UNCTAD
The Least Developed Countries Report 2010:
Towards a New International Development Architecture for
LDCs
Background Paper
Confronting Climate Change:
Towards A New International Agenda for Meeting the Financial
Challenges of the Climate Crisis in Least Developed Countries
Celine Tan
Birmingham Law School
University of Birmingham
Background Paper No. 4
.
This study was prepared for UNCTAD as a background paper for the Least Developed Countries Report
2010: Towards a New International Development Architecture for LDCs. The views in this paper are those
of the author and not necessarily those of UNCTAD or its member states. The designations, terminology
and format employed are also those of the author.
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Abbreviations
ADB
AWG-KP
Asian Development Bank
Ad-Hoc Working Group on Further Commitments for Annex 1 Parties under
the Kyoto Protocol
AWG-LCA Ad-Hoc Working Group on Long-Term Cooperative Action
CIF
Climate investment fund
EU
European Union
FAO
Food and Agriculture Organisation
FCPF
Forest Carbon Partnership Facility
G8
Group of Eight
G 77
Group of 77
GDP
Gross Domestic Product
GEF
Global Environmental Facility
GNI
Gross National Income
GHG
Greenhouse gas
IDA
International Development Association
IFI
International financial institution
IMF
International Monetary Fund
IPCC
Inter-governmental Panel on Climate Change
IPR
Intellectual property rights
LDC
Least developed country
MDB
Multilateral Development Bank
MDG
Millennium Development Goal
MRV
Monitorable, verifiable, reportable
ODA
Official development assistance
OECD
Organisation for Economic Cooperation and Development
REDD
Reducing emissions from deforestation and forest degradation
SIDS
Small island developing states
TRIPS
(Agreement) on Trade-Related Intellectual Property Rights
UN
United Nations
UNCTAD
United Nations Conference on Trade and Development
UNDP
United Nations Development Programme
UN-DESA
United Nations department for Economic and Social Affairs
UNFCCC
United Nations Framework Convention on Climate Change
UN-ORHLLS United Nations High Representative for the Least Developed Countries,
Landlocked Developing Countries and Small Island Developing States
US
United States of America
UNEP
United Nations Environment Programme
UNEP FI
United Nations Environment Programme Finance Initiative
UN REDD United Nations Collaborative Programme on Reducing Emissions from
Deforestation and Forest Degradation in Developing Countries
WTO
World Trade Organisation
WWF
Worldwide Fund for Nature
List of Figures & Tables
1. Figure 1: UNFCCC Funding
2. Figure 2: Financing outside the UNFCCC
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Paper Outline:
1. Introduction
2. Scope and Scale of the LDC Climate Challenge
a) Special circumstances and Vulnerabilities of Least Developed Countries
b) Financing the Adaptive Capacity of Least developed Countries
c) Structural and External Constraints on LDC Financing Capacity
3. LDCs, Climate Change and International Law
a) The Global Climate Change Regime
b) Least Developed Countries and Climate Change Governance
c) Climate Change Financing and the Climate Chang Regime
d) The Climate Change Regime Post-Copenhagen
4. International Support Mechanisms or Meeting the Financing Challenge in LDCs
a) Legal, Moral and Ethical principles Underpinning Climate Change Financing
b) The International Architecture of climate Change Financing
c) Coherence with the Climate Change Regime and Global Economy
5. Review of Existing and Proposed Instruments for Climate Change Financing in LDCs
a) Financing under the UNFCCC
b) Financing Outside the UNFCCC
6. Towards a New International Agenda for Financing Climate Change Adaptation and
Mitigation in LDCs
a) Equitable Framework and Compatibility with Global Climate Change Regime
b) Accountable, Transparent and Representative Governance
c) Policy Coherence with International Trade and Finance Regimes and National
Development Strategies
d) Sustainability and Predictability of Financing
7. Conclusion
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1.
Introduction
The threat and reality of climate change will be one of the most critical issues facing the
international community in the near future and responding to the financial imperatives of the
crisis represents a key challenge for countries as the global economy moves beyond the
international financial crisis of 2008-09. The science of climate change is clear: greenhouse gas
(GHG) emissions caused by human activity have altered the earth’s natural climatic processes,
leading to global warming and its associated meteorological effects. This is having and will
continue to have a significant impact not only on the ecology of the planet but also on the
sustainability of human communities who depend on it.
Although climate change will affect all nation states and communities, for developing countries
and particularly least developed countries (LDCs)1, confronting the climate crisis is a matter of
grave urgency given their economic and geographical vulnerability relative to industrialised
countries. The burden of shouldering the fallout from climate change, including increasing
climatic variability, extreme weather events and the occurrence of natural disasters, will fall
disproportionately on LDCs. The majority of LDCs are located in regions already experiencing
environmental stress and this geographical exposure, coupled with low levels of economic and
human development and greater reliance on climate-sensitive sectors, render these countries
extremely susceptible to the catastrophic effects of climate change.
Alongside greater immediate economic and human costs stemming from their inability to
mitigate natural disasters, LDCs are also prone to longer term socioeconomic pressures resulting
from the lack of resources and capacity to recover from the aftermath of such incidents and to
adapt to shifting climatic conditions and gradual environmental erosion. Given the difficult
socioeconomic circumstances already facing LDCs, climate change represents a significant threat
to their economic development and the achievement of key poverty reduction and human
development targets.
Responding to the challenges of climate change in LDCs, including reorienting their economies
towards more climate-resilient and ecologically sustainable pathways, will require a significant
injection of financial resources. These resources would have to be additional to those required to
meet existing social and economic development needs to ensure that past, present and future
gains in these areas are not compromised. It is unlikely that LDCs will be able to meet the
financial costs of climate change adaptation and mitigation2 without substantial external
Least developed countries refer to the 49 countries which the United Nations recognises as ‘the world’s poorest
and weakest countries’, exhibiting the lowest indicators of social and economic development. They have a
population not exceeding 75 million and a per capita gross national income (GNI) of less than US$905). See UNORHLSS website: http://www.unohrlls.org/en/ldc/related/59/ (4 January 2010) and further discussion in section
2.
2 Adaptation involves both the actions of adjusting practices, processes and capital in response to the actuality or
threat of climate change as well as changes in the policy environment, including social and institutional structures.
Adaptation assists in moderating potential damages, take advantage of opportunities or to cope with the
consequences of climate change. Mitigation of climate change refers to actions aimed at reducing the sources of
climate change, including reducing greenhouse gas emissions or enhancing their sinks, so as to prevent further
global warming. Although both sets of actions are important considerations for LDCs, this paper will focus
primarily on adaptation costs given the relatively low levels of GHG emissions contributed by LDCs and their
negligible obligations to reduce such emissions under the multilateral climate change regime. However, it is
important to note that some adaptation measures may also constitute mitigation actions which carry a financial cost
in terms of trade-offs with economic development.
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contributions from the international community. At the same time, because LDCs have
contributed the least to the problem of climate change, the principle of equity also demands that
they should be supported by those responsible for the crisis – the industrialised countries – in
confronting the challenge of climate change.
Consequently, finance for climate change adaptation and mitigation should be a key element in
the design of a post-financial crisis international financial architecture that responds to the needs
of LDCs. In developing a new financial agenda to address the challenges of the global climate
crisis, it is not just sufficient to determine the scope and scale of financing needed by LDCs to
meet the challenges of climate change but also, importantly, to consider the modalities in which
the requisite financial resources will be generated by the international community and the
channels through which these resources will be delivered to LDCs. The efficacy of financing for
climate change adaptation and mitigation in terms of shoring up their capacity to cope with
climatic shocks and the transition of LDCs towards a more sustainable economic trajectory will
depend largely on the infrastructure for mobilising and disbursing these financial resources at the
international level.
This paper considers the challenges confronting LDCs in meeting the adaptation and mitigation
requirements brought on by the climate crisis in light of their existing structural constraints. It
will review existing international support mechanisms for financing adaptation and mitigation in
LDCs and examine key elements of a proposed international framework for the mobilisation,
administration and delivery of such financing in the context of international law and policy.
Given that the international community’s responses to climate change is regulated by an intergovernmental regime – under auspices of the United Nations Framework Convention on
Climate Change (UNFCCCC) – establishing rights and obligations for states party to the regime
as well as providing a framework for negotiations on future action, any consideration of a
financial architecture for climate change financing must be made with reference to the decisions
and outcomes of deliberations within this fora.
2.
Scope and Scale of the LDC Climate Challenge
a)
Special Circumstances and Vulnerabilities of Least Developed Countries
Least developed countries are recognised by the international community as the world’s poorest
and weakest states. They are characterised by extreme poverty, low levels of capital, human and
technological development and heightened susceptibility to external economic shocks, natural
and man-made disasters and infectious diseases3. At present, 49 countries are classified as LDCs,
with 33 in Africa, 15 in Asia and one in Latin America. Although the LDCs as a group contribute
relatively little to global warming – emitting less than one percent of the world’s total GHG
emissions – they will be disproportionately affected by changing climatic conditions. Along with
the LDCs’ structural economic weaknesses, the geographical location of LDCs, coupled with
their high dependence on natural resources as a source of local livelihoods and national income,
render them acutely vulnerable to climate change. It has been estimated, for example, that ‘for
every 1˚C rise in average global temperatures, annual average growth in poor countries could
drop by 2-3 percentage points, with no change in the growth performance of rich countries’
(UN-DESA, 2009a: viii).
The heightened vulnerability of LDCs to economic and climatic shocks has been highlighted by
the effects of the aforementioned financial crisis and countries’ exposure to a series of natural
3
See UN-OHRLLS website: http://www.unohrlls.org/en/ldc/25/ (5 January 2010).
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disasters in recent years. While the epicentre of the current global recession was located in the
financial sectors of developed countries and its immediate fallout was felt keenly in these
countries and developing countries closely integrated into global financial markets, LDCs have
been significantly affected by the downturn in the real economy following the financial crisis4
(UNCTAD, 2009a: 1 – 2; Karshenas, 2009: 1). It has been estimated that the initial impact of the
global crisis on LDCs has amounted to a total income loss of around US$7.5 billion in 2009 or
30 percent of the GNI of affected LDCs with negative impacts on prospects of economic
growth and poverty reduction (Karshenas, 2009: 31).
At the same time, LDCs have been adversely affected by the cumulative effects of increased
natural disasters caused by shifting weather patterns, such as hurricanes, tornados, droughts and
flooding, leading to food shortages, collapse of local livelihoods and rising economic insecurity.
Ninety-eight percent of those seriously affected by natural disasters between 2000 and 2004 and
99 percent of all disaster casualties in 2008 were borne by developing countries, including LDCs
(Global Humanitarian Forum, 2009: 1; 60; UNDP, 2007: 8). Developing countries also bear the
brunt of the immediate economic impact of climate-related disasters and of longer term
environmental degradation, such as on agricultural crop yields, with more than 90 percent of the
US$125 billion in annual climate-related economic losses suffered by developing countries (ibid:
60). According to the UNFCCC, developing countries, on average suffer more damage from
climate-related impacts as a percentage of their GDP than developed countries (UNFCCC, 2008:
para 81).
Recent data points to an increasing frequency and intensity of natural disasters, with four times
as many such incidents occurring annually from 2000 – 2006 as during the 1970s and resulting
economic damage increasing sevenfold to US$83 billion a year (UN-DESA, 2009b). Currently,
over 2.8 billion people reside in areas prone to one or more of the physical manifestations of
climate change, namely desertification, droughts, floods, storms and sea level rise (Global
Humanitarian Forum, 2009: 15). The regions most at risk from droughts and floods are subSaharan Africa and South Asia where the majority of LDCs are located (Global Humanitarian
Forum, 2009: 15; UN-ORHLLS, 2009: 14 – 15). These are also the areas that are least able to
cope with the social and economic fallout from climate-related incidents.
The worst affected regions are sub-Saharan Africa, South Asia and small island states. Africa
remains the most vulnerable region, with 15 out of 20 of the world’s most vulnerable countries
located in the region (ibid: 58). A third of Africa’s population live in drought-prone areas and it is
projected that by 2020, between 75 and 250 million people in Africa will suffer from the effects
of increased water stress resulting from climate change (UN-ORHLLS, 2009: 15). The ten
countries most vulnerable to the socioeconomic impacts of climate change countries are all
LDCs: Afghanistan, Burundi, Chad, Comoros, Eritrea, Ethiopia, Niger, Somalia, Rwanda and
Yemen (Global Humanitarian Forum, 2009: 59). There have been 180 incidents of storms or
floods in these countries during the last 30 years, with 11 million people affected by drought in
2008 alone and 85 million having been affected by droughts in the last three decades (ibid).
Least developed countries are most at risk from shifting weather patterns and environmental
degradation and suffer the greatest burden of adjusting to threats of climate change because they
are already challenged by what is known as ‘multiple vulnerabilities’ on account of their low
levels of economic and human development (UN-DESA, 2009a: 71). According to the United
Nations Department for Economic and Social Affairs (UN-DESA):
This is includes the effects from a combination of a sharp reduction in world trade, rapid decline in commodity
prices, decline on foreign direct investment (FDI) and slowdown in remittance flows from migrant workers due to
rising unemployment in host countries (Karshenas, 2009: 1).
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Poorer countries and communities with poor health care, lack of infrastructure,
weakly diversified economies, missing institutions and soft governance structure
may be exposed not just to potentially catastrophic large-scale disasters but also
to a more permanent state of economic stress as a result of higher average
temperatures, reduced availability of water sources, more frequent flooding and
intensified windstorms ... Thus countries that are already vulnerable to climatic
shocks often find themselves trapped in a vicious circle of economic insecurity,
persistent poverty, vulnerability to shocks and inadequate capacity to cope with
those shocks (ibid).
LDCs clearly fall short of the requirements for a high adaptive capacity to climate change set out
by the Intergovernmental Panel on Climate Change (IPCCC) in 2001, including: a stable and
prosperous economy, a high degree of access to technology, well-delineated roles and
responsibilities for the implementation of adaptation strategies, systems for dissemination of
climate change adaptation information at national, regional and local levels and the equitable
distribution of access to resources (IPCC, 2001 in UN-ORHLLS, 2009: 7). The low adaptive
capacity of LDCs to the climate change will be eroded further if the countries are unable to
recover quickly from the immediately aftermath of current financial and climate-related crises
and suffer additional economic stress brought on by future economic and climatic shocks. It will
also be exacerbated if global mitigation action and targets are not achieved within a reasonable
timeframe and countries remain locked into unsustainable development paths, leading to ‘higher
emissions, more climate change impacts and larger investment and financial flows needs for
adaptation in the longer term’ (UNFCCC, 2009a: 2).
b)
Financing the Adaptive Capacity of Least Developed Countries
The urgency of addressing the low adaptive capacity of LDCs to climate change is clear. Unless
immediate action is taken to redress the vulnerabilities of LDCs to the threat and reality of
changing climatic conditions and gradual environmental degradation, the economic and human
costs will be substantial. Climate change is a critical threat to LDCs’ sustainable development and
will impact considerably on their achievement of key poverty reduction and human development
targets, notably the attainment of the Millennium Development Goals (MDGs)5. The impacts of
climate change on countries’ water supplies, food security, natural ecosystems and biodiversity
will affect the health and livelihoods of communities who reside within them. Climate change
will slow, and in worst cases, reverse, these countries’ progress towards eradicating poverty,
combating diseases and raising levels of human and economic development (Global
Humanitarian Forum, 2009: 67).
LDCs are already off-track in meeting their MDGs and the adverse effects of climate change will
ensure that most, if not all, will be unable to do so in the foreseeable future. Global food and
fuel shortages which are expected to accompany climate change are expected to impact
disproportionately on LDCs, particularly oil-importing LDCs. LDCs’ reliance on agriculture as a
source of household income and the production and export of primary products as a source of
national income means that increased climate variability and their effects will have a significant
socioeconomic impact on their capacity to maintain current levels of development. For example,
in sub-Saharan Africa, where over 60 percent of households rely on agriculture for their
livelihoods, heat-related plant stresses are expected to contribute to reduced yields in key crops
The Millennium Development Goals are a set of time-bound targets aimed at reducing poverty and facilitating
human development and committed to by the international community and adopted as the United Nations
Millennium Declaration in September 2000.
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by as much as 50 percent in some areas (UN-DESA, 2009a: xiii). In the same continent, 200
million people (or a quarter of the population) are already facing water stress and this is likely to
exacerbate existing health and sanitation problems, straining already precarious health services in
many areas (ibid: 78 – 79).
Adaptation measures should therefore be a critical aspect of development policy in LDCs and a
priority for the international development community. Adaptation actions are necessary ‘to
reduce vulnerability and enhance adaptive capacity to climate change risks’ (UNFCCC, 2008:
para 96). LDCs will have to make significant adjustments in their economic planning,
infrastructural development and natural resource management, among others, in order to scale
up their climate resilience and capacity to respond to the adverse effects of changing weather
conditions. These adjustments include climate proofing socioeconomic activities by integrating
future climate risk, expanding the adaptive capacity of socioeconomic activities to deal with
current and future climate risks and initiating actions to cope with the adverse effects of climate
change (UNFCCC, 2008: para 8; 99 – 105). These adaptive actions include ‘capacity building,
research and assessments, disaster risk reduction and risk management and specific interventions’
into relevant socioeconomic sectors and activities (ibid: para 9; 106).
Conservative estimates of costs for such adaptation vary but there is a general consensus that
they would run into tens of billions in US dollars annually. Although adaptation measures should
be integrated or mainstreamed into wider development planning generally, the UNFCCC has
stressed that ‘the financing of adaptation needs to reflect the fact that adaptation is responding to
the additional burden posed by climate change, quite distinct from the aggregate flow of
resources towards overall socio-economic development goals’ (ibid: para 97). This means that
the costs of shoring up the adaptive capacity of developing countries, particularly LDCs and
other vulnerable countries, should be calculated in addition to the resources necessary to stay on
existing economic and human development trajectories (see below).
A UNFCCC review in 2007 estimated that the additional investment and financial flows in 2030
to address climate change mitigation will amount to 0.3 to 0.5 percent of global GDP in 2030
and 1.1 to 1.7 percent of global investment in 2030 (UNFCCC, 2009a). To reduce global GHG
emissions to current levels by 2030, global investment and financial flows of between US$200 –
210 billion per annum would be needed in 2030 ‘in addition to the amount expected to be
available under a business as usual scenario’ (UNFCCC, 2009a: 1 – 2; 2008: para 60). Over half
this amount would be needed in developing countries (UNFCCC, 2008: para 60).
