation actions improved

Voluntary based: avoid compulsory targets?11

Active participation and ownership from developing countries

Long time before a transparent MRV mechanism is created in LDCs

Truly global trading system No prioritization of most vulnerable countries

Contribution to adaptation Unpredictability of sources

Accessibility: policy- vs. project-based approach

Other Submissions

Every week there are new submissions to the UNFCCC AWG-LCA from party countries, with diverse suggestions for an advanced and enhanced financial mechanism. Some countries put the accent on a needed focus on technology development and transfer and call for the recognition of voluntary technology-oriented agreements (EU countries); some prefer the adoption of a realistic view of international financing, which accounts for relative capabilities in reducing emissions (Singapore); while others support the mobilization of funds from private sector sources (United States). However, many of these suggestions just put light on individual countries’ preferences and overall views about an improved financial mechanism, without necessarily advancing concrete proposals for new financial systems or complementary funding instruments that could supplement or partly change the current financial framework. The proposed schemes that have been reviewed in

11

Today, only 37 industrial countries have binding targets for reducing carbon emissions, while others have no obligations at all. In fact, Article 4.1 of the convention does contain mitigation commitments for all parties. While the chapeau of that article makes clear that not every party is expected to implement such commitments identically, there nonetheless clearly are mitigation commitments for all.

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Part 2 of this report are, instead, tangible formal structures that build on existing practices while defining diverse original ways to address financial needs for mitigation and adaptation.

Conclusions

The review of newly proposed financial mechanisms reveals interesting insights and perspectives in UNFCCC negotiations, which can be summarized as follows:

1. Developing countries’ active role: Of the five analyzed proposals, three are advanced or supported by a developing country or group of developing countries (Mexico, South Africa, G77 and China). These countries view climate change as a serious political agenda and, building on the experience gained from existing mechanisms, have proactively moved toward deeper engagement in, representation in, and ownership of any new post-2012 financial mechanism. Both the Swiss and the Mexican proposals require developing countries to give their contributions in favor of mitigation and adaptation actions and in consideration of their (more or less relevant) input in carbon emissions. The South Korean proposal also increases the active role of developing countries at the international level and sheds light on voluntary commitments of LDCs in climate change negotiations.

2. UNFCCC guidance: All of the proposed schemes are put under the UNFCCC framework or can be linked to it. This is the tendency of recent submissions, which would prefer to build on previous experience and use the UNFCCC as the appropriate context for transparent climate change negotiations. This is particularly the case for developing countries, which see the UNFCCC (and relative accountability to the COP) as an adequate ground for addressing climate change issues in an open, universal, efficient, and equal milieu. Several developing countries referred to the large amounts of funds that are being planned outside the UNFCCC (e.g., WB CIFs) as schemes to instead be placed under the guidance of the convention, which is the body in charge of climate change negotiations and implementation of the outcomes.

3. Governance: Most of the submitted proposals by parties to the AWG-LCA call for equitable, appropriate, and balanced representation of all parties in governance, easy access to capital and low management costs, a demand-driven approach – with recipients involved in definition of needs – transparency, authority, and guidance of the COP.

4. Funding: Scaling up of funding is needed. If it remains at the same level, it will not meet the future requirements for adaptation and mitigation. For this reason, recent proposals focus on increased funding resources in addition to existing ODA. Any funding pledged outside the UNFCCC shall not be regarded as being in fulfilment of commitments by developed countries under Article 4.3 of the convention.

5. Common principles and common purposes: Many aspects, objects, and principles regularly recur in the analyzed proposals, in confirmation of a shared perception of what is (not) needed in the new post-Kyoto architecture:

a. adequacy of funds, to meet the needs of adaptation, mitigation, and technology transfer,

b. equity,

c. sources of funding to mainly come from developed countries in implementing their commitments under Article 4.3,

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d. new and additional funds above the current commitments on ODA and a 0.7 percent target,

e. predictability and stability in funding, to be sourced from assessed contributions from developed countries and/or carbon markets,

f. appropriate funding, preferably in the form of grants rather than loans,

g. polluter-pays principle,

h. priority access given to the most vulnerable countries, and

i. open and participatory governance.

6. Higher focus on adaptation: Given that financing for mitigation is more readily available and easier to access than financing for adaptation (e.g., the private sector is not much interested in building a seawall), there is a common inclination toward concerted adaptation measures.

7. Complementarity with carbon markets: The reviewed proposals do not undermine the existing international carbon markets and tend, instead, to complement them and integrate into them. However, market-based mechanisms alone are not seen as the ultimate solution to climate-related issues, since prior experience shows some distortions and inefficiencies with such markets, which require corrections. Plus, markets do not necessarily work well in developing economies, thereby raising the need for an enhanced financial mechanism.

8. Technology transfer and deployment: Technology is seen as a strong instrument for sustainable development. The proposed schemes tend to emphasize the role of technology, whose diffusion can be pursued through funds for research and development, functional windows for technology, or venture capital for emerging technologies.