Additional investment and financial flows for adaptation in developing countries is estimated at
between US$28 to US$ 67 billion annually, with an additional US$52 – 62 billion needed for
agriculture, water, health, ecosystem protection and coastal-zone protection (UNFCCC, 2009a: 2;
UNFCCC, 2007: para 746 – 753). These figures are likely to be much higher if mitigation action
is not taken to prevent further global warming. Non -UNFCCC sources have provided higher
estimates for the cost of adaptation. The United Nations Development Programme (UNDP) for
example calculates adaptation costs to reach US$86 billion by 2015 (UNDP, 2007). There is a
significant gap between what is available now and these projected figures. The UN-DESA
estimates current climate financing levels to be about US$21 billion and ‘heavily skewed towards
mitigation’ (UN-DESA, 2009: 157).
Most developing countries, especially LDCs which are heavily reliant on official development
assistance (ODA) as a source of revenue, are unlikely to meet the costs of such adaptation
through domestic sources (see further discussion below). However, these costs exceed the total
amount of ODA available to developing countries as a whole, already insufficient to meet
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international development goals, and meet the economic development needs of LDCs. The UNDESA reports that based on some estimates, the adaptation costs for developing countries
‘could be 9 – 10 times the 2008 levels’ of ODA (ibid). According to the Global Humanitarian
Forum, unless additional financing is made available for adaptation to climate change,
responding to climate change is ‘expected to consume an increasing share of development aid’
(Global Humanitarian Forum, 2009: 67). The World Bank’s concessional lending facility, the
International Development Association (IDA) has also argued that it would require additional
resources of between US$600 million to US$1.9 billion annually (or between six to 21 percent of
IDA financing at 2006 levels) to maintain the ‘net benefits’ of its projects to client countries at
their ‘without climate change’ level (IDA, 2007: para 18)
In addition to meeting the costs of adaptation, LDCs will also have to factor into account the
economic impact of climate change mitigation, both in terms of their own transition to a lowcarbon economy and the implications of a wider global transition which may result in changing
external economic circumstances, such as a reduction in world trade. As the figures above have
shown, investment and financial flows for mitigation will run into hundreds of billion US dollars
annually, with 46 percent of such new flows needed in developing countries in 2030 due to
expected economic growth and population increase, leading to higher energy demands
(UNFCCC, 2009a: 2; UNFCCC, 2008: para 60). These estimates do not include operating or
maintenance costs of mitigation investments (UNFCCC, 2008: para 63).
The climate crisis may yet provide LDCs with the opportunity to restructure their economies
onto a more sustainable track, including expanding access to clean energy, facilitating greater
sustainability in agriculture through improved land use, and protecting biodiversity through
better forest management. However, presently, LDCs lack the financial and technological
capacity to shift towards a low carbon growth path and develop more sustainable patterns of
production and consumption. Many continue to be locked into unsustainable development
trajectories as a consequence of their structural weaknesses and external constraints (see
discussion below).
Two key areas of focus for developing countries, including LDCs, in this regard are energy use
and forestry management. As energy use, primarily sourced from high carbon-emitting fossil
fuels, account for 60 percent of total GHG emissions, transiting towards more sustainable and
secure energy sources while maintaining and expanding access to affordable energy for industrial
and household use will be a major challenge for all developing countries, especially LDCs (see
UN-DESA, 2009: xi – xii; 35). Two-thirds of developing country parties to the UNFCCC have
reported energy supply measures as key priorities for investment and financial flows, notably
switching from fossil fuels to renewable energy (UNFCCC, 2007: para 758). The UN-DESA has
identified energy as ‘the critical link between development climate change mitigation’ as global
access to energy services remain as unequally distributed as income (UN-DESA, 2009: 42). Aside
from the fact that developing countries still face significant obstacles in expanding energy
services to its citizens6, access to sustainable energy sources is crucial to meeting the
socioeconomic development objectives of developing countries. LDCs are also faced with the
challenge of sustainable forestry management. Deforestation and forest degradation contribute
17.4 percent of carbon emissions, accounting for 35 percent of emissions from developing
countries and 65 percent from LDCs (ibid: 36). At the same time, forests remain a source of
livelihoods for around 25 percent of the world’s population, most of who reside in LDCs and
other developing countries (ibid: xiv). There is therefore an urgent need to develop effective
6
It has been estimated that between 1.6 billion and 2 billion people worldwide, mainly those in rural areas, lack
access to affordable energy services(UN-DESA, 2009: 51).
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forestry management and land-use change policies in LDCs to assist them in meeting the twin
challenges of mitigation and adaptation in this context.
Meanwhile, changing production and consumption patterns in industrialised and other
developing countries will also have an impact on LDCs, especially those reliant on external trade
as demand for commodities and manufacturing decrease in a shifting global economic
environment. Mitigation actions, both within and outside LDCs, may therefore have negative
implications on financial flows to LDCs and impact on their capacity to generate resources for
sustainable development. The sensitivity of LDC economies to fluctuations in demand and
supply in the global market means that LDCs will be adversely affected by shifts in trade and
financial flows resulting from climate-related policies in other countries. At the same time, there
is also a danger that LDCs, along with other developing countries, will be affected by the rise of
so-called ‘climate protectionism’ – the imposition of trade restrictive measures, such as trade
tariffs, taxes or other charges on the imports of products from developing countries on climate
grounds – which will have a significant impact not just on the economic development of
countries subject to such measures (mainly larger developing countries) but also on the global
economy as a whole (Khor, 2009a & b; see further discussion in section 4 (c)).
c)
Structural and External Constraints on LDC Financing Capacity
The problem of financing climate change adaptation and mitigation in LDCs is compounded by
the inherent structural weaknesses of LDC economies and the external economic constraints
faced by these countries. The combination of greater integration into global markets and the lack
of economic diversification in LDCs – notably the high dependence on primary commodity
production and export in African LDCs and reliance on low-skill manufactures for Asian LDCs
– have rendered these countries extremely susceptible to external economic shocks (see
UNCTAD, 2009a: ii – iii). The rapid falls in export revenues from declining commodity prices
and weak demands for manufactures resulting from the financial crisis of 2008-2009(ibid: 1- 3;
see discussion above) have illustrated the precarious state of LDC finances and highlighted their
lack of capacity to cope with unexpected shocks, including dealing with the adversities of climate
change. In addition to financial resources, LDCs also lack the technological capacity necessary
for climate change adaptation and mitigation and their access to such technology are hampered
by financial and legal costs as a consequence of stringent intellectual property rights (IPR)
regimes (see discussion below and in section 4(c)).
LDCs are also characterised by high levels of sovereign indebtedness. In spite of international
debt relief measures in recent years7, the debt burden remains unsustainably high in most LDCs
compared to other developing countries. The debt of LDCs average 42 percent of their GNI
compared to 26 percent in other developing countries and almost half of LDCs (22 countries)
shoulder debt burdens of between 50 and 100 percent of their GNI (UNCTAD, 2009a:2 – 3 ).
Debt servicing continues to absorb an average of a significant percentage of LDCs’ total
financial outflows and LDCs are heavily reliant on ODA as a source of revenue. For many
LDCs, ODA make up about 61 percent of their total net resource flows (UNCTAD, 2009a: 24)
and given the current state of the global economy, it is unlikely that this dependence will be
reduced in the short to medium-term.
The enhanced Heavily Indebted Poor Countries (HIPC) initiative (launched in 1999) and the Multilateral Debt
Relief Initiative (launched in 2005) have committed overall assistance amounting US$124 billion in nominal terms,
of which about US$52 billion are under the MDRI, to 35 eligible LDCs in 2009, amounting to 40 percent of their
2008 GDP (IDA and IMF, 2009: para 4).
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The indebtedness of LDCs and their reliance on ODA flows have also meant that LDCs are
often locked into external financing arrangements which further constrain their economic and
human development. Conditionalities established by international financial institutions, notably
the World Bank and the International Monetary Fund (IMF), bilateral donors and by official
creditors under debt restructuring and debt relief agreements have circumscribed the autonomy
of LDCs to devise national development strategies appropriate to their needs and circumstances.
Many LDCs remain tied into structural reform and stabilisation programmes which are premised
on the neoliberal model of economic policymaking as conditions for ODA and debt relief. These
policy prescriptions have had and continue to have adverse consequences for domestic resource
generation and the stimulation and maintenance of productive sectors within LDCs as well as
constraining the policy space available to LDCs in terms of socioeconomic planning and public
service delivery.
Consequently, alongside the financial factors which have limited LDCs’ ability to respond to the
adaptation and mitigation challenges posed by climate change, LDCs’ high aid dependency have
also weakened their adaptive capacity and their ability to transit towards a more climate-resilient
economy. Firstly, a general ideological opposition to state intervention in the economy on the
part of IFIs and bilateral donors is a major hurdle for the utilisation of resources for adapting
and mitigating climate change. In particular, the shift in emphasis from the state to the market as
a provider of goods and services has led to ‘fiscal retrenchment and the accompanying decline in
public investment across much of the developing world’ (UN-DESA, 2009a: 73). The retreat of
the state under structural adjustment programmes has also left LDCs with weak administrative
and policymaking capacity and this has an impact on their adaptive capacity. Without strong
central institutions to manage national responses to climate change and options to utilise policy
tools such as agricultural or industrial policy with a strong state-directed component, it will be
difficult for LDCs to formulate coherent and comprehensive strategies to respond to climate
change.
Secondly, many LDCs are locked into reform programmes, namely with the IMF, with tight
macroeconomic frameworks which establish fiscal ceilings for public expenditure. This means
that even where financing may be available for climate change activities, the thresholds for fiscal
expenditure established by the IFIs may make it difficult for countries to utilise this financing8.
Structural adjustment and aid conditionalities have also continued to focus on liberalisation,
deregulation and privatisation of economic sectors rather than mobilising domestic resources
and financing investments in productive sectors in LDCs (see UNCTAD, 2009a: 8). Again, as
many adaptation and mitigation actions would require state involvement, these could hamper the
capacity of LDCs to harness and utilise resources available for such efforts.
Thirdly, conditionalities associated with project and programme financing from the Bretton
Woods institutions and other multilateral development banks (MDBs) and bilateral donors have
also trapped many LDCs into unsustainable high-carbon development trajectories. In particular,
promotion of and financial support for extractive industries and carbon-intensive agricultural
production as well as a reliance on export-led trade and investment strategies have a rendered
LDCs extremely susceptible to fluctuations in oil prices and hampered their capacity to transit
towards a low-carbon economy. For example, civil society groups have long argued that the
World Bank and other MDBs remain heavily committed to investments in carbon-intensive
Studies of public health expenditure in IMF recipient countries have shown evidence that stringent fiscal
conditions, such as caps on civil service expansion, tight budget deficits and conservative inflationary targets, have in
some cases affected countries’ ability to both absorb additional external financing for healthcare expenditure as well
as constrained governments ability to expand and develop healthcare services (see for example, CEGAA and
RESULTs, 2009 and Centre for Global Development, 2007).
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energy projects and reforms in energy sectors that have focused on large-scale, privatised energy
provision without corresponding safeguards to ensure universal access (Tan, 2008a: 24).
The prioritisation of investments in centralised and large-scale fuel and hydropower projects,
coupled with the privatisation of public utilities in client countries, have not only caused social
and environmental dislocations for communities residing within the project jurisdiction but have
also contributed towards higher carbon emissions and reduced the poor’s access to energy
(Christian Aid, 2007). On the other hand, the promotion of large-scale agricultural investments
focused on mechanised farming and the utilisation of fossil fuel-based agricultural inputs, such as
chemical fertilisers, over and above organic and small-scale farming, have also exacerbated
countries’ reliance on oil and their vulnerability to oil shocks, with significant impacts on food
security.
The loss of policy space in and susceptibility of LDCs to conditionalities resulting from aid
dependency may be further exacerbated by recent events. The aforementioned financial crisis has
increased the dependence of LDCs to IFIs and ODA, meaning that many of the gains, including
the reduction of debt stock, attained during the period preceding the crisis may be compromised.
Both the World Bank and the IMF have seen an unprecedented rise in demand for financing
from developing country members, including LDCs as a consequence of the financial crisis9.
This renewed reliance on the Bretton Woods institutions will have two consequences on LDCs:
1) the debt burden of LDCs are likely to increase as a consequence and may adversely affect their
debt sustainability in the longer term, reversing debt relief gains and 2) LDCs will remain
committed to problematic policy conditionalities. This will impact on LDCs efforts to adapt to
climate change and transit to a low-carbon economy for reasons discussed above.
Additionally, the policy autonomy of LDCs (and hence, their adaptive capacity) are also
constrained by international trade and investment rules. Most LDCs are members of the World
Trade Organisation (WTO) and are also most likely to be signatories to various other bilateral,
regional and multilateral trade and investment regimes. These regimes have effectively reduced
the range of policy instruments which could have been deployed in developing countries to
achieve the level of economic (and consequently, human) development enjoyed by industrialised
and (and to some extent, newly industrialising) countries (see UNCTAD, 2006: 61; 167).
International trade and investment rules, such as those facilitating the liberalisation of industrial
tariff; the elimination of subsidies in industrial and agricultural sectors; the national treatment of
foreign investors and the imposition of mandatory minimum standards for IPR protection, have
had the effect of limiting the policy options available to developing countries to develop their
domestic productive and technological capacity (ibid: 167). This has implications both on the
ability of LDCs to mobilise domestic financial resources for socioeconomic development and
climate change adaptation and mitigation as well as on the shoring up of their overall adaptive
capacity (see further discussion in section 4(c)).
3.
LDCs, Climate Change Financing and International Law
a)
The Global Climate Change Regime
There is currently one intergovernmental regime for the regulation of climate change and that is
the United Nations Framework Convention on Climate Change (UNFCCC) which opened for
The IDA for example has seen a historic rise in disbursements totalling US$14 billion in fiscal year 2009, a 25
percent increase from US$11.2 billion in 2008, with the largest share of commitments (56 percent) going to
Africa(World Bank, 2009a: 7, 53). Of the total figure, US$11 billion was disbursed as credits compared to only
US$2.9 billion in grants (ibid: 53).
9
12
signature in 1992 and was entered into force in 1994. With 192 state parties, the Convention has
attained near universal membership. Currently, 48 out of 49 LDCs are parties to the Convention.
The objective of the UNFCCC and its related instruments is to stabilise ‘greenhouse gas
concentrations in the atmosphere at a level that would prevent dangerous anthropogenic
interference with the climate system’ (Article 2 of the UNFCCC). The UNFCCC is
complemented by the Kyoto Protocol 1997, adopted by 187 states, under which 37 industrialised
countries and the European Community commits to reducing their GHG emissions by an
average of five percent by 2012 against 1990 levels.
The UNFCCC is a multilateral ‘framework treaty’, sometimes known as a ‘regulatory treaty’.
These treaties do not always contain clear of detailed rules or establish specific, binding
obligations on parties but prescribe the principles under which these may be established (Birnie,
Boyle and Redgwell, 2009: 17 – 18). The Kyoto Protocol is the first and, currently, the only
binding instrument under the Convention. This does not mean, however, that the UNFCCC is
without legal effect. The commitments by parties to the UNFCCC are relevant to the
formulation of any future regulatory framework on climate change, including that of climate
change financing.
The provisions of the UNFCCC establishes the parameters under which parties are to work
towards in achieving the objective of the Convention, including establishing the guiding
principles relevant for the interpretation and implementation of the Convention and for the
negotiation for further legal instruments under the Convention (ibid: 359). It also commits
parties to undertaking actions specified under the treaty, albeit without specified international
standards, and establishes a governance structure for the regime. The UNFCCC is governed by
the Conference of Parties (COP) whose responsibility is to ‘keep under regular review the
implementation of the Convention and any related legal instruments that the Parties may adopt’
as well as to ‘make, within its mandate, the decisions necessary to promote the effective
implementation of the Convention’ (Article 7 of the UNFCCC). COP meetings are held
annually.
In undertaking actions to achieve the ultimate objective of the UNFCCC, the parties to the treaty
must be guided by the principles laid down in Article 3 of the Convention, including the
principle of equity, common but differentiated responsibilities, sustainable development and the
precautionary principle (UNFCCC, Article 3). In this regard, the UNFCCC, along with the
Convention on Biological Diversity (CBD) 1992, can be viewed as a key outcome of the
watershed political compact, the Rio Declaration on Environment and Development (hereinafter
the ‘Rio Declaration’) which emerged from the United Nations Conference on Environment and
Development (UNCED) (popularly known as the Earth Summit) held in Rio de Janeiro, Brazil
in 199210.
The Rio Declaration envisioned a ‘new and equitable global partnership’ towards meeting the
challenges of sustainable development based on equity among nations (intra-generational equity)
and equity through generations (inter-generational equity)11 (Preamble to the Rio Declaration on
Environment and Development 1992). These norms translated into commitments by states party
to the Declaration to recognise the historical and contemporary asymmetries in the economic
Although negotiations for the UNFCCC had taken place before and in tandem with the Rio process, this treaty
and the CBD are often linked with the Rio Declaration in the embrace of the key principles of the Rio compact.
11 While the latter refers to the need to fulfil developmental and environmental needs of present and future
generations, the former refers to the need to ensure a just distribution of resources across states.
10
13
and social conditions of countries, notably between developed12 and developing countries and
within developing countries, and acknowledge the special situation of the least developed and
environmentally vulnerable states (Tan, 2008b: 3). It also the commits states parties to
international action on the problems identified by the document based on this recognition (ibid).
This has important implications for the negotiations of environmental treaties both in during and
after the UNCED era. The UNFCCC and the CBD are both underpinned the normative
principles established in the Rio Declaration, notably the principles of equity, outlined above,
and the principle of common but differentiated responsibilities. The latter principle is crucial to
framing the rights and obligations of parties to the UNFCCC. Article 3(1) of the UNFCCC
provides that in achieving the objective of the Convention and in implementing its provisions,
parties ‘should protect the climate system for the benefit of present and future generations of
mankind, on the basis of equity and, in accordance with their common but differentiated
responsibilities’.
This principle provides what Birnie et al describe as the ‘explicit basis for the very different
commitments of developed and developing states parties’ under the Convention and under the
Kyoto Protocol (Birnie et al, 2009: 357). While acknowledging that regulation of climate change
and its effects are is the responsibility of all nation states, it recognises that some states are more
culpable than others and thereby should bear the higher burden of responsibility under
international law. The principle of common but differentiated responsibilities therefore imposes
higher standards of conduct for developed countries with regard to their international legal
obligations, in this case for the regulation of climate change.
The balance of obligations between developed and developing countries is one based on this
principle as well as on the science of climate change which has established unequivocally that
developed countries have been responsible for three-fourths of historical GHG emissions and
more than half of current emissions13 (see Yu, 2009). Accordingly, the UNFCCC recognises that
developed countries ‘should take the lead in combating climate change and the adverse effects
thereof’ (Article 3(1) of the UNFCCC) and that the ‘specific needs and special circumstances of
developing country Parties’ be ‘given full consideration’ under the Convention (Article 3(2) of
the UNFCCC).
Two sets of obligations are therefore created under the UNFCCC regime. Developed countries
commit themselves to: a) reducing GHG emissions and protecting and enhancing GHG sinks
and reservoirs (parties to the Kyoto Protocol further commit themselves to meeting binding
legal targets for emissions reductions); and b) assisting developing countries with finance and
technology to meet their obligations under the Convention and to adapt to climate change
(Articles 4 of the UNFCCC; Article 3 of the Kyoto Protocol). Meanwhile, developing countries
are exempt from undertaking binding emissions reductions but are encouraged to undertake
Developed countries are grouped into Annex I or Annex II countries for the purposes of UNFCCC, referring to
the appendices to the Convention and the Kyoto Protocol. Annex I Parties include the industrialised countries that
were members of the OECD (Organisation for Economic Co-operation and Development) in 1992, plus countries
with economies in transition (the EIT Parties), including the Russian Federation, the Baltic States, and several
Central and Eastern European States. Annex II countries consist of the OECD members of Annex I, but not the
EIT Parties. These are the countries which bear the primary responsibility for emissions and provision of financial
resources to developing countries. Developing countries are commonly referred to as non-Annex I parties. See:
http://unfccc.int/parties_and_observers/items/2704.php (9 January 2009).
13 The Preamble of the UNFCCC recognises the historical responsibility of developed countries, noting in its third
paragraph that ‘the largest share of historical and current global emissions of greenhouse gases has originated in
developed countries, that per capita emissions in developing countries are still relatively low and that the share of
global emissions originating in developing countries will grow to meet their social and development needs’.
12
14
mitigation and adaptation measures and are obliged to collect data on emissions and other
measures and communicate them to the COP14 (Articles 4 & 12 of the UNFCCC). However, as
discussed below, the extent of developing countries’ compliance with their obligations under the
Convention is depends on the ‘effective implementation’ by developed countries of their
aforementioned commitment to provide finance and technology transfer (Article 4(7) of the
UNFCCC).
Another important feature of the UNFCCC regulatory regime is its recognition of the right to
development of developing countries. In other words, the social and economic development
needs of countries should not be compromised by actions to mitigate climate change. Article
3(4) of the Convention enshrines this right and stipulates: ‘Policies and measures to protect the
climate system against human-induced change should be appropriate for the specific conditions
of each Party and should be integrated with national development programmes, taking into
account that economic development is essential for adopting measures to address climate
change’. Article 4(7) further recognises that ‘social development and poverty eradication are the
first and overriding priorities of the developing country Parties’.
The link between development policy and climate change regulation under the UNFCCC regime
is thus clear. Developing countries, especially LDCs, cannot afford to see their economic and
human development constrained by climate change, particularly given their relatively small
contribution to the problem (Yu, 2009). Moreover, it is also recognised that development is
necessary to minimise the effects of and prevent further climate change risks by improving the
adaptive capacity of developing countries (ibid). Again, this reflects the balance of obligations
between developed and developing countries within the Convention, with the developmental
needs of developing countries taken into account in reference to their limited mitigation actions
and the obligations of developed countries to support such actions and that of adaptation
activities in developing countries.
b)
Least Developed Countries and Climate Change Governance
The international community has recognised the specific needs and vulnerabilities of LDCs
under the global climate change regime underpinned by principles of equity and common but
differentiated responsibilities. As discussed in section 2, the consequences of climate change will
be shouldered disproportionately by the countries least responsible for the problem. LDCs have
contributed the least to the build-up of GHGs, and yet will be the most adversely affected by the
impacts of climate change and least able to adapt to their changing environment.
Consequently, in addition to providing that the needs and circumstances of developing countries
generally be taken into account in implementing measures to meet the objectives of the
UNFCCC, including mitigation (see previous discussion), the Convention also stipulates that ‘full
consideration’ be paid to the requirements of those states ‘that are particularly vulnerable to the
adverse effects of climate change and of those ... that would have to bear a disproportionate or abnormal
burden under the Convention(Article 3(2) of the UNFCCC, emphasis added). Article 4(9) of the
UNFCCC refers specifically to the LDCs, committing all parties to the Convention to ‘take full
account of the specific needs and special situations of the least developed countries in their
actions with regard to funding and transfer of technology’.
Further, Article 4(8) commits UNFCCC parties to giving full consideration to actions necessary
under the Convention ‘to meet the specific needs and concerns’ of developing countries ‘arising
14
This reporting requirement is also an obligation of the developed country parties (Article 12 of the UNFCCC).
15
from the adverse effects of climate change and/or the impact of the implementation of response
measures’ with particular reference to countries with specific geographical vulnerabilities,
including those with low-lying coastal areas, arid and semi-arid areas, areas prone to natural
disasters, areas prone to drought and desertification and areas with fragile ecosystems. Also
included in this list are countries ‘whose economies are highly dependent on income generated
from the production, processing and export, and/or on consumption o fossil fuels and
associated energy-intensive products’. Most, if not all, LDCs fall into one or more of the
categories singled out by the UNFCCC for specific attention.
The UNFCCC’s Conference of Parties at its seventh session reiterated the Convention’s
recognition of the special needs and circumstances of LDCs and established an LDC work
programme to implement the provisions of Article 4(9) which includes the following activities:
• Supporting preparation and implementation of national adaptation programmes of action
(NAPAs)
• Strengthening existing and where needed, establishing national climate change
secretariats and/or focal points to enable effective implementation of the Convention
and of the Kyoto Protocol
• Providing training in negotiation skills and language
• Promotion of public awareness programmes
• Development and transfer of technologies, particularly adaptation technologies
• Strengthening meteorological and hydrological services to collect, analyse, interpret and
disseminate weather and climate information to support implementation of the NAPAs
(COP, 2002: Decision 5/CP 7:para 11).
It was also at this session that the COP established the Least Developed Countries Fund
(LDCF) to support the LDC work programme, notably the preparation of NAPAs, through an
entity entrusted with operating the financial mechanism under Article 11 of the UNFCCC
(UNFCCC, 2009b: 4; see further discussion below). The Global Environmental Facility (GEF), a
trust fund established under the auspices of the World Bank Group in 1991 and an operating
entity of the financial mechanism of the UNFCCC, was entrusted with the responsibility for
administering the LDCF by the COP at their eight meeting (UNFCCC, undated: para 5).
Subsequent COP meetings mandated the LDCF to fund the implementation of NAPAs and the
rest of the LDC work programme (ibid). A Least Developed Countries Expert Group (LEG)
was also established at the seventh COP meeting to support LDCs in the preparation and
implementation of their NAPAs (UNFCCC, 2009b: 7). Only two elements of the LDC work
programme has been addressed so far – the training in negotiation skills and the preparation and
implementation of NAPAs (UNFCCC, undated: para 4).
The establishment of the LDC work programme was an important step in operationalising
UNFCCC parties’ commitment to act in support of the needs of LDCs. In particular, it offered
LDCs a process through which they are able to ‘identify priority activities that respond to their
urgent and immediate needs with regard to adaptation to climate change’ and to obtain financing
to support the activities which they have identified (UNFCCC, 2009b: 5 – 7; see further
discussion of the LDCF below). Through the NAPAs, LDCs have been able to communicate
urgent and immediate adaptation needs from a ‘bottom-up’ assessment and submit priority
projects for financing through the UNFCCC. As of November 2009, 43 out of the 48 LDCs that
have received funding for preparation of the NAPAs have submitted their documents and it is
expected that the remaining five will do so within the next year (UNFCCC, undated). The LDC
16
work programme also places emphasis on climate change adaptation which is an overriding
concern of LDCs given their low emissions levels and acute vulnerability to the adverse
consequences of climate change but which had been under-prioritised in the UNFCCC and
within the wider aid architecture.
Enhanced action on adaptation was also prioritised by the COP in the Bali Action Plan (BAP)
agreed at the COP’s 13th session (see further discussion below). The BAP stressed the urgency
for ‘enhanced action on adaptation’, including considering ‘[i]international cooperation to
support the urgent implementation of adaptation actions’, taking into account ‘the urgent and
immediate needs of developing countries that are particularly vulnerable to the adverse effects of
climate change, especially the least developed countries and small island developing States’ as
well as ‘the needs of countries in Africa affected by drought, desertification and floods’ (COP,
2008: Decision 1/CP 13, para 1(c)(i)). It also placed importance on consideration if ‘[d]isaster
reduction strategies and means to address loss and damage associated with climate change
impacts in developing countries that are particularly vulnerable to the adverse effects of climate
change’ (ibid: para 1(c)(iii)).
c)
Climate Change Financing and the Climate Change Regime
Finance is central to the principle of equity which underpins the multilateral climate change
regime. In acknowledgment of their historical responsibilities and their higher financial and
technological capacities, developed countries have committed themselves to providing financial
resources to support the adaptation and mitigation actions of developing countries under the
UNFCCC, particularly to LDCs, small island developing states (SIDS) and other vulnerable
states identified under the Convention. As discussed above, the availability of and access to
adequate financing is crucial not just to building up the climate resilience of LDCs but also to
these countries moving towards more climate-friendly economic trajectories and adapting to a
low carbon global economy.
Finance has been a crucial element in recent UNFCCC negotiations and will continue to be a
critical component in future discussions and decisions of the COP. The UNFCCC commits
developed countries to: a) providing ‘new and additional financial resources’ to meet the ‘agreed
full costs’ of developing countries in complying with their national communication requirements
under Article 12 of the Convention; and b) providing ‘such financial resources, including the
transfer of technology’ needed by developing countries to meet ‘the agreed full incremental
costs’ of implementing mitigation and adaptation actions and other commitments identified in
Article 4(1), including reporting of emissions and carbon sink removals; integration of climate
change considerations into national policies; education, training and public awareness and
research into climate change (Article 4(3) of the UNFCCC). In implementing these
commitments, consideration must be given to ‘the need for adequacy and predictability in the
flow of funds’ and ‘burden sharing’ among developed country members (ibid).
The UNFCCC also commits developed countries to assisting developing countries that are
particularly vulnerable to climate change in meeting their adaptation costs (Article 4(3) of the
UNFCCC) and also provides that developed countries ‘take all practicable steps to promote,
facilitate and finance, as appropriate, the transfer of, or access to, environmentally sound
technologies and know-how to other Parties, particularly developing country Parties, to enable
them to implement the provisions of the Convention’ (Article 4(4) of the UNFCCC). Crucially,
the UNFCCC ties the compliance of developing countries’ obligations under the Convention to
the effective implementation of developed countries’ commitments to such financing and
technology transfer (Article 4(7) of the UNFCCC).
17
In order to facilitate the discharging of finance and technology transfer obligations under the
Convention, the UNFCCC also provides for the establishment of a financial mechanism under
Article 11. Aimed at ‘the provision of financial resources on a grant or concessional basis,
including the transfer of technology’, the mechanism is to ‘function under the guidance of and be
accountable to the Conference of the Parties which shall decide on its policies, programme
priorities and eligibility criteria’ related to the Convention (Article 11(1) of the UNFCCC). The
operation of the financial mechanism of the Convention can be ‘entrusted to one or more
existing international entities’ (ibid) but the governance of the mechanism should be transparent
and ‘should have an equitable and balanced representation of all Parties’ (Article 11(2) of the
UNFCCC).
The COP designated the operation of the financial mechanism to the Global Environmental
Facility in 1998 (subject to review every four years) and, more recently, to the Adaptation Fund
Board in 2008. The GEF operates the three trust funds established under the Convention – the
GEF Trust Fund, the Strategic Climate Change Fund (SCCF) and the Least Developed
Countries Fund – while the Adaptation Board operates the Adaptation Fund (see Figure 1). The
GEF, SCF and LDCF are funded from voluntary contributions from UNFCCC parties
(developed and developing countries) while the Adaptation Fund is funded by a two percent levy
on transactions under the Kyoto Protocol’s Clean Development Mechanism (CDM) (see
discussion below).
UNFCCC Financing
Article 11 UNFCCC: Financial Mechanism
Global Environmental Facility
(GEF) (UNFCCC):
Funded by voluntary contributions
from developed countries
GEF
Trust
Fund
Special
Climate
Change
Fund
(SCCF)
Least
Developed
Countries
Fund
(LDCF)
Non-UNFCCC Financing:
Article 11(5): Bilateral, regional
or multilateral channels
Operating
Entities
Adaptation Fund Board (Kyoto
Protocol):
Funded by 2% levy on transactions from
Clean Development Mechanism but can
also receive contributions
Adaptation Fund
*Operating entities under the UNFCCC financial
mechanism report to and operate under the guidance of
the UNFCCC Conference of Parties
Figure 1: Financing under the UNFCCC
The GEF Trust Fund focuses primarily on mitigation activities and the reduction of GHG
emissions by supporting projects in renewable energy and energy efficiency although a Strategic
Priority on Adaptation (SPA) programme was established in 2003 to pilot adaptation actions in
18
developing countries (UNFCCC, 2008: para 156). The SCCF finances ‘activities, programmes
and measures relating to climate change’ that are complementary to those funded by the GEF,
including adaptation, transfer of technology and in areas of ‘energy, transport, industry,
agriculture, forestry and waste management’ (COP, 2002: Decision 7/CP 7, para 2). The LDCF
funds the LDC work programme (see discussion above).
The Adaptation Fund was established in 2001 to finance adaptation activities in developing
countries party to the Kyoto Protocol through proceeds from a two percent levy on transactions
under the Clean Development Mechanism (see further discussion of the CDM in section 5).
Article 12.8 of the Kyoto Protocol provides that in addition to covering administrative expenses,
‘a share of the proceeds from certified project activities’ under the CDM shall be used ‘to assist
developing country Parties that are particularly vulnerable to the adverse effects of climate
change to meet the costs of adaptation’. In 2007, the Adaptation Board was established as an
operating entity of the Adaptation Fund, with the GEF serving as the secretariat and the World
Bank as trustee of the fund on an interim basis (Adaptation Fund Board, undated: para 4).
Aside from financing under the Convention, the UNFCCC also allows developed countries to
discharge their finance obligations by providing financial resources ‘through bilateral, regional
and other multilateral channels’ (Article 11(5) of the UNFCCC). This includes channelling
resources through bilateral aid agencies, multilateral development banks (MDBs) such as the
Asian Development Bank (ADB) and the World Bank, or through UN agencies. The largest and
most prominent portfolio of such non-Convention financing are the Climate Investment Funds
(CIFs) established as trust funds in 2008 under the auspices of the World Bank Group. The CIFs
are comprised of the Strategic Climate Fund (SCF), an umbrella fund with various financing
windows – currently the Forest Investment Program (FIP), the Pilot Programme for Climate
Resilience (PCCR) and the Scaling Up Renewable Energy Program (SREP) – and the Clean
Technology Fund (CTF). At present, there is no coherent way in which to account for the
manner in which non-Convention funds are mobilised or disbursed to developing country
parties and no means of monitoring, verifying or reporting (MVR) on the compliance of
developed country parties of their obligations under the Convention using non-Convention
means (see further discussion in section 5(a)).
d)
The Climate Change Regime Post-Copenhagen
In 2007, the UNFCCC’s COP agreed on the Bali Action Plan which launched ‘a comprehensive
process to enable the full, effective and sustained implementation of the Convention through
long-term cooperative action, now up to and beyond 2012’ with a view towards achieving an
agreed outcome and adopt a decision at the COP’s 15th session in Copenhagen in December
2009 (COP, 2008: Decision 1/CP 13). The negotiating process for this outcome was to be
conducted under the auspices of the Ad-Hoc Working Group on Long-Term Cooperative
Action (AWG-LCA), a subsidiary body established under the UNFCCC, and was to take place in
parallel to the negotiations under the Ad-Hoc Working Group on Further Commitments for
Annex 1 Parties under the Kyoto Protocol (AWG-KP). The AWG-KP was established in 2005
to discuss the second round of commitments under the Kyoto Protocol after the expiry of the
first commitment period in 2012.
This dual course of action created a two-track negotiating process, known as the Bali Road Map,
for parties to the UNFCCC and parties to the Kyoto Protocol to work towards achieving two
separate outcomes at Copenhagen. The legal outcome for the AWG-KP was clear – the
adoption of an amendment of the Kyoto Protocol for emissions reductions by Annex I parties in
the second commitment period (Lim, 2009: 2). The outcome of the AWG-LCA was less certain,
19
with outcomes ranging from a single or a set of decisions of the COP to an additional Protocol
under the UNFCCC to the establishment of a new international treaty (ibid). As these
negotiations took place within the ambit of the Convention, they were (and continue to be)
guided by the principles enshrined in the framework treaty (see discussion above).
Negotiations under both tracks in the run-up to and during the Copenhagen summit were
fractious and contentious. While it is beyond the scope of this paper to discuss the detailed
political aspects of the negotiations, it is suffice to note that there was a clear split between the
views of the developed countries and that of developing countries on fundamental issues such as
the future of the Kyoto Protocol, global emissions reductions and the provision of finance and
technology (Khor, 2008). Developed countries also lobbied for a single outcome agreement,
merging the two negotiating tracks and effectively extinguishing the Kyoto Protocol (Khor,
2010; Lim, 2009). This was a move strongly resisted by developing countries, especially members
of the Africa Group and other LDCs, who were also critical of the manner in which the
multilateral negotiation process was ‘hijacked’ by the developed countries in developments
orchestrated by the Danish chair of the COP session15 (ibid).
Negotiations on the future of the climate change regime post-Copenhagen have remained
contentious. The US has recently indicated that it has strong reservations about continuing to
engage in the multilateral process under the auspices of the current Convention (Goldenberg,
2010; Goldenberg and Vidal, 2010). The widely publicised three-page Copenhagen Accord, the
result of a closed door session involving 26 country leaders during the closing hours of the
summit, has been mistakenly touted as the only outcome of the Copenhagen meeting. Although
the Accord references the commitments by parties under the UNFCCC, the US has also
indicated its intention to use this document as the basis for a future climate change regime which
does not yield full ownership to the UN16 (ibid). A joint letter by Danish Prime Minister Lars
Loekke Rasmussen and UN Secretary-General Ban Ki-Moon dated 30 December 2009 and
issued by the Permanent Mission of Denmark in New York to heads of states and governments
of the UNFCCC member states asserts that the Accord ‘represents the essential first step in a
process leading to a robust international climate treaty’ at the 16th COP in 2010 and requested
the state parties to ‘publicly associate themselves with the Accord’ (Chee, 2010).