All these elements generate remarkable insights into future directions in the UNFCCC negotiations for a new financial architecture. The political attention toward climate change matters has consistently increased, and global and local interests interplay in international negotiations. The positive development in this aspect is that countries have realized previous errors and have learned valuable lessons from prior failures.

PART 3: OTHER ENVIRONMENT-RELATED FUNDS

Introduction

In this review of funds and mechanisms within the global financing regime, it seems appropriate to say some words about funds that are not tackling climate change with a specific focus but that are supporting actions in the broader environmental area. Given the close ties between climate change and its effects on the environment, these funds are indeed supplementary instruments of the climate-related mechanisms reviewed in previous sections. By covering areas like renewable energy, green investments, poverty and environment, and phaseout of ozone-depleting substances (ODS), these schemes are contributing to new actions and initiatives at a global level, offering technical and financial support to address environmental degradation.

Part 3 of this report analyzes five financial schemes, as summarized in Table 10, arranged by multilateral organizations for actions in favor of environmental quality and renewable energy. Proposals for novel bilateral and multilateral funds to undertake global environmental issues have lately been put forward, in the desire to achieve more immediate impacts, activate programmatic options, and, possibly, mobilize private sector resources (Porter et al. 2008). This new offer of

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financial schemes has already been the focus of recent research work;12 therefore the present paper expressly does not cover these proposals, leaving to the reader the decision to deepen knowledge on them through more detailed literature. For comprehensiveness’ sake, however, an annex table has been added in Appendix I, so as to provide with this study a full overview of all the proposals advanced at the international level for a renewed architecture of global environmental funds.

Finally, the analysis in Part 3 is similarly structured to that in Part 1, with information organized into objectives, financing and disbursement, and governance.

12

An original piece of research specifically targeting these new proposals for environment-related schemes has been recently published by WWF and Heinrich Böll Stiftung: “New Finance for Climate Change and the Environment,” Porter et al., July 2008.

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Table 10: Existing environment-related funds and financial mechanisms

Questions MF Montreal GEEREF ADB – Poverty and

Environment ADB – CEFPF IFC - SEF


Agreed to in 1987. Established by the Second Meeting of the Parties to the Montreal Protocol (1990).

Announced by EC and EIB at the COP 13, 2007. It became operational in 2008.

Adopted as part of ADB’s Environment Policy, 2003.

Established in 2007. IFC and E+Co, launched in 2005.

Fund sources Replenished on a three-year basis by the donors (industrialized countries, incl. countries with transition economies).

EU Commission and public and private sectors. Recent pledges from governments of Norway and Germany. Unpredictability of sources, based on pledges.

Governments of Norway and Sweden. Voluntary contributions (no polluter-pays principle). Appropriate: grants.

Contributions from bilateral, multilateral, and individual sources, including companies and foundations. Voluntary (no polluter-pays principle).

Donor funds from the GEF. Financing is leveraged from other lenders. Voluntary (no polluter-pays principle). No new and additional.


Pledges amount to US$2.2B over the period 1991 to 2007. The total budget for the 2009 -2011 triennium is US$490M. Unpredictability: dependent on pledges.

Period 2007-2010: €100M raised, €150M-200M anticipated from public and commercial sources.

Expected additional risk capital of €300M to 1B in the longer term.

US$8.5M total contributions until 2010.

Target size US$250 million of total contributions by 2008.

US$19Moverall resources.

Purpose of the fund

Assist developing country parties to the Montreal Protocol whose annual per capita consumption and production of ODS is less than 0.3 kg to comply with the control measures of the Protocol (Article 5 countries).

As a global risk capital fund, it aims at mobilizing private investments in energy efficiency and renewable energy projects in developing countries and economies in transition. Assistance for small-scale projects.

Promote environmental objectives in ADB’s operations. Linkages prioritized: (i) sustainable use of natural resources; (ii) reduction of air and water pollution; (iii) reduction of vulnerability.

Establishment of Clean Energy Fund, a multidonor fund to support “green energy” investment projects.

Establish clean energy trust funds, a series of bilateral funds.

Finance investments in, and technical assistance to, renewable energy and energy efficiency enterprises.

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Governance Operates under the authority of the parties to the Protocol. Representative - managed by an Executive Committee with an equal representation of seven industrialized and seven Article 5 countries.

Under the authority of a Board of Directors, consisting of sponsors (EC, governments, and private sector). No representation of recipient countries. No authority of COP.

Under the authority of the ADB’s Board of Directors (12 elected by members from Asia region, 12 outside the region), in conjunction with participating countries. No authority of COP.

Under the governance structure of ADB’s operations (see PEF). No authority of COP.

Managed by E+Co, with no involvement of recipient countries. The E+Co investment process is rigorous and subjected to monitoring and evaluation procedures.


The fund falls under the United Nations umbrella, and it is supportive of the activities carried out at the UNFCCC level.