Under the current Convention, the Copenhagen Accord does not amount to more than a
political declaration as the Accord was not formally adopted by the COP (Khor, 2010; Third
World Network, 2009a). The COP merely ‘took note’ of the document which does not accord it
with legal status under the UNFCCC or the Kyoto Protocol (ibid). There are now attempts to
translate the Accord into a binding plurilateral agreement which means parties to the Convention
can choose to sign up to binding commitments on a voluntary basis and there have been reports
that developing countries are currently being pressured to do so (Chee, 2010; Third World
Network, 2010a; 2009a). However, many countries remain sceptical of the Copenhagen Accord
and are primarily concerned that entry into such an agreement will not result in the ‘weakening
of the existing legal architecture for climate actions’ under the UNFCCC (Third World Network,
2010a).
For further details of the politics of Copenhagen from a developing country perspective, see Khor, 2010 and de
Castro Muller (2009).
16 Todd Sterm, the US lead climate change negotiator and his deputy, Jonathan Pershing have both suggested that
the UN be sidelined in future climate change negotiations following the ‘chaos’ at Copenhagen (Goldenberg, 2010
and Goldenberg and Vidal, 2010). Stern has indicated that the US supports the translation of the Copenhagen
Accord into a an international treaty with ‘the full weight of international law’‘ but that it will not yield full
ownership of the negotiation process’ for this to the UN (Goldenberg, 2010).
15
20
It is also pertinent to note that the actual adopted outcomes of the 15th COP session – those
endorsed by all parties – are the affirmation of the two-track negotiations under the AWG-KP
and the AWG-LCA and an extension of their mandates beyond 2009. At Copenhagen, the COP
requested both working groups to continue their negotiations on the issues under their
respective mandates and present results buy the next COP session in Mexico at the end of 2010
(Third World Network, 2009b). For the purposes of this paper, this means that key elements of
an international architecture for climate change financing under the auspices of the Convention
remain on track and will be developed further in the coming year. This includes, inter alia,
discussions on operationalising the BAP’s provisions on enhanced adaptation actions under
paragraph 1(c), enhanced action on technology development and transfer in paragraph 1(d) and
enhanced action on the provision of financial resources and investment (COP, 2008: Decision
1/CP 13).
The crucial question now will be how the provisions of the Copenhagen Accord and its potential
translation into a binding international legal agreement will impact on the existing negotiations
for climate financing. The Copenhagen Accord will commit its parties to ‘[s]caled up, new and
additional, predictable and adequate funding’ with ‘improved access’ to developing countries in
accordance with the UNFCCC (Copenhagen Accord, 2009: para 8) This includes pledges by
developed countries to provide US$30 billion for the period between 2010 and 2012 split
between financing for adaptation and mitigation and a pledge to mobilise an addition US$1000
billion a year by 2020 to address the mitigation needs of developing countries (ibid). It also
commits parties to the establishment of a Copenhagen Green Climate Fund as an operating
entity of the UNFCCC’s financial mechanism to support adaptation and mitigation activities and
a Technology Mechanism to enhance action on development and technology transfer (ibid: para
10 – 11).
The relationship between the design of a financing framework by a putative plurilateral
agreement and that of the other financing mechanisms established or under negotiation under
the UNFCCC will be a key consideration in future discussions under the UNFCCC. Some
commentators have already expressed concerns that developing countries, especially LDCs and
other vulnerable states, would be financially pressured into signing onto the Copenhagen Accord
(Khor, 2010). The linking of financing to mitigation actions under the Accord is clearly a
violation of the central tenets of the UNFCCC, notably the balance of obligations between
developed and developing country parties which contingents the implementation of developing
country obligations on the provision of finance and technology transfer by developed countries
(Khor, 2010). As the South Centre notes:
... the Copenhagen Accord re-interprets the commitments of developed countries
to provide or mobilize climate financing to support developing countries’ climate
change-related mitigation and adaptation sections in ways that are conditional
and highly ambiguous and uncertain as to quantum, source, modality,
institutional architecture and channel of delivery and access (South Centre, 2010:
3).
This will therefore impact on developed countries’ discharge of existing financial and technology
transfer obligations under the Convention, particularly those signatories to the Accord if it is
translated into a binding legal instrument, thereby ‘laying the foundation for a shift away from
the UNFCCC per se as the primary multilateral instrument for global long-term cooperative
action on climate change’ with adverse effects for developing countries (ibid).
4.
International Support Mechanisms for Meeting the Financing Challenge in LDCs
21
a)
Legal, Moral and Ethical Principles Underpinning Climate Change Financing
The multilateral climate change framework embodied by the UNFCCC provides an international
legal framework for the global regulation of climate change, including the provision of financial
resources and transfer of technology to meet the challenges of climate change adaptation and
mitigation. As discussed in the previous section, the UNFCCC is premised on the two
interrelated principles of equity and common but differentiated responsibilities and states party
to the Convention and the Kyoto Protocol have their obligations defined by adherence to such
principles, reflecting their historical contributions to the climate crisis and their respective
economic and technological capabilities.
Outside the Convention, these principles can and should inform the international community’s
responses to climate change, particularly in its consideration of an appropriate international
architecture for financing the challenges of climate change adaptation and mitigation in
developing countries, especially LDCs. While there remains significant disagreement among
international lawyers and legal academics as to whether these principles have attained the status
of customary international law – meaning that they apply to countries which are not signatories
to the treaties which espouse them or to countries party to such treaties outside the treaty
framework – these principles nonetheless have significant normative impact on states’
engagement with the issues of climate change regulation. Birnie et al argue that existing case law
has demonstrated that although a treaty does not automatically create customary law17, ‘it may
both codify existing law and contribute to the process by which customary law is created and
develops’ (Birnie et al, 2009: 24). This is especially pertinent ‘if the treaty was negotiated by
consensus or has the consistent support of a large majority of states’ and is subsequently
supported by evidence of consistent state practice18 (ibid).
Consequently, it can be argued that as they are derived from a lawmaking treaty with near
universal membership and have consistently been reiterated by parties to the Convention, the
principles enshrined in the UNFCCC may be close to attaining the status of customary
international law, particularly if they have also been reiterated in other international regulatory
fora, notably in other multilateral environmental agreements, such as the CBD. Nonetheless, the
key principles of equity and common but differentiated responsibilities have substantial
normative force outside its immediate sphere of regulation and hence should inform the actions
of states party to it even if these actions are taken outside its regulatory jurisdiction. These
principles also reflect the wider ethical and moral principles underpinning the relationship
between developed and developing countries in the context of climate change regulation,
particularly in determining the sources of and modalities for delivering climate change financing.
Central to the discussion of who pays for climate change financing and how these resources
should be disbursed are the notions of equity, justice and human rights. While the legal principle
of equity, discussed above, is premised mainly on the notion of equitable burden sharing of
Customary international law are legal rules evolved from the constant and uniform practice of states and other
subjects of international law and which is accompanied by a belief that such practice is obligatory rather than
discretionary or habitual (opinion juris).
18 The International Court of Justice (ICJ) in two landmark cases, the North Sea Continental Shelf Cases (1927) and
Nicaragua v US (1986) accepted that ‘there is a lawmaking intention behind the negotiation of certain multilateral
treaties’ and this can constitute evidence of opinion juris, one of the two elements necessary for a principle to become
a rule of customary international law, in favour of new rules of international law (Birnie et al, 2009:: 25). However,
such principles do not ‘create ‘instant’ law but must be accompanied by a demonstration of sustained state practice,
the other component necessary to establish customary international law, that is treaty rules must be ‘supported by
consistent and representative state practice over a period of time’ (ibid).
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22
responsibilities and balance of obligations between entities of differing capacities, the ethical and
moral notion of equity reflects the need to redress fundamental global inequalities in social and
economic development exposed by the climate crisis. As noted by the UN-DESA, today’s
climate crisis ‘is the result of the very uneven pattern of economic development that evolved
over the past two centuries, which allowed today’s rich countries to attain their current levels of
income, in part through not having to account for the environmental damage now threatening
the lives and livelihoods of others’ (UN-DESA, 2009a: viii). The notion of climate justice
requires a focus on how resources are directed to reduce these development disparities and who
should bear the primary responsibility for doing so.
The historical culpability of industrialised countries is clear. Industrialised countries have
contributed up to three-quarters of the cumulative GHG emissions since 1840. (UN-DESA,
2009a: 8 – 9). Since 1950, industrialised countries have contributed three-quarters of GHG
emissions despite only comprising of 21 percent of the world’s population (Adams and
Kuchsinger, 2009: 5; UN-DESA, 2009a: 8 – 9). Although developing countries’ share of global
emissions has risen in absolute terms in recent years, their per capita emissions remain a fraction
of that of developed countries19 (ibid). For LDCs, this gap between historic and current
emissions remain marginal as they have not significantly increased their absolute or per capita
emissions by very much over the past few decades. The top 100 least-emitting countries which
includes all the LDCs, account for less the three percent of current global emissions (WWF,
2009: 26). The Worldwide Fund for Nature (WWF) suggests that the average emissions
produced by 150 million Bangladeshis are one-sixtieth of that produced by an average North
American (ibid). This inequality is exacerbated when the disproportionate burden of shouldering
the adverse of climate change – falling primarily on developing countries, especially LDCs as
discussed previously – is taken into account.
This stark disparity between liability and injury raises critical issues not just of historical
responsibility and contemporary culpability but also of recompense and redistribution. In this
vein, developing countries and civil society groups have begun to use the concept of ‘climate
debt’ to underpin discussion and debate on climate change regulation and policymaking. The
concept of climate debt evolved from a wider notion of ‘ecological debt’ premised on the fact
that the socioeconomic development of industrialised countries has been ‘subsidized by and
conditioned upon the appropriation and degradation of environmental resources’ of developing
countries (Rice, 2009: 226). Developed countries have therefore appropriated more than their
fare share of global environmental resources in their industrialisation process and developing
countries continue to underwrite their socioeconomic development by shouldering the ecological
fallout from developed countries’ unsustainable patterns of production and consumption (ibid:
244 – 246).
Accordingly, the concept of climate debt encompasses a consideration of a two-fold debt owed
by developed countries to developing countries on account of their historical culpability for
climate change: a) an emissions debt and b) an adaptation debt. An ‘emissions debt’ refers to the
debt owed by developed countries to developing countries as a consequence of its
overconsumption of fossil fuels in their industrial development and current patterns of
production and consumption and for substantially diminishing the earth’s capacity to absorb
greenhouse gases (Jones and Edwards, 2009: 11 – 13; Third World Network, 2009c: 2 – 3). An
‘adaptation debt’, on the other hand, refers to the developed countries’ culpability for the adverse
The two most populous developing countries, for example, have contributed significantly less per capita than
most OECD countries and economies in transition. In 2005, China contributed 1.2 metric tons of carbon per capita
while India contributed 0.3 tons per capita compared to 5.3 tons per capita for the US, 4.5 tons for Canada and 2.9
tons per capita for the Russian Federation (UN-DESA, 2009a: Table 1.3).
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23
effects of climate change on developing countries, particularly LDCs and other vulnerable states,
and poor and vulnerable communities residing within these states (ibid).
In other words, developed countries have succeeded in developing and maintaining their current
social and economic pathways without necessarily absorbing any of its associated environmental
costs. Instead, it has been left to developing countries to manage the ecological fallout from such
unsustainable patterns of production and consumption without recompense from the
beneficiaries of these processes. Climate justice thus demands that climate debt be repaid
inasmuch as developing countries have been required to repay financial debt to developed
countries. Aside from drastically reducing their current emissions, developed countries should
also discharge the debt by providing finance and technology to developing countries to assist in
their adaptation and mitigation efforts (ibid). This approach also reflects an adherence to the
‘polluter pays’ principle underpinning most municipal and international environmental regimes,
requiring those actors that have created environmental pollution and degradation and caused
injury to others as a consequence of their actions to compensate those injured for harms
suffered.
Climate justice can also be viewed from the perspective of human rights, both in terms of a
substantive fulfilment of states’ obligations under human rights treaty regimes and under
customary international law but also, less legalistically, by providing a useful policy orientation to
climate change regulation. A human rights approach to climate change policymaking can assist in
identifying vulnerable communities and assessing the probability and intensity of actual and
potential harm caused by climate change as well as providing a framework through which policy
measures are evaluated against their efficacy in overcoming the identified challenges20 (ICHRP,
2008: 6 – 11; Robinson and Miller, 2009).
Human rights standards therefore establish minimum acceptable thresholds below which no-one
can fall, including thresholds of vulnerability to the adverse effects of climate change, and
enables the review of climate impacts through the prism of harm to actual persons, such as
identifying them as violations to rights to health, water or food (ibid). Adopting a human rights
perspective to climate change policy and regulation also emphasises the importance of
accountability and transparency in the governance of the climate change regime, including the
administration of financial resources. The focus on the accountability of actors responsible for
respecting, protecting and fulfilling human rights related to climate change engenders a
framework under which compliance is prioritised alongside commitments (ibid.
b)
The International Architecture of Climate Change Financing
The legal, moral and ethical principles that do and should underpin international financing for
climate change adaptation and mitigation is challenged when tested against the current and
proposed framework for the mobilisation, administration and delivery of such financing.
The current architecture for climate change financing for LDCs can be categorised: a) financing
under the UNFCCC (see Figure 1); and b) financing outside the UNFCCC (see Figure 2).
Financial resources for these funds are raised through a combination of official transfers and
levies on market transactions (in the form of carbon finance in the case of the Adaptation Fund).
There has also been a small amount of private capital mobilised to support adaptation and
mitigation measures, mainly through publicly guaranteed loans and investment guarantee
instruments although market-based products are also increasingly being introduced as a means of
As the International Council for Human Rights Policy (ICHRP) notes: ‘human rights analysis and advocacy have
always paid particular attention to those who are on the margins of society as a result of poverty, powerlessness or
systemic discrimination’ (ICHRP, 2008: 8).
20
24
raising private capital to support adaptation and mitigation investment projects (see further
discussion in section 4(b) below).
Non-UNFCCC Financing
Bilateral
Multilateral
World Bank
Climate Investment
Funds
Clean Technology
Fund
United Nations
•
•
Forest Carbon
Partnership Facility
UN REDD
MDG
Achieveme
nt Fund
(UNDP)
•
Strategic
Climate Fund
•
Pilot
Programme for
Climate
Resilience
Forest
Investment
Programme
Scaling Up
Renewable
Energy
Programme
Cool Earth
Partnership
(Japan)
International
Forest Carbon
Initiative
(Australia)
Global Climate
Change Alliance
(European
Commission)
International
Climate Change
Initiative
(Germany)
Figure 2: Non-UNFCCC Financing (non-exhaustive)
Financing under the UNFCCC is channelled through the Convention’s financial mechanism and
the four funds established under its auspices: the GEF Fund, the Special Climate Change Fund
and the Least Developed Countries Fund administered by the GEF and the Adaptation Fund
administered by the Adaptation Fund Board (see section 3(b)). Financing outside the Convention
is channelled through a variety of sources, mainly multilateral development banks and bilateral
aid agencies. The largest portfolio of non-UNFCCC funds are the aforementioned climate
investment funds established under the World Bank Group. A limited amount of climate-related
finance are also channelled through non-governmental organisations (NGOs) or private
philanthropy organisations Most of the non-Convention sources of financing are generated
through ODA transfers. Climate change financing can be delivered in the form of loans, either
concessional or non-concessional or grants. For LDCs, finance is delivered via non-concessional
loans and grants.
The current architecture for international climate change financing is fragmented, incoherent and
inefficient as well as lacking in accountability and transparency. It is also lacks adherence to the
fundamental notions of equity, justice and global cooperative action that should premise such
transactions (see discussion above). The multiplicity of funds available, coupled with the
25
operational complexity of individual financing instruments, has led to a fragmentation of
policymaking and regulation around the issue of climate change financing and their inconsistency
(and sometimes, incompatibility) with the objectives of and commitments of parties to the
multilateral climate change regime discussed in the previous section. In the main, the current and
emerging architecture for the delivery of climate change financing is, as noted by the UN-DESA,
‘as unnecessarily complex as it is massively underfunded’ (UN-DESA, 2009a: 173).
Moreover, there are significant question marks over the efficacy of current financial transfers,
both quantitatively and qualitatively, in responding to the adaptation needs and mitigation
requirements of recipient countries and raised concerns about the longer-term impact of the
financial transfers on the socioeconomic development trajectories of these countries. In
particular, high transaction costs, including complex and costly administrative arrangements and
fragmented nature of current financing instruments have resulted in a haphazard maze of funds
and other financing initiatives which have little coherence at the national policy level and which
may hinder rather than support developing countries’ adaptation and mitigation efforts.
Additionally, there remains a significant financing gap between the amount of finance pledged by
donors and the amount deposited and available for disbursement to developing countries, not to
mention the amount actually required to address the climate challenge (see section 2(b)). A
recent survey of UNFCCC and non-UNFCCC climate funds by the Climate Funds Update
project has highlighted a substantial gap between funds pledged and funds deposited and
dispersed. As of January 2010, the total amount pledged by donors for the 18 funds, including
the Adaptation Fund, LDCF, SCCF and the CIFs, was about US$18.72 billion while the
resources actually deposited21 amounted to US$2 billion and the amount dispersed was only
US$733.5 million22. Notably among developed country donors, Japan which has pledged the
most (54.4 percent) and the US, the third largest commitment (9.8 percent) only accounted for
0.24 percent and 0.2 percent of the total deposits to the climate funds so far23.
This discrepancy along with the uncertainty over whether these financial commitments will be
additional to existing ODA has led to frustration on the part of developing countries on the
political will of developed countries to discharge their obligations under the climate change
regime and to tackle the urgency of the climate crisis. For LDCs and other vulnerable countries,
there is also the added concern that insufficient funds are being directed towards adaptation
efforts which they urgently require as compared to mitigation operations. Currently, mitigation
activities make up 82.6 percent of projects funded by climate funds (excluding the 2.7 percent
for REDD projects) while adaptation projects only amount to 14.7 percent of the total projects
funded24.