The fund develops autonomously from the UNFCCC framework but can be easily attached to preexisting mechanisms.

None None The facility receives donor funds from the GEF, the designated financial entity for UNFCCC.

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Management An Executive Committee assisted by the fund secretariat manages the fund. Projects and activities supported by the fund are implemented by international agencies.

Implemented by the BoD, with the assistance of the EIF, acting as trustee for the participation of the EC.

The PEF is held by ADB on behalf of the participating donors and is administered separately from ADB’s own resources.

ADB’s Regional and Sustainable Development Department manages the CEFPF in consultation with ADB’s operations directors responsible for clean energy projects.

SEF is managed by E+Co, an investment company that specializes in the financing of small-scale energy projects in emerging markets.


The fund provides finance for activities aimed at phasing out the ODS used in a broad range of sectors. It funds only the incremental costs incurred in converting to non-ODS technologies.

The GEEREF invests in regional subfunds worldwide. Only projects that meet strict investment criteria can qualify for GEEREF funding.

Priority given to demonstrated potential opportunities for environmental improvement and poverty reduction.

PEF-financed activities should be fully in line with national poverty reduction strategies and with ADB’s country strategy and program.

Proposals for support should be consistent with ADB’s policies, adopt a participatory approach, and have good potential for replication in the country and/or region. Prioritization of weakly performing states.

Eligibility criteria encompass social, environmental, and financial indicators to capture the impact of the project. Focus on sustainable development.


From 2000, MF has encouraged the development of national phaseout plans to eliminate the remaining consumption of the most common ODS in a country.

Limited accessibility: project-based only.

Focus on projects, which have nonetheless to comply with country priorities and strategies.

Project based. Project based.

Time frame Seventh replenishment covering 2009-2011 activities.

Current funding covering period 2007-2010.

Current funding covering period 2008-2010.

No specific time frame for fund’s activities currently set.

Open time frame, depending on funds’ availability.

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N/A Project-based baseline accounting standard.

N/A N/A Project-based baseline accounting standard.

Performance Implementation of projects to result in phaseout of consumption of >250,251 ODS tons and the production of about 174,646 tons ODS, most of which were already phased out by 2007. Pledges amount to US$2.2B over the period 1991 to 2007.

The raised investments are estimated to bring 1 gigawatt of clean energy capacity to recipient countries, saving up to 2M tonnes of CO2 emissions. These investments would also reduce harmful indoor and outdoor air pollution and create jobs and income.

As part of ADB’s overall operations, 60 projects were selected for technical assistance (environmental sustainability) grants in 2007 (US$80M). Some of these also promote green energy. To mitigate GHG emissions and help DMCs adapt to climate change, ADB has focused its clean energy and environment programs on energy efficiency, carbon market, and other mitigation projects.

According to the Portfolio and Business Plan (E+Co), the seed capital investment alone of 87 investments (US$11.5M) has produced a series of benefits, which include 478,000 tonnes of CO2e avoided annually (life cycle value of almost US$42M).

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Objectives

Although the initiatives under analysis all aim at addressing, more or less directly, environmental quality and climate change issues, they take on different intents and objectives, also in relation to the mandate of the multilateral entity that has generated them.

The Multilateral Fund for the Implementation of the Montreal Protocol has the main objective of assisting developing country parties to the Montreal Protocol, whose annual per capita consumption and production of ozone-depleting substances is less than 0.3 kg, to comply with the control measures of the Protocol (Article 5 countries). The latter was agreed to in 1987 after scientists showed that certain man-made substances were contributing to the depletion of the Earth’s ozone layer, which protects life below from damaging ultraviolet radiation. The Multilateral Fund was then established in 1990 as the financial mechanism of the treaty to help Article 5 countries meet the agreed incremental cost of fulfilling the Protocol’s control measures.

The Global Energy Efficiency and Renewable Energy Fund (GEEREF) is a joint initiative of the European Commission and the EIB to mobilize private investments in energy efficiency and renewable energy projects in developing countries and economies in transition. By offering a model for public-private partnership, the fund will provide the private sector with a new financial mechanism that raises risk capital for investment in clean energy in developing countries. The focus is on investments below €10 million, as these are mostly ignored by international financial institutions. The GEEREF is designed to complement multilateral financial instruments through entities such as the World Bank and the United Nations.

Given the increased energy use in its DMCs, the Asian Development Bank (ADB) has lately committed a greater use of resources to the environment and clean energy. Two relevant programs managed by the ADB in these areas are the Poverty and Environment Program, financially assisted by the Poverty and Environment Fund (PEF), and the more recent Clean Energy Financing Partnership Facility (CEFPF). The PEF is a multidonor trust fund aimed at financing poverty reduction activities with linkages to environmental protection. The three main poverty-environment linkages prioritized include (i) sustainable use of natural resources, (ii) reduction of air and water pollution, and (iii) reduction of vulnerability and disaster prevention. The PEF provides catalytic financing for environmental pilot interventions that reduce poverty.