As alluded to in previous sections, negotiations for climate change financing, notably within the
UNFCCC and particularly in the run-up to, during and in the aftermath of the Copenhagen COP
meeting have been characterised by deep divisions in the views of developed and developing
countries, the providers and recipients of such funding respectively, on the sources and structure
Deposits represent the funds that have been transferred from the donor into the account(s) of the respective
funds (see Climate Funds Update website).
22 See Climate Funds Update website: ‘Pledges v Deposited v Dispersed’
http://www.climatefundsupdate.org/graphs-statistics/pledged-deposited-disbursed (17 January 2010).
23 See Climate Funds Update website: ‘Pledges By Donor Country’, http://www.climatefundsupdate.org/graphsstatistics/pledges-by-country; and ‘Deposits by Donor Country’ http://www.climatefundsupdate.org/graphsstatistics/deposits-by-country (17 January 2010). The second largest donor, the UK, which has pledged 12.9 percent
of the funds has deposited 29.2 percent of the total.
24 See Climate Funds Update website: ‘Areas of Focus Overall’, http://www.climatefundsupdate.org/graphsstatistics/areas-of-focus
21
26
of climate financing (see section 3(d)). Although developed and developing countries both agree
that finance is paramount to assisting developing countries, especially LDCs and other
vulnerable states, adapt to climate change and transit to a low-carbon economy, there are
substantial divergences in their views on how these financial resources should be provided and
under what conditions. There have also been disagreements over the sources and quantum of
finance allocated to climate change financing and the links between climate change financing and
the wider international financial architecture and development framework.
The two key areas of disagreement between developed and developing countries with regard to
the design of an international architecture for climate change financing have therefore been on:
a) sources of financing; and b) modalities for financing. On the former, developed countries have
expressed preference for non-UNFCCC channels for the mobilisation, administration and
disbursement of climate financing, namely through existing bilateral and multilateral ODA
institutions, such as the World Bank and other MDBs (Khor, 2008: 17; South Centre, 2009a:
para 1). Developing countries, on the other hand, would like to see climate change financing
channelled through the UNFCCC with oversight of the funds coming under the authority of the
Conference of Parties, enabling greater accountability, transparency and, importantly, consistency
with the climate regulatory regime (ibid; see further discussion in section 5).
Channelling funds through ODA mechanisms also complicates the accounting of climate change
financing and conflates developed countries’ treaty-based financing obligations under the
UNFCCC with their voluntary ODA commitments. Aside from enabling funds to be ‘double
counted’, that is, using the same resources to meet both UNFCCC and ODA commitments25,
the utilisation of funds outside the Convention to meet treaty obligations also makes it difficult
for parties to the Convention to monitor developed countries’ compliance with their obligations
under Article 4 of the UNFCCC (ibid; see section 3 and further discussion in section 5).In many
cases, developed countries have explicitly sought to use ODA climate-related financing to count
towards their contributions under the UNFCCC. This in itself is a violation of Article 4 (3) of
the UNFCCC which stipulates that such funding has to be ‘new and additional’ to existing aid
flows.
Developed countries are also in favour of mobilising resources for climate change financing
through market-based mechanisms and private sector financing, as well as promoting private
sector delivery of climate change adaptation and mitigation activities. According to arguments
put forward by proponents of market-based instruments, including carbon trading and the use of
equity markets to secure capital for investments, these mechanisms could potentially yield
financial resources of around US$15 to US$30 billion annually to support adaptation and
mitigation efforts(Stewart et al, 2009: 5). Public financing would be utilised to mobilise private
investments, including creating an enabling environment for foreign direct investment (FDI) and
to incentivise the participation of private sector in the delivery of adaptation and mitigation
projects as will instituting the requisite regulatory and institutional structures to support private
sector activity in these areas.
Developing countries, on the other hand, are understandably concerned that a focus on private
sector-led financing and market-based mechanisms will detract discussion from public sector
commitments on emissions reductions and provision of public financing. Additionally, there are
significant reservations about market mechanisms and the private sector provision for what is
essentially a global public good, given the problems associated with market failures in light of the
This includes using climate change financing figures to meet ODA targets, such as their commitments to provide
at least 0.7 percent of GNI as ODA as articulated in various international compacts, including the Monterrey
Consensus on Financing for Development 2002 (see South Centre, 2009a: para 17 - 20).
25
27
financial crisis. This includes concerns over the limited geographical coverage and scale of
market-based instruments and private investment to generate sufficient resources to finance
climate change adaptation and mitigation and its reliability and predictability as a source of
finance for public goods and services (Griffith-Jones, Meyer and Stokes, 2009; South Centre,
2009a 1 – 2; UN-DESA, 2009a: 161 – 167).
The second major strand of disagreement among developed and developing countries on the
design of international financial support mechanisms for meeting the climate challenge centres
around the mechanisms through which public sector financing will be channelled. Aside from
the aforementioned preference for channelling climate financing through existing bilateral and
multilateral ODA instruments and development organisations, a substantial amount of climate
financing flowing through current climate funds take the form of loans, albeit concessional loans,
rather than grants. Developing countries and civil society groups have argued that the preference
for loans rather than grant financing to support adaptation and mitigation actions in developing
countries, particularly LDCs, will have an adverse effect on the countries’ debt sustainability in
the longer term (Jones and Edwards, 2009: 31; Tan, 2008a: 18 – 19; see section 3 and discussion
below). The use of loans also raises similar questions regarding additionality of financial flows
associated with the use of ODA as a source of financing (see above and further discussion on
section 5).
There are also divergences over the manner in which funds are disbursed and instruments used
to deliver adaptation and mitigation activities. Currently, much of the climate financing is
delivered through project-based modalities although there are proposals for moving towards
sectoral and programmatic approaches, including disbursing financing via budget support26
mechanisms(SEI, 2009: 62 – 70; UNFCCC, 2008: para 199 – 204). The weakness of projectbased delivery of climate financing is that it limits comprehensive solutions to adaptation and
mitigation needs and circumvents national public expenditure systems and strategic planning
(UNFCCC, 2008: para 200 – 202). It also increases transactions costs, relies heavily on imported
technical assistance and does not generally build local capacity (IDD and Associates, 2006 in
UNFCCC, 2008: para 200).
There is also dissatisfaction on the part of developing countries about access to climate funds.
Developing countries have called for direct access to funding, notably under the UNFCCC, not
funds mediated through external agencies and for greater coherence and predictability in which
funds are disbursed (SEI, 2009: 67 – 69; see further discussion in section 5).Currently, even
within the UNFCCC, countries vying for adaptation and mitigation financing have to submit
proposals through one of the implementing agencies, such as the World Bank, other MDBs or
UN agencies such as the UNDP (ibid). Additionally, aside from resources from the Adaptation
Fund, finance provided through the Convention’s financial mechanism often have co-financing
requirements as funds only cover ‘full incremental costs’ as opposed to ‘full costs’ which have to
be borne either by the recipient government themselves or through financing leveraged through
other sources (ibid). Similar arrangements apply with respect to the World Bank’s climate
investment funds where access to the funds is mediated by MDBs, that is, eligible countries
Budget support approaches have become common means of delivering conventional ODA and are increasingly
used by bilateral and multilateral donors to deliver financing to recipient countries. There are many different
modalities for budget support but they generally involve channelling resources directly into a government’s budget
using ‘their own allocation, procurement and accounting systems’ (UNFCCC, 2008: para 202) and expenditure is not
ring-fenced around specific projects or activities although donors often insist on recipient governments meeting prequalification criteria, including fiduciary standards and a blueprint for achieving international development targets
such as the World Bank and IMF-initiated Poverty Reduction Strategy Papers (PRSPs) for low-income countries.
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would need to have an ‘active MDB country programme’ in place (World Bank, 2008: para 17;
see also World Bank, 2008b: Annex A, para 16).
c)
Coherence with Climate Change Regime and Global Economy
As discussed above, the current and emerging framework for climate change financing is
fragmented and multifarious, leading to high transaction costs and operational complexity.
Moreover, the current framework lacks coherence not just with the multilateral climate change
regulatory regime but also with developments within the wider international economy and
computability with existing global economic governance mechanisms. For LDCs, there is a
critical need to address climate financing within the context of the structural constraints, both
domestic and external, that they face in mobilising resources for socioeconomic development as
identified in section 4(c) in addition to the imperative that such financing be placed within the
context of commitments under the UNFCCC.
Developing countries, including LDCs, have consistently called for greater coherence in the
financial architecture for climate change financing, ensuring that finance for climate change
adaptation and mitigation be brought in line with states’ obligations under the UNFCCC, given
the near universality of its membership. Developing countries are particularly concerned that
developed country proposals for international support mechanisms for climate change financing
will weaken the multilateral regulatory regime established by the UNFCCC and compromise the
legal and political compact that form the basis of international cooperation on climate change
regulation and policymaking, notably the undermining of the principles of equity and common
but differentiated responsibilities.
The treaty obligations undertaken by developed countries to provide finance and technology
transfer under the Convention must be distinguished from other commitments developed
countries may have made voluntarily to support climate change mitigation and adaptation. The
basis of such obligations is legal not altruistic and as such, these commitments should not be
premised on the donor-donee relationship which characterises conventional ODA financial
transfers. Although Article 11(5) enables these countries to provide such financing through nonConvention sources, these funds must be provided within the context of their commitments
under the Convention. Without a more coherent framework for supervising finance delivered
through non-UNFCCC sources, developing countries are concerned that they may create parallel
structures for climate change financing that is inconsistent with Convention provisions and fail
to provide the ‘new and additional’ finance required by the Convention. Using non-Convention
funds also subjects the recipients to conditionalities (see further discussion in section 5(b)).
A further danger today is the potential conflict of countries’ commitments under the UNFCCC
regime and that of the quasi-regime established by the Copenhagen Accord which may provide
developed countries with a framework outside the Convention and outside the United Nations
through which finance can be channelled. The US, especially, has indicated strongly that the UN
and treaty-based institutions should not be given full ownership of the new regulatory process
for climate change under the Accord, including the administration of the financial resources
mobilised under the putative agreement (Goldenberg, 2010; Goldenberg and Vidal, 2010). These
proposals would create parallel structures not just for climate change financing but also climate
change regulation which will exacerbate the problems of fragmentation and incoherence further,
with detrimental effects on the capacity of developing countries, especially LDCs and other
vulnerable states, to respond to the climate crisis.
29
Current and proposed international support mechanisms also fail to take into account their
intersections with other aspects of economic and development policy in recipient countries. As
discussed above, LDCs face many structural constraints on their ability to adapt to climate
change impacts and transit towards a low-carbon, high development pathway, including external
constraints placed on them on account of their sovereign indebtedness, integration into the
global market and restrictive international trade and finance rules and practices (see section 3(c)).
The lack of capacity to generate domestic resources for adapting and mitigating climate change
means that LDCs are significantly reliant on international financing to support such measures
but also equally susceptible to any adverse effects of such measures on their economies and
human development strategies.
As discussed in the previous section, a bulk of non-UNFCCC resources will be disbursed in the
form of concessional loans to LDCs. Given that many LDCs are already saddled with heavy debt
burdens (which are likely to increase with the costs of the 2007-08 financial crisis) the delivery of
climate financing via loans rather than grants raises concerns over their debt sustainability in the
longer term. This comes at a time when many of the LDCs have had some, albeit limited
success, in clearing their debt through multilateral debt initiatives over the past decade, notably
through the enhanced Heavily Indebted Poor Countries (HIPC) initiative and the Multilateral
Debt Relief Initiative (MDRI). The use of loans as opposed to grants for climate financing also
raises the issue of additionality of such financing and their compatibility with the climate change
regime described in section 4 as it requires developing countries to pay to resolve a problem
historically attributed to developed countries (see Tan, 2008a: 17).
The result of additional debt and use of non-Convention funding is the heightened likelihood of
LDCs being subjected to policy conditionalities which may hamper future development
pathways and undermine national ownership not just of climate-related policies but also social
and economic trajectories as a whole. Reliance on external funding places LDCs in a vulnerable
position vis-à-vis the global economy and the international economic community if the structural
constraints (see section 2(c)) under existing prescribed policy frameworks are not redressed.
Without sufficient resources to support ongoing socioeconomic development needs, the added
fiscal burden of servicing climate-related debt will only worsen the indebtedness of LDCs and
heighten their vulnerability to adverse climatic impacts.
This may be exacerbated by reliance on private investment lows to supplement official financing.
As will be explored in detail in the next section, developing countries, including LDCs may be
compelled to create an investment-friendly climate for foreign investors to attract ‘green’
investment flows and create other market incentives to encourage private sector participation by
liberalising FDI and other financial flows. However, without a strong industrial policy to direct
such investments and adequate institutional and regulatory oversight over other financial
transfers, this could easily translate into developing countries being locked into bilateral
investment agreements which primarily benefit investors from developed countries. This could
include, inter alia, the creation of favourable tax regimes enabling greater profit remittances and
tax holidays which have an impact of reducing rather than increasing the fiscal revenue of LDC
governments.
At the same time, there is also the critical issue of technology transfer and financing the costs
associated with access to technology for LDCs to transit towards a low-carbon economy and to
adapt to climate change. There is a general consensus that technology transfer is an essential
ingredient in efforts to combat climate change, facilitating the ‘continuous innovation and rapid
diffusion of climate-related environmentally sound technologies (EST)’, particularly to
developing countries to enable them to develop their own technological base to address climate
30
change (UN-DESA, 2009a: Yu, 2009: 8 – 12). However, there are disagreements between
developed and developing countries on how this should take place and, significantly, the role
played by intellectual property rights (IPRs) in technology transfer since the majority of ESTs are
patented technologies owned by firms located in developed countries (Yu, 2009: 9).
Developed countries, which view commercial transactions – through trade and investment flows
– as the primary means of facilitating such transfers, have argued that creating an enabling
environment for technological diffusion through strong IPR protection and enforcement
regimes would create incentives for technology transfer to developing countries (South Centre,
2009b: para 32; Yu, 2009: 8 -11). The claims are that ‘without adequate protection against leakage
and misappropriation of new technical information, new firms which hold the technology and
related know-how will be unwilling to transfer the same in open technology markets’ (South
Centre, 2009b: para 33). On the other hand, developing countries are concerned that IPRs will
inhibit rather than incentivise technology transfer as IPRs raise the cost of accessing such
technologies given the bias of the current regime towards the owners rather than users of
technology generally (ibid; UN-DESA, 2009a: 127). Aside from high royalty fees, restrictive
terms of patent licences, and the absence of underlying technical skill and knowledge to develop
the technological capacity also inhibit the ability of developing countries, particularly LDCs, to
access EST technologies (ibid).
Consequently, a key concern is that climate change financing, both within and outside the
UNFCCC framework, could be tied to the stringent implementation of IPR standards and
enforcement in developing countries. Civil society groups have already highlighted concerns with
legislation passing through the US Congress which will link US participation in the multilateral
climate regime and its provision of climate change financing to the international protection and
enforcement of IPRs (Adams and Luchsinger, 2009: Box 4; Shashikant, 2009). For example, the
2009 amendment to the American Clean Energy and Security Act 197827 will, among other
things, stipulate that climate change financing disbursed through bilateral and multilateral
agencies should be conditional on recipient countries’ commitments to comply with international
IPR standards, such as those provided in the WTO’s Agreement on Trade-Related Intellectual
Property Rights (TRIPS) and in bilateral investment treaties (ibid).
The conditioning of finance and technology transfer to compliance with international IPR
standards are not only protectionist in nature and hinders the flow of finance and technology
transfer from developed to developing countries but may also be inconsistent with the
obligations of developed countries under the UNFCCC to provide such resources to developing
countries, particularly to LDCs and other vulnerable states. Further, if accompanied by proposed
restrictive trade measures, such as the imposition of tariffs or financial charges on imports from
countries which do not meet ‘clean’ production methods, and efforts to liberalise the import of
environmental goods and services in developing countries (see Khor, 2009a & b; Yu, 2009: 5 –
8), these measures could have an overall detrimental effect on developing country economies by
constraining the development of local industrial capacity and the mobilisation of domestic
resources to support climate-related activities.
Authored by Democrat representatives Henry Waxman and Edward Markey and known as the Waxman-Markey
bill. Two other statutes, the Foreign Operations and Related Programs Appropriations Act 2010 and the Foreign
Relations Authorisation Acts for Fiscal Years 2010 and 2011, which govern, inter alia, public procurement and
federal government expenditure, stipulates that US contributions to multilateral funds, including the World Bank’s
climate investment funds, should be conditioned on certification that IPR regimes are not undermined in UNFCCC
negotiations(Shashikant, 2009; see discussion in section 5(a)). These laws essentially view investments in green
technology in developing countries as commercial opportunities for US firms ad aim to protect US competitive
interests through IPR protection and enforcement (ibid; also Adams and Luchsinger, 2009: Box 4).
27
31
Although LDCs are generally exempt from these proposals - which many developing countries
are calling ‘climate protectionism’ (ibid) – on account of their relatively low emissions, the impact
of these measures on other developing countries will affect their access to alternative sources of
technology, such as those produced by larger emerging economies such as Brazil, China and
India if restrictive trade and IPR measures inhibit the development of ESTs in these countries.
Aside from securing the monopoly of EST by developed countries (and thereby raising the costs
of access), the effect of unilateral trade measures proposed by developed countries may have
adverse effects on international trade generally. These measures are also contrary to UNFCCC
obligations, notably Article 3(5) of the Convention which stipulates that parties ‘should
cooperate to promote a supportive and open international economic system that would lead to
sustainable economic growth and Development in all Parties, particularly developing country
Parties, thus enabling them to better address the problems of climate change. Measures taken to
combat climate change, including unilateral ones, should not constitute a means of arbitrary or
unjustifiable discrimination or a disguised restriction on international trade’.
6.
Review of Existing and Proposed Instruments for Climate Change Financing in
LDCs
a)
Financing under the UNFCCC
(i)
Financing Gap and Unpredictability of Financing Flows
The main problem with the financing instruments established under the UNFCCC is the limited
amount of finance currently available and contingent upon voluntary contributions by developed
country parties. As discussed above, the financing gap between the resources required to support
climate change adaptation and mitigation in LDCs and the resources available remains
significant. Additionally, most of financial resources pledged by developed countries for climate
change financing have been committed to funds outside the UNFCCC and channelled through
other bilateral and multilateral institutions. This means that there has not only been a
fragmentation of climate funds, as discussed in the previous section, but also the absence of a
coherent accountability framework for monitoring state parties’ compliance with their financial
obligations under the Convention.
Figures show that the resources currently pledged and deposited into the funds available to
LDCs for adaptation and mitigation under the SCCF, the LCDF, the SPA (under the and the
GEF Trust Fund) and the Adaptation Fund remain dwarfed by the financial resources pledged
through other bilateral and multilateral channels. At present, pledged finance for the
aforementioned four funds amounts to around US$350 million28, far from the estimated US$28
to US$ 67 billion required annually in developing countries to support adaptation needs alone
(see section 2(b)).In contrast, the amount pledged under the World Bank’s climate investment
funds alone currently totals US$6.15 billion and Japan itself has pledged US$10 billion to its
bilateral Cool Earth Partnership fund., currently the largest of all the international climate
funds29.
Although the Copenhagen Accord has included pledges to scale up financing under the
UNFCCC, including up to US$30 billion between 2010 and 2012 for adaptation and mitigation
(Copenhagen Accord, 2009: para 8), this figure still falls short of the conservative end of
estimates for such financing. There is also a further commitment to mobilise US$100 billion for
See Climate Funds Update website: http://www.climatefundsupdate.org/graphs-statistics/pledges-by-fund (20
January 2010.
29 Ibid.
28
32
mitigation efforts with funding sources from a mixture of bilateral and multilateral public and
private finance, including ‘alternative sources of finance’ (ibid) but this does not represent a
commitment to provide financing per se, merely to commit to mobilising resources (Third
World Network, 2010b: 10).
Further, due to uncertainty over its status within the UNFCCC, it is difficult to predict where
these new resources will be placed within the Convention and which countries will be eligible for
the funds. As discussed in section 3(d) there are attempts to translate the Accord into a
plurilateral agreement under the auspices of the UNFCCC, meaning that only UNFCCC state
parties which voluntarily sign up to the agreement is bound by obligations therein and
correspondingly, only those who sign the agreement are entitled to claim rights established under
the agreement, including the right to access climate financing provided for under the agreement.
As the Accord links finance with mitigation obligations for non-Annex I countries (ibid: para 5)
– for LDCs, this obligation is voluntary and ‘on the basis of support’ – the provisions of the
Accord is clearly in conflict with the principles of the UNFCCC which stipulate that developing
country commitments under the Convention must be subject to developed countries meeting
their finance and technology transfer obligations under Article 4.
The Copenhagen Accord also states that ‘new multilateral funding for adaptation will be
delivered through effective and efficient fund arrangements with a governance structure
providing for equal representation of developed and developing countries’ and that a significant
portion of such funding’ should flow through the Copenhagen Green Climate Fund
(Copenhagen Accord, 2009: para 8). However, there is no indication as to whether these new
mechanisms or climate fund would be housed within the UNFCCC and subject to the guidance
and oversight of the UNFCCC COP as is the case with the GEF Trust Fund, SCCF, LCDF and
the Adaptation Fund. The US has indicated that it is reluctant to hand over management of the
funds pledged to the UN (Goldenberg and Vidal, 2010) but it is unclear if this also means
establishing the fund outside the auspices of the multilateral treaty itself. This will make
monitoring of financial pledges made in the Accord difficult.
The financing gap within the UNFCCC-managed funds reflects the lack of political will on the
part of developed countries to meet their obligations under the UNFCCC and their preference
to channel financing through institutions which they have greater control over (see discussion in
section 5(b) below) as well as their reluctance to subject such financial transfers to rigorous
accounting. There are currently no binding financial targets for developed countries to meet in
order to fulfil their financial obligations under the Convention and no means of verifying
whether commitments to provide financing have been fulfilled or whether financial resources
pledged and/or deposited into UNFCCC funds are additional to existing ODA flows of
developed countries consistent with the provisions of the UNFCCC (see Article 4(3) of the
UNFCCC and section 3).
For example, a recent study by the Institute of European Environmental Policy (IEEP) found
that a political commitment by 20 industrialised countries – the 15 European Union countries
plus Canada, Iceland, New Zealand, Norway and Switzerland – in 2001 to contribute US$410
million per year by 2005 towards climate change adaptation and mitigation, both within and
outside the UNFCCC, have yet to be accounted for (IEEP, 2009). This promise, made at the
seventh meeting of the UNFCCC Conference of Parties in 2001, should have generated a total
of between US$1.6 billion to US$2.87 billion from 2001 to 2008, channelled through the
UNFCCC financial mechanism or through other bilateral or multilateral institutions (Pallamaerts
and Armstrong, 2009; BBC, 2009). Although the EU insists that it had met its share of the
bargain – amounting to US$369 million a year – through various channels, there has been no
33
paper trail to verify this assertion nor can it confirm if these transfers were additional to existing
aid transfers or if they were in the form of loans or grants (ibid). The IEEP report concludes that
‘it is very surprising that there is not a single official document issued by the EU with reliable and
verifiable information on the total level of financial support to developing countries for climate
change mitigation and adaptation purposes provide by the Union and its member states’
(Pallamaerts and Armstrong, 2009: 16).
The IEEP’s conclusion on the EU’s track record in this instance resonates with developing
countries’ experience of political commitments made in other arenas, notably the political
commitments made by developed countries in various international development fora to
contribute 0.7 percent of their GNI to ODA. It is also not unusual for developed countries to
double-count aid or to classify non-traditional disbursements to developing countries as ODA.
Most notably, increases in ODA levels in 2005 and 2006 were due to debt relief measures,
including substantial cancellations of Iraqi debt and commercial debt of Nigeria, being included
in ODA calculations of OECD countries (OECD, 2007: 2; Tan, 2008a: 19).
The inadequacy of resources available under UNFCCC funds have been routinely noted and
criticised by developing country parties. Developing countries, including LDCs, have called for
greater urgency in the scaling up of funds under the Convention’s financial mechanism and for
legally binding financial commitments which includes provisions for monitoring, verifying and
reporting (MRV) these commitments under the Convention, similar to the MRV requirements of
mitigation efforts (see South Centre, 2008a: para 37 – 38). Proposals for a new financial
mechanism under the COP by the G77 and China (and supported by Africa Group) have also
called for binding levels of funding, set at defined budgetary contributions of between 0.5
percent to one percent of the GNI of the GDP of Annex 1 countries and that predictability,
stability and timeliness of funding is ensured (G77 and China, undated; see also Brown, Nanasta
and Bird, 2009). It has been argued that as many of the Annex 1 countries have successfully
managed to commit US$4.1 trillion towards bailing out financial sectors as a result of the global
committing financial crisis, meeting the minimum estimates to support adaptation, mitigation
and technology transfer to developing countries should not pose too many obstacles (South
Centre, 2009a: para 11).
There have also been proposals to diversify the revenue pool of the funds available under the
UNFCCC, including revenue raising mechanisms which do not rely on national funding sources,
such as the auctioning of ‘assigned amount units’ (AAUs), levies on international aviation and
shipping and using proceeds from a tax on currency transactions (the ‘Tobin Tax’) (Brown et al,
2009: 19; UNFCCC, 2008para 170 – 177). These mechanisms do ‘not rely on national funding
sources but instead relies on funds that are ‘non-national in scope and therefore cannot be traced
back to any one national budget or ODA commitment’ (Brown et al, 2009: 19). These alternative
sources also attempt to circumvent the difficulties of securing resources for climate financing
from within developed countries’ budgets given that such contributions ‘can be politicized very
quickly and their availability is subject to national approval and national circumstances’30 (ibid).
Nonetheless, one of the limitations of extending revenue streams to include non-national sources
under the UNFCCC’s financial mechanism is that it will make MRV of Annex 1 countries’
obligations under Article 4 difficult if not impossible and also raises the same tracking and
accountability issues currently faced by the UNFCCC funds.
For example, current legislation being approved by the US Congress conditions the finance made available by the
US federal government for climate financing is conditional upon climate change efforts not weakening international
intellectual property rights protection and enforcement (see discussion in section 4(c)).
30
34
Consequently, proposals to diversify the sources of revenue within the UNFCCC funds must be
considered carefully so as to ensure their long-term sustainability as a pool of resources
sufficiently adequate to meet the needs of developing countries, particularly LDCs and other
vulnerable states. They must also be evaluated against their compatibility with Convention
provisions as well as scope for accountability of obligations. The aforementioned G77 and
China’s proposal reiterates that the main source of funds under a proposed financial mechanism
should be the public sector and that it would ‘maintain consistency with the policies, programme
priorities and eligibility criteria adopted by the decisions of the COP’ and that all other funding
activities outside the Convention related to climate change be brought in line with COP
principles and practice (G77 and China, undated).
(ii)
Problems with Access to and Eligibility for GEF-Managed Funds
The strength of the UNFCCC climate funds is that the funds come under the authority and
guidance of the Conference of Parties, meaning that that their use comes under the scrutiny of
the COP which decides on ‘its ‘policies, programme priorities and eligibility criteria’ (Article 11
of the UNFCCC) and ensures that their utilisation is consistent with the Convention’s provisions
(see discussion in section 3). However, the limited availability of funds under the UNFCC has
had a significant impact on countries’ access to financing under the Convention, particularly
access to funds for adaptation which is a key concern for LDCs given their heightened
vulnerabilities and relatively low levels of GHG emissions. For most of the history of the
UNFCCC, financing for mitigation has been prioritised over financing for adaptation and
currently, the bulk of climate financing available remains primarily geared towards mitigation
operations (see section 4(b)). It is only fairly recently that there has been a shift in focus towards
adaptation, beginning with the institution of the LDC work programme and culminating with the
Bali Action Plan which called, inter alia, for ‘enhanced action on adaptation’ in paragraph 1(c)
(COP, 2008; see discussion in section 3).
The underfunding of adaptation efforts have partly been attributed to uncertainty over the costs
of adaptation and the complexity in defining the scope of adaptation activities to be funded.
Firstly, estimates for adaptation are difficult to calculate for the purposes of allocating funds, due
to the unpredictability of climatic impacts as well as the technical definitions of adaptation per se.
The effects of adaptation are also likely to worsen if mitigation actions are not taken urgently
(see discussion in section 2(b)) and this is likely to increase the amount needed for adaptation
substantially. Prior to the inception of National Adaptation Programme of Actions (NAPAs),
there were no mechanisms by which countries, especially LDCs and other vulnerable states,
could identify adaptation requirements and cost them for the purposes of seeking finance.
However, although these ‘bottom-up’ assessments have yielded crucial, nationally-based
information on adaptation priorities of LDCs and highlighted key domestic sectors for
adaptation financing, NAPAs are not ideal instruments for projecting long-term adaptation
needs (BOND and Bretton Woods Project, 2009: 4; SEI, 2009: 38). As they are limited to
responding to urgent and immediate adaptation needs, NAPAs are poorly placed to incorporate
future climate projections and scenarios due to lack of technical capacity at the local level to
interpret and contextualise data (SEI, 2009: 38).
Secondly, there is no clear consensus within the international community as to what is defined as
adaptation and a ‘lack of commonly accepted and uniform typology of adaptation activities’ (ibid:
56). This, as well as the need to prioritise the limited available funds, has resulted in a fairly
narrow definition of adaptation within the context of UNFCCC funds and a view of adaptation
that is centred on what is termed ‘impact-focused adaptation’ rather than ‘vulnerability- focused
adaptation’ (ibid: 34). The former relates to activities seeking ‘to address the impacts of
35
associated exclusively with climate change’ while the latter relates to activities seeking ‘to reduce
poverty and other non-climatic stresses that make people vulnerable’ to the effects of climate
change (ibid: 16, Figure 2.1). The latter approach to adaptation is thus closely linked to
development outcomes and encompass not just enhancing the climate resilience of a
development project, such as infrastructure construction, but also addressing the multiple drivers
of vulnerability which lead to poor adaptive capacity.
The combination of limited funds and narrowly defined scope of adaptation has resulted in
complex if not difficult access and eligibility criteria for the UNFCCC funds focused on
adaptation, notably the SCCF and LCDF, as well as the SPA programme under the GEF Trust
Fund, constituting the main sources of Convention-based financing to LDCs. Funding under the
UNFCCC is limited to meeting the ‘full incremental costs’ or additional costs of adaptation31.
This means that only the ‘incremental costs associated with increasing the climate resilience’ of a
development project receive funding from the SPA while the costs of projects to be funded by
the SCCF and LCDF must be additional to the normal costs of the development project to
which they are attached32 (SEI, 2009: 67 – 6; UNFCCC, 2008: para 187 – 188).This requirement
for additionality has meant that the funds have focused on financing impact-based adaptation
measures, that is, the climate resilience component of the development project. Further,
applications for funds under the SPA need to demonstrate that it generates ‘global
environmental benefits’ (UNFCCC, 2008: para 187).
Developing countries, including LDCs, have long expressed their dissatisfaction with the access
criteria for funds under the aforementioned funds, all currently managed by the Global
Environmental Facility (see section 3(b) & (c)). Developing countries have felt sidelined from the
governance of the GEF-managed funds which they view as ‘dominated by donor concerns’
(Brown et al, 2009: 5; see also Ayers and Huq, 2008). In particular, countries have been critical of
the rules and modalities for accessing financing which are time-consuming and lead to high
transaction costs as well as the complexity and duplicity of administrative and operational
procedures. As mentioned in the previous section, finance from the GEF-managed funds is not
directly accessible by UNFCCC parties but have to be mediated through one of the GEF
implementing agencies33. Consequently, aside from meeting the eligibility criteria established by
the COP, countries must also meet the criteria for access set by the GEF and its implementing
agencies in order to secure funding. Countries do not have direct access to financing from the
GEF-managed funds but must channel their requests through one of the ten GEF agencies
which will work with the country to develop n adaptation project on the ground and submit it to
the GEF for consideration (UNFCCC, 2009b: 15). The entire process could take up to 22
months (ibid; see also SEI, 2009: 67 – 69).
This distinction between funding for impact-focused adaptation (building resilience to climate change) as opposed
to funding for vulnerability-focused adaptation (building countries’ resilience to climate variability) was made in
order to clearly demarcate costs as well as burden sharing under the UNFCCC. According to Ayers and Huq,
developing countries have generally supported this approach ‘in order to prevent industrialized countries
incorporating adaptation funding into development assistance and thereby avoiding providing new and additional
funding for adaptation under the UNFCCC’ (Ayers and Huq, 2008: 5). However, recent negotiations under the
AWG-LCA, parties have begun to address vulnerability-focused adaptation needs for future financing under the
UNFCCC (SEI, 2009: 34).
32 A project is eligible for LCDF or SCCF funding if climate change ‘affects one of the core sectors of development,
such as agriculture, water, health or infrastructure’ (UNFCCC, 2008: para 188).
33 Currently the World Bank, the United Nations Environmental Programme (UNEP), the United Nations
Development Programme (UNDP), the United Nations Industrial Development Organisation (UNIDO), the Food
and Agricultural Organisation (FAO), the International Fund for Agricultural Development (IFAD), the European
Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IADB), the Asian
Development Bank (ADB) and the African Development Bank (AfDB).
31
36
Moreover, as the climate funds will only support the incremental or additional costs of the
project, recipient countries would need to mobilise co-financing from either its own resources or
other bilateral or multilateral donors (ibid). For example, the SPA would only finance the climate
resilience aspect of a development project while financing for the costs associated with its
generation of global environmental benefits would be funded from other GEF programmes with
the rest being borne by the recipient country or other sources (UNFCCC, 2008: para 187). The
co-financing requirement means countries must also meet the conditions for funding set by the
co-financiers, mainly the MDBs34which are controlled primarily by developed countries and
reflect developed countries’ priorities vis-à-vis climate change and other environmental concerns.
Further, as noted by Ayers and Huq, ‘distinguishing ‘additional’ costs of climate change impacts
from baseline development needs is extremely complex if not possible’ and as many countries
are unable to fund the baseline needs in the first instance, ‘the offer of funding for the additional
cost is futile’ (Ayers and Huq, 2008: 4).
(iii)
Inappropriate Funding Modalities
Aside from access and eligibility limitations, the current framework for funding under the
UNFCCC also suffers from limitations in the design of the modalities of delivering finance to
developing countries as well as the substantive focus of the funded activities. As discussed
above, for many years, the priorities for funding under the UNFCCC have focused primarily on
mitigation rather than adaptation and on discrete projects rather than on a programmatic
approach for supporting national strategies on climate change adaptation and mitigation. The
focus on supporting urgent and immediate needs of LDCs and other vulnerable states have also
led to the marginalisation of medium to long-term issues relating to adaptation and mitigation,
including tackling the developmental challenges posed by social, economic and geographical
vulnerabilities of LDCs discussed in sections 2 and 3.
Disbursement of funding under the GEF-managed funds currently take the form of projects,
that is, expenditures are ring-fenced around an identified project, such as the construction of a
power plant or dam or to support an agricultural or forestry-based development project. While a
project-based approach is effective in piloting adaptation actions in countries and sectors, its
suitability as a mechanism for delivering scaled-up financial resources to comprehensively
address adaptation needs of LDCs is questionable (UNFCCC, 2008: para 1999). Not only can
their cumulative administrative costs be high, reliance on projects as a modality for delivering
financing also circumvents national budgetary and planning systems and can rely heavily on
imported technical expertise with little scope of skills transfer between foreign consultants and
local policymakers (see UNFCCC, 2008: para 200. For LDCs, project-based aid generally stretch
their already burdened administrative systems given their reliance on ODA as a source of
revenue as they would have to comply with multiple systems of monitoring and accounting tied
to individual donors and/or funds.
Further, delivery of adaptation actions through fragmented projects on an ad-hoc basis do not
address the wider drivers of vulnerability to climate change faced by LDCs. It tends to, as noted
by the UN-DESA, to perceive ‘the climate challenge primarily ‘in terms of a series of discrete
and unconnected threats which can be addressed through incremental improvements made to
existing arrangements’ instead of addressing adaptation and mitigation needs through ‘an
According to the GEF, the major co-financiers are the GEF agencies, providing one third of the total cofinancing, with more than 54 percent of such contributions coming from the World Bank (mainly in the form of
loans) and another 40 percent supported by the ADB 9again in the form of loans). Recipient governments provide
30 percent of the total and the private co-finances 24 percent of the total (GEF, 2009: para 30).
34
37
integrated and strategic approach’ including large-scale investments and integrated policy
measures (UN-DESA, 2009a: 80 – 81).