On the other hand, the objective of the CEFPF is to improve energy security in DMCs and decrease the rate of climate change through increased use of clean energy. With CEFPF support, the ADB aims at reducing the cost of new technologies, facilitating their deployment, and lowering barriers. Such deployments will have a strong demonstration effect with respect to the cost-effectiveness of such investments, the potential energy savings, and the financial benefits of clean energy. CEFPF will also allow the ADB to expand the “Energy for All” initiative and thereby increase access by the rural and urban poor to modern forms of energy.

Last, the IFC-supported Sustainable Energy Facility (SEF) has the objective to finance investments in and technical assistance to renewable energy and energy efficiency enterprises. The facility supports private companies, with a focus on small businesses, investing in such sectors as

grid-connected, renewable energy projects including wind, biomass, run-of-river hydropower, geothermal power, and solar power of less than 15 megawatts,

off-grid, distributed generation projects including solar home systems and small central stations, and

energy service companies as they implement energy efficiency investments in areas such as industry, lighting, and heating.

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Financing and disbursement

The Multilateral Fund for the Implementation of the Montreal Protocol receives funds by donors (industrialized countries – non-Article 5 – including countries with economies in transition) on a three-year basis. The latest replenishment has raised fresh funds to flow into the 2009-2011 triennium budget (US$490 million). The collected funds are then used to promote activities including the closure of ODS production plants and industrial conversion, technical assistance, information dissemination, training, and capacity building aimed at phasing out the ODS used in a broad range of sectors. The funding can only cover the additional (the so-called incremental) costs incurred in converting to non-ODS technologies. Financial and technical assistance is provided in the form of grants or concessional loans and is delivered primarily through four “implementing agencies”: the UNEP, UNDP, United Nations Industrial Development Organization, and WB. Up to 20 percent of the contributions of giving parties can also be delivered through their bilateral agencies in the form of eligible projects and activities.

The GEEREF is a global risk capital fund, receiving contributions from both private and public actors, including a kick-start monetary commitment from the European Commission. For the current period of operations, 2007-2010, the fund has received €80 million from the EC, and thanks to additional pledges from the German and Norwegian governments, it is already well above €100 million. The GEEREF expects to mobilize additional risk capital from the private sector of at least €300 million, and possibly up to €1 billion in the longer term. The GEEREF does not lend or grant funds but will invest them with the aim of making sustainable profits for its investors. In fact, the GEEREF invests in regional subfunds specializing in energy efficiency and renewable energy projects. It gives priority to meeting the needs of the developing countries in sub-Saharan Africa, the Caribbean, and the Pacific. In addition, the fund includes a technical assistance facility (around 10 percent of the total fund size) to engage local and international technical expertise for improving project proposals and business plans. Only projects that meet strict investment criteria can qualify for GEEREF funding.

Within the ADB framework, the PEF is a multidonor umbrella facility receiving contributions from governments on a three-year basis (2008-2010 contributions: US$8.5 million). It acts as a traditional donor mechanism, with the ADB administering contributions along the Poverty and Environment Program’s purposes and disbursing technical assistance grants to beneficiaries. PEF-financed activities should demonstrate potential opportunities for environmental improvement and poverty reduction, as well as involve the private sector and play a catalytic role, with emphasis on innovation, pilot testing, and potential replication.

The CEFPF receives contributions from bilateral, multilateral, and individual sources, including companies and foundations. The target size by the end of 2008 was US$250 million. The Partnership Facility performs its financing role with the establishment of (1) a Clean Energy Fund (CEF), a multidonor fund to support technical assistance and grant components of “green energy” investment projects, and (2) clean energy funds, a series of bilateral funds. The CEFPF coordinates existing and new resources granted to the ADB to promote clean energy through (i) pooled grants through the CEF; (ii) bilateral grants through clean energy trust funds; (iii) project-specific loans, grants, or guarantees under framework agreements to be negotiated with the financing partners; (iv) knowledge provision and exchange; and (v) other forms of assistance, such as risk-sharing mechanisms. Money is disbursed in support of initiatives that are consistent with the ADB’s policies, introduce innovative solutions, adopt a participatory approach, have a high demonstration value in the sector, and have good potential for replication in the country and/or region. Assistance is available to central and local governments, government agencies, the private sector, and other entities eligible to receive assistance from the ADB.

Finally, the IFC’s SEF collects funding through donor financial contributions from the Global Environmental Facility, but it also leverages financing from other lenders. As of today, US$19 million

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has been gathered in support of small-scale energy projects meeting specific social, financial, and environmental criteria. The facility does not provide grants but rather invests seed and growth capital to implement and expand sustainable small and growing energy businesses in Africa, Asia, and Latin America. Larger than microenterprises, small and growing businesses typically employ between 10 and 150 staff members and are capable of absorbing investments generally between US$25,000 and US$1million. The focus is therefore on debt and equity investments in early stage or more mature enterprises.

Governance

The analyzed financial schemes differ in governance structure. While all the instruments should be characterized by a traditional form of multilateral governance, being subjected to the authority of the multilateral institution they are promoted by, the outcomes in terms of representation and involvement of recipient countries are different. Apart from the most obvious GEEREF case, where the decision-making process is driven by all-European sponsors, with no engagement of beneficiary countries, even the IFC facility does not envisage much recipient involvement in the decision process because funding and activities are fully handled by a private investment company to which IFC devolves its contributions and whom IFC supervises in terms of consistency of operations with its own mandate. The ADB’s schemes fall under the authority of the ADB’s Board of Directors, in conjunction with participating countries. Members of the board are half elected by members of the Asian region and half by members outside this region, thereby providing for a geographical balance (although this method of representing constituencies implies that the interests of smaller DMCs might not be adequately represented). Last, the Multilateral Fund for the Implementation of the Montreal Protocol operates under the authority of the parties to the Protocol, which, every three years, decide its budget, with contributions based on the UN assessment scale. It is managed by an Executive Committee with an equal representation of seven industrialized and seven Article 5 countries, which are elected annually by the Meeting of the Parties based on equitable geographic representation. Members have equal voting rights, but the Executive Committee has never actually voted; decisions are mainly based on consensus. A representative constituency system introduced by the Executive Committee allows each of the 14 members to co-opt additional countries from the same region. This has remarkably broadened the participation of stakeholders in the decision-making process and enhanced their sense of ownership of the process. Further, the establishment of national ozone units has helped 140 countries take ownership of their national ozone protection program by providing a continuous link to the assistance under the Multilateral Fund, as well as a channel of communication to the agencies implementing Multilateral Fund projects.

Conclusions

The review in the previous pages with reference to environment-related funding schemes has described modalities of operations, funding, and objects of some initiatives carried out by international institutions. It reveals the existence of independent funds that are operating in the environmental field with explicit focuses: ODS phasing out, renewable energy, energy efficiency, green investment promotion, support to small clean energy projects, and the like. The pursuance of specific targets is at the basis of the birth of different, autonomous funds, which further contribute to the image of atomization of efforts in the international climate and environment financial architecture. Each scheme provides different types of funding – from grants to loans to equity capital – to activities falling into its defined eligibility requirements. For some financial schemes, the analysis shows an intent to favor a deeper involvement of the private sector, so as to leverage increased resources for environmental purposes. However, despite this attempt, the overall raised amounts are not sufficient for addressing environmental issues on a proper scale.

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In terms of governance, the Multilateral Fund shows the most inclusive approach for a balanced representation of Northern and Southern interests, also in consideration of its implementation role as an international treaty. The ADB is also subject to a governance structure that tries to balance the interests of DMCs (beneficiaries) and participating countries (donors), as well as an equal geographical representation. The remaining funds (GEEREF and SEF), on the other hand, do not show much involvement in decisional processes from recipient developing countries.

In terms of potential use of programmatic/sectoral approaches in these funds, the review reveals a preference for project-based activities, but, at the same time, some of the revised schemes (Multilateral Fund, ADB) have the structures for future scaling up of efforts toward more comprehensive programs of action or sectoral initiatives: Instead of focusing on projects only, funding could be disbursed to projects as parts of wider sectoral activities, with precise targets and objectives to achieve in a certain time frame. Projects financed under the ADB schemes already need to comply with country priorities and strategies, and this is certainly a good basis to build upon toward adoption of broader policy-based approaches. The Multilateral Fund for the Implementation of the Montreal Protocol is already working in this direction: Since 2000 the Multilateral Fund has put less emphasis on the funding of stand-alone projects to replace technologies using ODS. Instead, it has encouraged the development of national ODS phaseout programs that map out a detailed plan of action to eliminate the entire remaining consumption of the most common ODS in a country. Each plan is governed by an agreement between the Executive Committee and the government concerned that specifies, among others

the annual reduction target to be achieved by the government,

the total funding level from the Multilateral Fund,

a schedule for the disbursement of funds, and

an independent verification of achievement of the annual reduction target.

In conclusion, the picture of funds fragmentation and limited resources, as identified in Part 1, is again confirmed by this last review and calls for a need for harmonization and scaling up of efforts. Partnerships and cooperation among institutions can also be recommended as helpful means by which to coordinate funding initiatives, with improved benefits for the global environment.