There has been recognition by the UNFCCC COP and donors that programmatic approaches to
climate change financing are preferable to projects for serving the long-term adaptation and
mitigation needs of countries. The GEF Council have, in April 2008, decide to introduce
programmatic approaches under the GEF Trust Fund ‘recognising that medium-to-long term
programmes constitute more effective financing vehicles for supporting countries’ sustainable
development than traditional project-by-project funding provision’ (SEI, 2009: 66). Similarly, the
recently operational Adaptation Fund envisages financing both adaptation projects and
programmes and the G77 and China have proposed that funds be made available to support
adaptation actions and strategic plans by developing countries ‘in alignment with their broader
development strategies’ (Adaptation Fund Board, undated: para 9; G77 and China, undated: 1;
UNFCCC, 2008: para 201). However, the main limitation to initiating more comprehensive
programmes of action financed by UNFCCC-based funds is the resource constraints discussed
above and adopting a more holistic approach to the climate challenge in LDCs would require a
massive scaling up of resources to match the policy objectives of such a framework.
(iv)
The Adaptation Fund and Limitations of the Clean Development Mechanism
(CDM)
Frustration with GEF-managed funds has led to developing countries successfully lobbying for
the establishment of a new operating entity under the UNFCCC’s financial mechanism to
manage the Adaptation Fund established in 2001 to fund adaptation activities in developing
countries party to the Kyoto Protocol. Unlike the GEF Trust Fund, SCCF and LCDF, the
Adaptation Fund is not financed by voluntary contributions but by a two percent levy on
transactions under the Clean Development Mechanism (CDM). This does not however preclude
the Fund from being supplemented by other sources of financing. The Adaptation Fund is
managed not by the GEF35 but by an independent Adaptation Fund Board with representation
from the five UN regions and reserved seats for LDCs and SIDS, meaning greater representation
of developing countries in its governance structure (see section 3(b)); also UNFCCC, 2008: para
190). Countries can also access funds from the Adaptation Fund directly without going through
another international organisation. The Adaptation Fund’s operational policy states that
proposals for financing can be submitted directly through national implementing entities (such as
ministries or government cooperation agencies) which meet the established fiduciary standards
or countries can submit applications through an approved multilateral implementing entity which
will bear the full responsibility for the management of projects and/or programmes funded by
the Adaptation Board(Adaptation Fund Board, undated: para 20 – 31).
While the Adaptation Fund offers a more equitable and efficient framework for the
administration and delivery of climate financing under the UNFCCC, there should be caution on
relying on its underlying market-based premise and funding streams as a model for climate
change financing. In particular, suggestions by Annex 1 parties to bridge the shortfalls in public
financing of UNFCCC funds through finance raised by CDM and other carbon trading
mechanisms must be treated with caution given the unpredictability of financing through such
market-based means. Funding generated under the CDM, including those passed through the
Adaptation Fund, cannot be towards the discharge of financial obligations of developed
countries under Article 4 (3) of the UNFCCC because of: a) the source of such funding and b)
the purposes of the CDM.
35
The GEF only provides secretariat services to the Adaptation Fund.
38
The Adaptation Fund is reliant on proceeds from transactions under the CDM which, in turn,
was established as one of the flexibility mechanisms under the Kyoto Protocol that countries
could utilise as means of meeting their GHG emissions reduction targets (Article 12 of the
Kyoto Protocol). Through the CDM, non-Annex 1 countries would benefit from projects
resulting in ‘certified emission reductions’ (CERs) thus aiding their mitigation efforts while
Annex 1 countries could use CERs accruing from such projects to contribute towards their
quantified emission targets under Article 3 of the Protocol (Article 12 (3) of the Kyoto Protocol).
A share of the proceeds flowing from such transactions would be held back by the CDM for
administrative purposes and then channelled through to the Adaptation Fund to support
vulnerable developing countries (Article 12(8) of the Kyoto Protocol).
This form of carbon offsetting essentially means that developed country emitters are meeting
their emission caps by purchasing carbon credits from developing countries through supporting
emission reduction projects in developing countries. At the same time, funds are generated to
support adaptation activities in countries vulnerable to climate change impacts. Proponents of
the CDM argue that its transactions have the potential of raising up to US6 billion per annum
for adaptation and mitigation purposes, with the primary CDM market has been valued at almost
US$12 billion (see Clifton, 2009: 19; Jones et al, 2009: 12). The UNFCCC estimates that the
Adaptation Fund alone could generate between US$80 – 300 billion per year between 2008 and
2012 assuming annual sales of 300 – 450 million CERs and a market price of €17.5 per CER
(UNFCCC, 2008: para 159).
However, these figures are heavily dependent on the price of carbon in the market, market
performance (likely to be affected by the recent financial crisis) and the successful completion
and performance of CDM projects (Griffith-Jones et al, 2009: 12; SEI, 2009: 116). Critics have
argued that the volume instability and price volatility of carbon markets are serious limitations to
the scaling up of mechanisms such as the CDM as a means of generating predictable and
sustainable resources for climate financing in developing countries, especially the large-scale
investment necessary for meeting adaptation challenges and shifting towards a low-carbon
economy (see Clifton, 2009; Griffith-Jones et al, 2009; Jones and Edwards, 2009: 27 – 28; UNDESA, 2009a: 160 – 161).
Finance from CDM levies cannot also be technically considered ‘new and additional’ for the
purposes of compliance with financial obligations under the Convention as such funds do not
flow directly from developed countries to developing countries. Instead, the levies represent a
two percent diversion of proceeds destined for developing countries for CDM projects and thus
contributions from one set of developing countries to another (Khor, 2008: 17; Yu, 2009: 18).
The financial resources and technology transfer to developing countries taking place via CDM
transactions are therefore only compensatory payments to developing countries for the offset
credits (CERs) that will be credited to developed countries to count towards meeting their
emissions targets under the Kyoto Protocol and cannot be considered additional finance to
developing countries to meet their climate-related needs (Yu, 2009: 18).
Moreover, CDM offset projects as a whole have not benefitted LDCs directly outside of their
contributions to the Adaptation Fund (which have yet to be disbursed). UNFCCC data has
revealed that out of the 700 projects implemented between 2004 and 2007 with a total value of
US$6 billion for developing countries, almost four out of five projects were concentrated in just
four countries – Brazil, China, India and Mexico (UN-DESA, 2009a: 161). Within Africa,
separate surveys have demonstrated that nearly 75 percent of projects were located in three
39
countries – Nigeria, South Africa and Egypt, with South Africa accounting for 30 percent of all
CDM credits (see Griffith-Jones et al, 2009: 16).
These figures demonstrate that the emphasis on carbon finance as a means of financing climate
change activities in developing countries, especially LDCs where the infrastructure and
regulatory mechanisms are not sufficiently developed to encourage commercial investment, is
misguided. As noted by Griffith-Jones et al, the lack of technical capacity, a weak CDM-related
institutional framework and high transaction costs associated with the implementation of a CDM
project in reality limits the participation of LDCs in the initiative (ibid). While a shift towards a
sectoral approach may be more beneficial for LDCs by enabling LDCs to undertake voluntary
sectoral emissions reductions and have these credited in CERs, thus reducing transaction costs
and encourage economies of scale (ibid: 17 – 18), these reforms and their application to LDCs
must be considered carefully as they may impact on LDCs’ overall development trajectories.
Thus, instead of focusing on CDM as a means of finance, emphasis particularly for LDCs,
should be placed on other means of generating finance, including the aforementioned enhancing
of developed countries’ public financial contributions towards adaptation and mitigation.
b)
Financing outside the UNFCCC
(i)
Donor-Centric Design and Governance
Discussions in the previous sections have indicated that finance provided for climate change
adaptation and mitigation to developing countries have been primarily channelled through nonUNFCCC institutions and mechanisms and this pattern looks likely to continue in the near
future pending negotiations at the UNFCCC. According to estimates by the South Centre,
around 65 percent of funds available for climate change financing is pledged through nonUNFCCC channels (South Centre, 2009a: 7 – 8) but there is no mechanism for coordinating the
rapidly proliferating climate finance initiatives operating outside the auspices of the UNFCCC.
The majority of funding is increasingly funnelled through the World Bank’s climate investment
funds which have amassed pledges of around US$6.15 billion for financing mitigation and
adaptation activities in developing countries since their inception in July 2008 (see discussion in
section 5(a) above).
Developed countries have expressed their preference for climate financing to be dispersed
through existing bilateral and multilateral channels, maintaining that the UNFCCC is not
institutionally equipped to handle financial flows on the scale needed to meet the global climate
challenge (South Centre, 2009a: para 15) and that funds for such purposes should be located
within institutions who have had a longer track record and experience in mobilising, disbursing
and administering finance for development and environment operations. However, the
conflation of climate finance with ODA risks undermining global efforts to tackle climate
change primarily because of the problems associated with the governance of the existing
international aid architecture which is based on a very different relationship between parties to
the financing.
A fundamental concern with climate funds located outside the UNFCCC is that they remain
primarily donor-driven initiatives premised on an asymmetrical aid relationship between the
financier and the recipient of financing. Unlike funds placed under the authority and guidance of
states parties to the UNFCCC, non-Convention funds are often designed with little input from
the developing countries who will be the recipients of such financing and who do not have much
standing within the governance structures of these funds. A study by Porter et al of existing
bilateral and multilateral climate finance initiatives found that only a few of the non-UNFCCC
40
initiatives have involved recipient countries in the inception phase or consulted recipient
countries, with the majority of multi-donor arrangements involving consultations within the
donor community (Porter et al, 2008: 51).The relationship of these funds to the UNFCCC’s core
principles and obligations are also unclear and, as will be discussed below, may instead create
parallel structures of climate change governance contrary to the Convention.
A key example in this context is the speed and scale in which the aforementioned climate
investment funds were mobilised and operationalised. Established as trust funds within the
World Bank Group, with the Bank acting as overall coordinator for the CIF partnership and as
trustee of the funds, the Clean Technology Fund (CTF) and the Strategic Climate Fund (SCF)
were developed and instituted within less than a year. The funds, which draw their resources
from voluntary donor contributions, provide financing to eligible middle- and low-income
countries through a mixture of loans, grants, equity stakes, guarantees and other financial
instruments (Tan, 2008a: 3; World Bank, 2008a & b). The funds are implemented in
collaboration with regional development banks, including the African Development Bank, the
Asian Development Bank, the European Bank for Reconstruction and Development, the InterAmerican Development Bank and the World Bank itself. Countries must therefore have ‘an
active MDB program’36 in place to be eligible for CIF funding and resources from the CIFs will,
in effect, subsidise financing made by the MDBs to developing countries for climate-related
activities (Tan, 2008a: 3
The CTF provides finance for investment ‘in projects and programs that contribute to
demonstration, deployment and transfer of low carbon technologies with a significant potential
for long term greenhouse gas emissions savings’ (World Bank, 2008a: para 14) while the SCF
provides financing focused on ‘accelerating and scaling up transformational low carbon and
climate resilient investments while at the same time promoting sustainable development and
poverty reduction’ (World Bank, 2008b: para 17). While the CTF is a stand-alone fund, the SCF
acts as an umbrella vehicle for the receipt of donor funds to be channelled into specific
programmes related to climate change adaptation and mitigation (Tan, 2008a: 6 – 7; World Bank,
2008b: para 18). Targeted programmes with dedicated funding streams are established under the
SCF and donor resources will be mobilised and pledged to the respective programmes but the
SCF can also act as a mechanism to transfer donor funds to other trust funds, including the CTF
(ibid). Currently, the SCF has three established programmes: the Pilot Programme for Climate
Resilience (PPCR)37, the Forest Investment Partnership (FIP)38 and the Scaling Up Renewable
Energy Program (SREP)39.
The climate investment funds were designed primarily by donor countries with little input from
developing countries and their design and operational policies continue to reflect the strategic
priorities of the donor architects of the funds (Tan, 2008a: 13 – 15). Although developing
Defined as ‘where a MDB has a lending program and/or an on-going policy dialogue with the country’ (World
Bank, 2008: footnote 5).
37 Aimed at piloting climate resilience projects and integrating them into development planning, based on NAPAs
and aligned with other donor initiatives to scale up funding for adaptation. See CIF website:
http://www.climateinvestmentfunds.org/cif/ppcr
38 Aimed at supporting developing countries’ efforts to reduce deforestation and forest degradation (REDD) and
promotes sustainable forest management ‘by providing scaled-up financing to developing countries for readiness
reforms and public and private investments, identified through national REDD readiness or equivalent strategies’.
See CIF website: http://www.climateinvestmentfunds.org/cif/node/5
39 Aimed at increasing renewable energy use and renewable energy access in low-income countries by scaling up
development of renewable energy solutions and providing ‘a catalyst for the transformation of the renewables
market by obtaining government support for market creation, private sector implementation, and productive energy
use’. See CIF website: http://www.climateinvestmentfunds.org/cif/srep
36
41
countries and civil society groups were belatedly consulted, their input was ring-fenced to
commenting and improving upon pre-existing operational proposals. It remains the case that
donors have the option of deciding which of the two funds their contributions will support and
within the SCF, which programme they will support and financial commitments can only be
made subject to the availability of resources within the specified funds or programmes. This
essentially means that donors can pick and choose their own financing basket as opposed to the
funds being demand-driven and responsive to the needs of countries in need of climate change
financing (ibid).
Moreover, although the funds themselves may be governed by more representative structures of
decision-making – composition of the governing trust fund committees are based on equal
representation of donor and recipient countries – individual projects or programmes funded by
the CIFs remain subject to the operational policies of the implementing MDBs (ibid; World
Bank, 2008a: para 19 – 20; World Bank, 2008b: Annex A, para 16). This means that climate
finance under the CIFs may be subject to conditions other than the criteria for access established
by the respective funds, more so if the MDB involved is co-financing the project. Given the
donor-dominated nature of the MDBs, particularly the World Bank, involved in CIF financing,
concerns are that countries would be subjected to additional policy conditionalities not related to
the climate change activity that is being funded, including the implementation of policy and
regulatory reforms (Tan, 2008a: 19 – 20). For example, the Bank’s track record in managing its
other trust funds, including the HIPC Trust Fund, demonstrates that it has significant leverage in
determining the conditions for access to and use of resources by recipient countries (ibid).
Similar concerns apply to the use of bilateral ODA as a means of financing climate change
adaptation and mitigation in developing countries, with the design of instruments subject to the
policy objectives of the bilateral donor and the imposition of conditionalities and modalities for
financing which may be inappropriate for the circumstances of developing countries, especially
LDCs. In particular, developed countries have expressed a preference for market-based solutions
to meeting the climate challenge and this has been translated, in some cases, into supporting the
use of public financing (that is, ODA) to create incentives for private investment and the
development of regulatory tools to create an enabling environment in developing countries for
these purposes. These policies may not be appropriate for many countries where public
investment remains inadequate and where public finance may be better targeted towards largescale infrastructural development and public investment projects as well as in creating a stronger
policy environment for developing appropriate national strategies for combating climate change.
Additionally, ODA is susceptible to political, economic and foreign policy concerns within
donor countries and is highly vulnerable to national budgetary constraints. As such, donors are
inclined to set conditions on the use of funds which protect their domestic interests but which
may have a detrimental effect on efforts to combat climate change in developing countries.
Notably, as discussed in section 4(c), the latest US legislation governing US contributions to the
CTF and SCF conditions its contributions (of US$225 million and US$75 million respectively) to
certification by the US Secretary of State to the Congressional Committees of Appropriations
‘that all actions taken during the negotiations of the United Nations Framework Convention on
Climate Change ensure robust compliance with and enforcement of existing international legal
requirements as of the date of the enactment of this Act that respect intellectual property rights
and effective intellectual property rights protection and enforcement for energy and environment
technology’ (Section 7089 of the Foreign Operations, and Related Programs Appropriations Act,
2010; see also Shashikant, 2009: 3). These conditions have been viewed as a response to
proposals by developing countries calling for the relaxation of IPR regimes in the context of
42
UNFCCC negotiations to enable effective technology transfer under the provisions of the
Convention (Shashikant, 2009: 4).
The aforementioned example demonstrates the inadequacy of an ODA framework to form the
basis of an effective global financial response to the climate change challenge. The main problem
with non-UNFCCC funds is that it is premised on a donor-donee aid relationship and not on the
principles of equity and common but differentiated responsibilities which should characterise
financing relationships related to climate change regulation (see section 4(b)). The power
dynamics involved in such a relationship not only runs contrary to the principles of the
multilateral climate change regime (see discussion below), it can also have a detrimental effect on
the ability of countries to respond to the effects of climate change and transit to a low-carbon
economy. Porter et al argue that the creation of new climate funds outside the UNFCCC and
located within the World Bank have ‘significant implication for the north-south accord on
funding’, representing ‘a distinct step back’ from the uneasy political compromise which led to
current arrangements for the financial mechanism of the Convention (Porter et al, 2008: 47).
(ii)
Fragmentation of Funds and Incompatibility with Global Climate Regime
Developing countries, including the G77 and China and the Africa Group, have expressed
serious concerns over the proliferation of funds and fragmentation of financing sources and
modalities for delivery of climate finance. Developing countries have argued that this trend not
only risks ‘uncoordinated’ global efforts in meeting the climate challenge and tackling its adverse
effects and inconsistency with the multilateral climate change regulatory regime but it also risks
duplicating the use of limited financial resources aimed at combating climate change (de Castro
Muller, 2008: 1). Without clear guidance on what constitutes the definition of financial resources
discharged in compliance of UNFCCC obligations discussed in section 3 and a system for
supervising compliance, the proliferation of funds outside the UNFCCC will lead to a
duplication of funded activities and an inefficient distribution of resources.
The aforementioned study by Porter et al has indicated that duplication of funded activities may
be a significant problem with the advent of the Bank’s climate investment funds, leading to the
possibility of donors scaling down their contributions to the UNFCCC-based funds (2008: 39 –
42). The authors argue that the investments in low carbon technologies to be financed through
the CTF may overlap and are likely to compete with the existing mitigation operations under the
GEF climate focal area, some of which are funded by the GEF Trust Fund, leading to the World
Bank disengaging from the GEF and seeking arrangements with the CTF instead (ibid: 39 – 40).
Meanwhile, adaptation measures supported by the SCF through the PPCR could duplicate
adaptation activities currently funded by the LCDF, SCCF and the Adaptation Fund and lead to
competition for bilateral donor funds (ibid: 41). According to the study, the LDCF and SCCF
‘are already supported by overlapping groups of donors’, the LCDF by 17 donors and the SCCF
by 13 (ibid).