ANALYSIS

The objective of this review of existing and proposed financial mechanisms is to define the potential and shortcomings of the current (or projected) financial regime and put this in relation to the creation of a new improved financing scheme that could transfer sufficient resources from North to South in an efficient, transparent, and participatory way. International climate change negotiations are indeed now working in this direction, and the regular submissions from parties and civil society to the AWG-LCA reveal the desire of governments and organizations to achieve an innovative climate change agreement that could overcome existing weaknesses in the global financial structure, while providing nations with suitable tools to handle the adverse consequences of climatic modifications. The starting point is, obviously, the identification of problems and distortions in current funding schemes. In order to understand why results have not been proportional to initial efforts, it is essential to categorize difficulties and troubles, which represent the “working base” for further improvements. From the description of both climate-related and environmental funds reported in previous pages, similar critical matters and needs have been identified, which can be outlined as follows:

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1. FUNDING

a. Insufficient financial sources to tackle climate change issues on an appropriate scale

b. Fragmentation of funds, in and outside UNFCCC umbrella

c. Unpredictability of funding, strongly dependent on developed countries’ pledges and contributions

d. Growing market-based funding, although markets are not functionally working in all developing countries (inequality in benefits distribution among developing nations)

2. GOVERNANCE

a. Low representation/involvement of developing countries in financial decision making

i. Need for essential improvements in governing transparency

ii. Need for increased efficiency in operations

3. PURPOSE

a. Atomization of efforts

b. Historical focus on mitigation rather than adaptation

i. Rising need for increased technology transfers

4. STAKEHOLDERS

a. Public sector as main player in the international financial regime

i. Need for enhanced engagement of the private sector

5. SCALE

a. Project-based focus, individual activities

i. Need for policy-based, scaled-up actions

6. TIMING

a. Short-term perspective as a result of unpredictability of post-Kyoto context

b. Preference for interim actions/projects, delivering results by 2012 or slightly after

As seen in Part 1 and Part 3, climate- and environment-related funds are offering different opportunities, under and outside the UNFCCC umbrella, to tackle environmental degradation and the adverse consequences of climate change. Be they bilateral or multilateral initiatives, funds or market-based instruments, governments and international organizations in developed countries are taking the lead in implementing mitigation actions. However, given the ample impact that GHG emissions have at the global level, independently of their source of origin, it is fundamental not to restrict climate change action to industrialized countries, but to consent to active participation in the process by developing countries as well, thereby widening the scale of global mitigation activities. The fragmentation of sources does not guarantee an optimal scope of action, as the global dimension of the climate change crisis necessitates either (1) a participatory, financially significant mechanism that has abundant resources in place to tackle the climate problem with proper, coordinated actions or (2) the interaction of different – but complementary – financing schemes, each focused on a specific aspect of mitigation/adaptation (or geographical areas), which interact and work in synergy with one another, to avoid overlapping and duplication of efforts, and toward an integrated and symbiotic system of climate change financing. Nevertheless, the current picture of the global financial structure is neither the first nor the second case. The fragmentation of resources derives from the existence of different funds, which mainly work autonomously from one another

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and which are fairly dependent on (unpredictable) donor countries’ contributions. The actual governance issues in relation to balanced and equal representation are also a frequent problem in many financial mechanisms (CDM in primis) and if not wholeheartedly addressed, they might create a recurrent path of (inefficient) climate change action based solely on the developed countries’ perspective. Further criticism has arisen around the weak involvement of the private sector, whose resources can be abundantly mobilized, as well as about the project-based approach, whose individual focus is not accompanied by proper integration with policies and programs at the national or sectoral level.

The latest submissions to AWG-LCA demonstrate common perceptions of urgent problems and outlines of an improved climate change agreement. As seen in Part 2, some shared elements among the analyzed proposals show the preferred post-2012 direction: new and additional funding, more involvement and representation of developing countries, open and transparent governance, increased resources for technology transfer and adaptation, a polluter-pays principle, and an enhanced policy-based approach. This is, in brief, what new proposals seek to achieve. LDCs have become more and more active in international negotiations – as the Mexican and G77 and China proposals prove – and have stressed their interest in an enhanced and more universal financial regime. The Mexican and Swiss proposals actually include nonindustrialized nations in the category of donors, and the South Korean submission gives international credit to its domestic climate-related actions. This amplified representation of developing countries, and recognition of their mitigation efforts, can only be seen in positive terms, as it could put developing countries’ needs and difficulties on the table and help rectify mistakes, distortions, and inefficiencies in the existing financial architecture. In this respect, interesting talks can be expected at the upcoming COP 15, when the proposed schemes will be further discussed. With the recent augmented involvement of developing countries in the international emissions reduction arena, and the broader engagement of such key nations as China and India, other critical countries (like the United States) might be stimulated in, for instance, adopting binding targets under the Kyoto Protocol.

In view of all these considerations, improvements toward an enhanced financial regime might account for the following:

UNFCCC framework: It is clear that the UNFCCC is the most participatory environment for carrying out climate change negotiations. Any new financial scheme outside it would not be perceived by all countries as the outcome of open and transparent talks. Building on existing structures can also be more efficient, as it can also avoid duplication of institutions and efforts. The existence of a renovated financial structure under the UNFCCC would preferably be complemented by other (already existing or new) environmental funds and schemes, many of these reviewed in this paper, so as to link the various financial initiatives under a cooperative relationship from the perspective of improved efficiency and concerted efforts.

New and additional funding: As reviewed in Part 1, the available funding is not sufficient for tackling the adverse consequences of climate change on an adequate scale. Economic literature suggests far bigger amounts of monetary flows for mitigation and adaptation measures, and in this respect it is essential to commit more substantial financial sums to the climate change cause. The reviewed proposals work in this direction and not only suggest more significant pledges from governments but suggest market-based mechanisms and private sector involvement as possible fundraising areas, as well as advocate for contributions from developing countries (in measure of their capacity).

Improved governance: Governance is a critical element in structuring financial funding, and it is fundamental to build a new scheme that takes into account everyone’s interests (both industrialized and nonindustrialized nations). Good governance allows for an

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equitable and balanced representation of constituencies, provides easier access to funding from developing countries, accelerates procedures, and ensures open and transparent operations. Without these elements, any new financial mechanism may just not make any durable impact in favor of the global environment (and people).

Policy-based action: Recent negotiations under the UNFCCC have focused on a gradual shift from project-based activities to programs of action and cooperative sectoral approaches. The proposed financial schemes reviewed in Part 2 all adopt a programmatic/sectoral perspective to overcome the limits of project-targeted actions, which are not able to reach the scale necessary for effective impacts. On the other hand, programs, broadly defined, could become good vehicles to tackle sector, subsector, or systemwide emissions. Among the reviewed proposed mechanisms, the Mexican and G77/China proposals seem most appropriate for a full implementation of programmatic initiatives, given their open engagement of both developed and developing countries, which can promote dialogue and cooperation on the running of, for instance, sectoral approaches. The South Korean submission is also suitable in this respect, and the creation of a Registry of NAMAs is already a good base for further policy-based developments. The CDM has also adopted programs of activities, which can be defined as a discrete sum of individual projects. Both national policies and measures programs, as well as sectoral approach agreements in certain industries, might be useful ways through which developing countries would be willing to contribute to the global effort to tackle climate change in a post-2012 legal framework, as long as the actions that they commit to are aligned with their development needs. A critical element in the design of policy-based programs is to use apt methodologies that allow evaluating actions in an adequate way. Scaled-up efforts require methodological approaches that emphasize emission reduction trends and transformational impact rather than tracking each tonne of emission reduction.

Long-term outlook: Given the need for carrying out significant mitigation and adaptation actions, whose impact can create lasting, sustainable benefits, any new financial scheme should work under a long-term perspective, so as to allow for the implementation of relevant initiatives that can bring about transformational change. This is particularly important if efforts’ scaling up is put in place through policy-based, programmatic approaches.

With these elements in mind, some directions and suggestions already exist for defining an improved global financial architecture. How it would be structured is still not fully clear because of the many interests and perspectives at play. But COP 15 has given the climate change political agenda a high priority, and key agreements and new directions are expected to come out of this meeting.

CONCLUSIONS

With the strong political attention that climate change has gained in recent years, there is hope that new climate change talks, negotiations, funds proposals, and targeted research could actually contribute to a revised financial architecture in which all countries and interests are equitably balanced. The key element behind a global financial system is that, as such, it has to indeed be global. Therefore, much attention today is given to developing appropriate governance structures that can contribute to a truly open and universal financial mechanism, in which increased monetary flows efficiently and transparently move from North to South.

In this respect, 2009 may offer a good opportunity for governments to show their commitments and concrete intentions for an improved global financial structure. Even if what can

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realistically be achieved in Copenhagen is just a consensus on a basic framework for a post-Kyoto agreement, this would already be enough for moving forward – and give signals to market-based financial mechanisms of future actions and positive enhancements.

The present report has attempted to contribute to the climate change financing debate by sharing knowledge on various funds and shedding light on new proposals, in the hope that the insights will represent useful inputs in further climate-related discussions and negotiations for a successful post-2012 agreement.

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Appendix I

Table 11: New environmental bilateral funds (liberally taken from Porter et al. 2008)

Questions GCCA

EU

ETF-IW

UK

Japanese Cool Earth

Partnership

German International

Climate Initiative

German Life Web Initiative

Australian GIFC

Norwegian NORAD

Rainforest Initiative

Spanish MDG Fund


Joint initiative between DGs Development, Environment and External Relations of the European Commission.

Joint DEFRA-DfID initiative of the UK government.

Announced by Japanese prime minister, with the Ministry of Foreign

Affairs coordinating development.

Led by the German Ministry of Environment.

Under UNCBD structure, initiative presented at CBD COP 9 in May 2008.

Departments of

Environment, Forestry and Foreign Affairs (including AusAid).

Norwegian Ministry of Environment.

Initiative agreed between the Spanish government and the UNDP.

Total amounts, time frame, and annual disbursement

US$79M. 2008-2010,

US$26M/yr

US$1.6B.

2008-2010,

US$531M/yr

US$10B.

2008-2012,

US$2B/yr

US$634M per year, uncertain time frame.

N/A US$188M, uncertain time frame.

US$560M.

2008-2012,

US$112M/yr

US$143M.

2008-2011,

US$36M/yr

Purpose of the fund

Adaptation, mitigation, deforestation, disaster risk reduction, climate change, and poverty reduction.

To support climate change mitigation and adaptation and to tackle deforestation in developing countries.

To assist mitigation of, and adaptation to, climate change. Improve access to clean energy.

To support sustainable energy systems, forest management, and adaptation; trigger private investments.

To support the UNCBD Programme of Work on Protected Areas.

To facilitate global action to address emissions from deforestation.

To support adaptation in Africa, climate change research and multilateral initiatives.

To support environmental management, access to finance and adaptation capacity.

Governance Potential recipients not involved in design or initiation

Potential recipients involved in design stage.

Involvement of potential recipient countries though normal

GTZ and KfW responsible for implementation.

Funding will respond to country-identified

Involvement of potential recipient countries through normal

N/A N/A

60

phases.

Stakeholders invited to development dialogue forum.

Development assistance strategies with partner countries.

Recipient countries to develop adaptation plans and budgets.

DfID to propose budget support as a means of implementation.

bilateral channels.

Recipient countries involved in the development and implementation of projects and through normal bilateral cooperation channels.

needs. bilateral channels.

61

Table 12: New environmental multilateral funds (liberally taken from Porter et al. 2008)

Questions FCPF

(WB)

TFA

(GEF)

CTF

(WB)

Earth Fund

(GEF-IFC) SCF and its PPCR (WB)

Kyoto Adaptation Fund

Fund sources The United Kingdom and Germany, both FCPF’s Readiness Fund and Carbon Fund; Nature Conservancy to Carbon Fund only; six other countries to Readiness Fund only.

GEF Global and Regional Exclusion funds (US$40M) and US$20M from the land degradation focal area.

UK and Japan. Uncertainty prevails regarding contributions from the United States and other donors.

GEF has allocated US$50M and hopes to obtain US$150M in cofinancing from private sector entities.

PPCR: World Bank hopes to interest donor countries in supporting the fund, but no pledges have been reported.

A 2% levy on the emission permits generated under the Kyoto Protocol’s

Clean Development

Mechanism.

Total amounts and time frame

US$165M. US$91M Readiness Fund; US$74M Carbon Fund;

2008-2012. Grants.

US$60M,

2008-2010. Grants.

Uncertain,

2008-2012. Concessional financing, MDB/bilateral financing

US$200M,

2008 – uncertain. Grants, concessional loans, innovative funding tools.

Up to US$1B,

2008-2012. Grants and highly concessional loans.

2008-2012: US$80M-US$300M/yr.

By 2030: US$100M-US$500M/yr (low est.) to US$1B-US$5B/yr (high est.). 2008-2012. Grants.

Purpose of the fund

Two objectives:

(1) supporting countries for a large-scale system of payments for reducing emissions from deforestation and degradation (REDD) and (2) verifying emissions reductions.

Motivating tropical forest countries to invest country resources allocated through the RAF to projects dealing with SFM: mitigation, biodiversity, and provision of environmental services.

Accelerate the transformation to low-carbon economies by financing the more rapid deployment of low-carbon technologies and sector strategies.

Leverage private sector funding to stimulate more innovative and cost-effective solutions in developing countries to the threats of climate change, biodiversity loss, and land degradation.

Provide financing and risk management tools targeted to the needs of developing countries. Focus on low-carbon and climate-resilient investments and sustainable development and poverty reduction.

Assist developing countries meet their costs of adaptation.

Governance and board membership

Six representatives of REDD countries; six representatives of donors and buyers.

Under GEF Trust Fund rules: 14 developed country representatives, 16

Eight representatives each from developed and developing countries; a WB senior

Under GEF Trust Fund rules: 14 developed country representatives, 16

Eight representatives each from developed and developing

AFB, consisting of 16 members and 16 alternates, in representation of

62

Each REDD country receives one vote, each donor or buyer gets one vote per million dollars contributed.

developing country representatives, and two representatives from countries in Central Asia and Europe and the former Soviet Union. One vote per country.

representative; a representative from the MDBs; a country representative when decision is made on a country investment plan.

developing country representatives, and two representatives from countries in Central Asia and Europe and the former Soviet Union. One vote per country.

countries, a WB senior

representative, a representative from the MDBs.

different constituencies (majority from developing countries).

Decision-making method

Simple majority of votes.

With no consensus, decisions are made by 60% majority of both participants and of total contributions.

Consensus; no votes.

With no consensus, decisions are made by 60% majority of both participants and of total contributions.

Consensus; no votes.

Decisions made by two-thirds majority.

WWF

1250 24th Street NWWashington, DC 20037USA

Tel: +1.202.778.9752Fax: +1.202.293.9211Email: [email protected]: http://www.panda.org/mpo

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Review of the CDM and Other Existing and Proposed Financial Mechanisms to Transfer ...assets.panda.org/downloads/cdm_1.pdf · 2009-09-23 · 4 8. harlotte Streck (limate Focus, russels)