The fragmentation of climate financing has also undermined the ability of the UNFCCC’s COP
to monitor developed countries’ compliance with their obligations under the Convention and
can have the potential effect of institutionally weakening the UNFCCC and its financial
mechanism, effectively ‘lessening the normative value of the UNFCCC itself as a binding legal
regime’ and compromising the role of the UNFCCC ins serving ‘as the main conduit for public
sector-sourced climate financing (South Centre, 2009a: para 16). Although Article 11 of the
Convention has provided that developed country parties may avail themselves of bilateral,
regional or other multilateral channels in order to discharge their financial obligations under the
43
Convention (see discussion in section 3(c)), the COP has decided that such funding should be
consistent with the policies, programmes and priorities provided by the parties.
At its first session, the COP had decided that:
Consistency should be sought and maintained between activities (including those
related to funding) relevant to climate change undertaken outside the framework
of the financial mechanism and the policies, programme priorities and eligibility
criteria for activities as relevant, established by the Conference of the Parties.
Towards this end and in the context of Article 11.5 of the Convention, the
secretariat should collect information from multilateral and regional financial
institutions on activities undertaken in implementation of Article 4.1 and Article
12 of the Convention; this should not introduce new forms of conditionalities (COP,
1995: Decision 11/CP 1, para 2(a), emphasis added)
Pursuant to this and other decisions of the COP, the G77 and China’s aforementioned proposal
for the establishment of a new financial mechanism under the UNFCCC has called for any
funding pledged outside of the Convention ‘not to be regarded as the fulfilment of commitments
by developed countries under Article 4.3 o the Convention, and their commitments for
measurable, reportable and verifiable means of implementation , that is finance, technology and
capacity building, in terms of para 1.b(ii) of the Bali Action Plan’ (G77 and China, undated: para
6). The proposal states that in addition to facilitating ‘linkages between the various funding
sources and separate funds ... to promote access ... and reduce fragmentation’, the mechanism
would also ‘maintain consistency with the policies, programme priorities and eligibility criteria
adopted by the decisions of the COP’ and that all activities outside the Convention is consistent
with the COP decision above (ibid).
These calls reflect the fact that the development of funds outside the UNFCCC framework has
clearly not followed the guidance of the COP nor reflected its policies, programmes or priorities
or the principles of the Convention. Firstly, the use of ODA to fund the bulk of nonConvention financing and the preference of loans over grants as means of delivering finance
raises the question of additionality. As discussed above, there are significant problems with the
double-counting of ODA funding as financing that meets both their commitments to existing
ODA targets and their UNFCCC financial obligations contrary to their obligations to ensure that
climate finance is new and additional(see South Centre, 2009a: para 17).
Although the newer initiatives, such as the CIFs, do stipulate that funding of these instruments
should be ‘new and additional resources supplementing existing ODA flows’ (World Bank, 2008a:
para 48), these provisions only ensure that funds are additional to current aid flows. They do not
necessarily have to represent an additionality in terms of developed countries’ commitments to
aid targets, that is the 0.7 percent of GNI and contributions to the CIF are likely to be classed in
most, if not all, donor countries as contributing towards this target and not additional to it (Tan,
2008a: 19). Further, the use of loans, albeit concessional in nature, to finance adaptation and
mitigation measures in developing countries reduces lowers the additionality of such financing
significantly as these resources will have to be repaid in the longer term. Moreover, the debt will
only reduce the creditworthiness of developing countries, LDCs in particular, in the mediumterm as the effect of undertaking more debt will have an effect on their debt sustainability
assessments used by official and private creditors tin their lending decisions.
The preference for loans rather than grants also essentially means that developing countries will
have to finance their own adaptation and mitigation measures, effectively paying to deal with a
44
problem caused by developed countries. This undermines the balance of obligations central to
the global climate change regime outlined in section 3(a) whereby developed countries undertook
to provide financial resources and technology transfer to developing countries in recognition of
their historical culpability and on account of their higher capacity to do so. It also runs contrary
to Article 4(7) which links developing countries’ commitments under the Convention, including
voluntary mitigation efforts, to the availability of such resources (see section 3). Decoupling
finance from the Convention also weakens the link between finance from developed countries
and mitigation actions of developing countries as envisaged under the Convention. In the
context of LDCs and adaptation measures, given their existing pressures and future
vulnerabilities, the use of loans rather than grants will further exacerbate the stark disparity
between culpability and injury, undermining the compensatory role that was envisaged for
climate financing in this area.
The linking of financing to other aspects of climate change negotiations, such as technology
transfer or emissions reductions (as envisaged by some developed country proponents of the
Copenhagen Accord) outside the negotiating framework of the UNFCCC also undermines the
authority of the treaty to serve as a multilateral forum for global regulatory cooperation. The
CTF, for example, enables MDBs to bundle investment projects and programmes with
‘complementary financing for policy and institutional reforms and regulatory frameworks’
(World Bank, 2008a: para 24). This means that CTF financing could be used to leverage policy
reform in countries similar to reforms undertaken as part of an MDB structural or sectoral
adjustment loan used in other economic and social sectors to developing countries (Tan, 2008a:
21). This is effectively conditionality through the back doors, committing recipient countries to
regulatory reform, such as binding carbon reduction targets, outside the formal state-to-state
negotiating forum of the UNFCCC, undermining both ongoing negotiations as well as the
provisions of the Convention itself40.
(iii)
Parallel Structures and Concerns over Institutional Competence
The proliferation of funds outside the UNFCCC creates parallel processes of climate change
governance which may undermine existing multilateral negotiations under the Convention.
Although proponents of non-UNFCCC funds, especially the World Bank’s CIFs, have stressed
the primacy of the UNFCCC process, many do not view them as necessarily inconsistent with
the agenda of the global climate change regime. The terms of reference for the CIFs, for
example, recognise that the UNFCCC and the ongoing Bali Action Plan as the primary site for
deliberations on the future of the climate change regime, including its financial architecture, and
view the CIFs as interim measures for filling immediate financing gaps (World Bank, 2008a: para
11; 2008b: para 12). The funds include sunset clauses linked to an agreement on a new financial
architecture within the UNFCCC (ibid). However, there is no fixed date for this and the CIFs are
expected to cease operations only when a new financial entity becomes effective and will not
prejudice a continuation of the CIFs if the UNFCCC parties so agree (Tan, 2008a: 23).
The tying of CIFs’ termination to the creation of a financial mechanism under the UNFCCC
may therefore derail rather than speed up negotiations for the establishment of such as fund as
developed countries have less of an urgency and incentive to create alternatives (ibid). It also
enables the World Bank and other MDBs, buffered by an injection of donor financing, to
establish track records in mobilising, administering and disbursing climate financing to
This practice has been common with finance from the international financial institutions (IFIs), notably the IMF
and the World Bank, over the past 30 years. In particular, many LDCs have been required to undertake unilateral
trade liberalisation measures as part of their structural adjustment programmes (SAPs) financed by the IFIs which
have undermined their negotiations within bilateral and multilateral trade agreements, such as the WTO.
40
45
demonstrate their continued viability at the same time as reducing the capacity of the UNFCCC
funds to do so. This concern is reflected in the ongoing disagreements between developed and
developing countries in negotiations under the AWG-LCA on the future of climate change
financing discussed in section 3(d). There is also evidence to suggest that many multilateral
‘interim’ funds, particularly those established under the World Bank, have expanded rather than
shrunk over the years. The Bank’s Prototype Carbon Fund (PCF), for example, was established
as a temporary instrument for pioneering carbon transactions pending the development and
operationalisation of the CDM but a decade and more than US$2 billion later, the Bank’s carbon
portfolio had expanded to 11 funds and carbon financing has become a mainstay of the bank’s
lending programme (Redman, 2008: 13).
The use of MDBs as the primary conduits for climate change financing also raises questions
about their mandate and expertise in delivering effective solutions for adaptation and mitigation
in developing countries, especially LDCs. The proposals by some developed countries to
develop strong environmental roles for MDBs, particularly the World Bank (see for example
DEFRA and DFID, 2008) is fundamentally misguided given the track record of these
institutions in managing the environmental risks associated with their financing in such
countries. MDBs are not environmental agencies and cannot be utilised as means to create
parallel climate change governance policies outside the multilateral climate change regime as
these are not roles that the institutions have the constitutional mandate nor technical
competence to assume.
Multilateral development banks have poor environmental track records based on their historical
lending patterns and the management of the social and environmental impacts of their
operations. Critics have viewed the institutions’ current shift towards climate financing as a
means to finding new niche markets for their financial products and to tap into an issue of global
concern for profit (Porter et al, 2008; Redman, 2008; Tan, 2008a). The World Bank, in particular,
is reinventing itself as an institution for sustainable development and establishing itself as a key
broker of climate financing – both between donors and recipients as well as between
governments and the private sector. This reinvention is problematic for two reasons: 1) the
Bank’s historical culpability in the climate crisis; and 2) its unsatisfactory track record in serving
the needs of its clients, particularly LDCs.
Developing countries and civil society groups have highlighted the inconsistencies between the
Bank’s rhetoric on climate change and its operational policies and practice. In particular, NGOs
have argued that the Bank’s core energy portfolio continues to be focused on supporting
conventional fossil fuel production, with oil, gas and power accounting for 77 percent of the
bank’s total energy programme in 2006 and renewables accounting for only five percent (NGOs,
2008, Oil Change International, 2007: 10). Although the World Bank Group has recently
announced a substantial rise in its financing of renewable energy and energy efficiency projects
and programmes – increasing by 24 percent in 2009 from the previous fiscal year to a record
US$3.3 billion and now constituting 40 percent of its total energy lending (World Bank, 2009) –
this does not negate the fact that for most part of its institutional history, the Bank and its
subsidiaries have been actively supporting fossil fuel energy development, many of such
investments remain operational and contributing towards current and future GHG emissions41.
Out of the recent rise, over 50 percent of the financing went to energy efficiency operations which include
subsidies for existing fossil fuel power plants (ibid; Jones and Edwards, 2009: 30). Further, a three-year analysis of
the Bank’s lending from 2007 – 2009 conducted by the Bank Information Centre reveals that annual average lending
was US$2.2 billion, including US$470 million for coal, compared with US$780 million for renewable energy (Bank
Information Centre, 2009).
41
46
The negative impacts of the Bank’s energy investments have been extensively documented over
the years. Aside from the social and environmental dislocations caused by large projects for
energy extraction and production, notably oil pipelines and hydropower dams, the Bank’s
support for privatisation and deregulation of energy sectors in developing countries have
resulted in energy insecurity, particularly for poorer communities. As discussed in section 2, one
of the major challenges facing LDCs in confronting the climate crisis is the challenge of meeting
domestic energy consumption needs and expanding energy access while at the same time
transiting towards more sustainable and secure energy resources.
However, a number of studies have highlighted not just the Bank’s preference for large-scale
fossil fuel energy projects in developing countries but also the fact that these investments have
tended to benefit foreign and commercial interests rather than local citizens, particularly in lowincome countries (see Christian Aid, 2007, Vallette and Kretzman, 2004). Vallette and Kretzman,
for example, found that 82 percent of the World Bank Group’s oil extraction projects since 1992
were designed for export and in most cases, the principal beneficiaries of Bank financing to oil,
coal and gas projects in developing countries were developed countries’ consumers and
corporations, facilitating a massive transfer of developing countries’ oil and gas resources to
feed the north’s energy demands rather than supplying energy to the poor in developing
countries (Vallette and Kreztman, 2004: 2).
Given its problematic past lending portfolio, it is therefore questionable if the World Bank and
other MDBs engaged in similar lending practices) represent the most appropriate institutions
through which climate financing is delivered. Moreover, climate concerns aside, placing the
World Bank and other MDBs in charge of climate financing may also reinforce the
unsatisfactory practices and policy prescriptions which have contributed to the multiple
vulnerabilities experienced by LDCs compounding their adaptive capacity, including
macroeconomic conditionalities which constrain fiscal space and structural reforms which favour
agricultural reform based on liberalisation, p[privatisation and dependence on fossil fuel inputs
(see section 2(c)). Placing the responsibility of meeting this challenge on institutions partly
responsible for exacerbating the climate crisis risks further undermining recipient countries’
adaptive capacities and their transition towards a more sustainable growth path.
(iv)
Questionable Preference for Market-Based Solutions
Many of the current and proposed financing instruments operating outside the UNFCCC are
geared towards market-based solutions to climate change, either as a source of climate-related
financing or as adaptation or mitigation efforts in their own right. The former category includes
utilising and expanding carbon finance markets to both reduce GHG emissions in developed
and developing countries and generate finance for adaptation and mitigation actions in
developing countries, including LDCs, and facilitating private sector investment, notably foreign
direct investment (FDI) in providing funding for adaptation and mitigation operations. The
‘crowding in’ of private sector resources in this respect is aimed at supplementing, if not
replacing public sector finance to meet the scale of investments needed to support adaptation
and mitigation efforts (UN-DESA, 2009a: 157). On the other hand, the latter category includes
using the market and private sector to allocate and provide for goods and services to facilitate
adaptation and mitigation measures in developed and developing countries. Pursuant to this,
public financing may be utilised to create market incentives and an enabling regulatory
environment to facilitate the operation of market-based or commercial instruments and
investments.
47
Developed countries and multilateral development banks have argued strongly for an increased
emphasis on mobilising such market-based solutions to climate change while developing
countries and civil society groups have expressed caution and concern over the development of
such mechanisms as the means of tackling the climate challenge (see discussion in section 4(b)).
While the involvement of the private sector and the use of market mechanisms is inevitable
given the scale of the climate challenge and the growing recognition that many of climate
investments would need to be front-loaded given the urgency of the crisis (ibid), it remains
questionable whether focus should be placed on developing such solutions at the expense of
motivating public sector financing and remedying the deficits with the current international
architecture for public financing of climate change adaptation and mitigation.
Questions over the suitability of market-based solutions are particularly pertinent when
considering the suitability of such approaches to the special circumstances of LDCs. Specifically,
there are concerns over the ability of market mechanisms and the private sector to deliver what
are essentially global public goods in light of the propensity of market failure and the grave
implications such a failure can have in vulnerable economies such as LDCs. Reliance on markets
and private sector financing for funding climate-related activities, particularly adaptation
measures, in economies that do not have the relevant policy, institutional or regulatory
frameworks to support their operations may lead to further adverse effects and increase rather
than decrease LDCs’ vulnerability to adverse climatic impacts and their capacity to transit
towards a sustainable development pathway.
Firstly, as discussed above in relation to the Clean Development Mechanism, carbon markets
may not provide a stable and predictable source of financing climate change adaptation and
mitigation in LDCs because of its reliance on market pricing and high transaction costs of
implementing offset projects in LDCs. Given their low levels of GHG emissions, reliance on
offsetting as a means of financing transition towards a low-carbon economy, particularly within a
sectoral or programmatic approach, may be counter-productive to LDCs’ transition to more
sustainable development paths by constraining their policy options vis-à-vis industrial or
agricultural policy. It is also uncertain if carbon markets can sufficiently generate the resources
necessary for the upfront investment at a scale required to meet the climate challenge in LDCs.
There are also reservations over the extension of carbon markets to initiatives aimed reducing
emissions from deforestation and forest degradation (REDD), especially in LDCs. REDD
activities have the potential of serving as a key source of income for mitigation measures in
LDCs as well as playing a global role in reducing GHG emissions overall as 65 percent of
emissions from LDCs are contributed by deforestation and land degradation (UN-DESA, 2009a:
36; see also discussion in section 2(b)). REDD approaches are targeted at providing financial
incentives to countries to maintain their forests and switch to more sustainable land use policies.
Several multilateral initiatives, most notably the United Nations Collaborative Programme on
Reducing Emissions from Deforestation and Forest Degradation in Developing Countries (UNREDD) and the World Bank’s Forest Carbon Partnership Facility (FCPF), have been recently
established to assist countries in developing national REDD strategies as well as trialling
incentive structures for REDD projects (FAO, UNDP & UNEP, 2009; FCPF, 2009). The FCPF
in particular would be experimenting with sector-wide carbon financing by crediting REDD
projects and trading them within the carbon markets (FCPF, 2009; Redman, 2008: 36). However,
critics have expressed concerns with involving markets into REDD initiatives given their
opportunities for abuse by commercial actors, notably logging companies and investors, at the
expense of indigenous and forest dwelling communities who rely on forests as their source of
livelihood (ibid; see also Bretton Woods Project, 2007: 1).
48
Additionally, the complexity of carbon market structures and the use of sophisticated financial
instruments, such as derivatives (futures, forward contracts, options contracts), in the trading of
carbon finance means that complex regulatory structures would have to be developed in order to
supervise the operation of carbon markets and to monitor associated financial instruments which
would raise administrative costs and require some degree of technical expertise (Clifton, 2009: 5;
13 – 14; UN-DESA, 2009a: 161). Without adequate regulatory frameworks for mitigating market
failure in this area and the increasing involvement of commercial investment banks and
speculators in carbon trading, there is a significant risk that carbon trading ‘will develop into a
speculative commodity bubble’ that could provoke another financial crisis similar to the recent
global financial crisis (Clifton, 2009: 5; 13 – 14; Jones and Edwards, 2009: 27 – 28). The impact
of such a failure will not just adversely affect the adaptive capacity of LDCs but also hamper
their socioeconomic development efforts.
Secondly, similar regulatory and institutional concerns have been raised vis-à-vis the use of
private equity markets as a source of climate financing and the delivery of climate change actions
through private sector actors. On the first issue, significant incentive structures42 would have to
be established by host governments in order to attract investments, for shifting towards green
technology and low-carbon energy use as well as for building climate resilience, both for foreign
direct investment (FDI) and for portfolio investment (UN-DESA, 2009a: 166). Given that ‘FDI
tends to lag rather than lead economic growth’ and that portfolio investment is reliant on the
availability of ‘climate accountable financial instruments’ and a relatively sophisticated regulatory
framework (ibid: 166 – 167), these options are often closed to many LDCs whose policy and
institutional environments do not facilitate such investments. Nonetheless, where LDCs have
been encouraged to secure such funding, domestic investment regimes may have to be
restructured to accommodate the needs of private investors, including the favourable tax regimes
for foreign investors and the removal of discriminatory industrial subsidies for domestic
industries. This may have an adverse effect not only on the countries’ overall policy space but
also ultimately on their fiscal and technology transfer benefits from such investments (see
discussion in section 3 (c)).
Reliance on market-based mechanisms to meet the adaptation challenge in LDCs must also be
treated with caution for the same reasons. Various studies have demonstrated that the private
sector is incapable to delivering such public services at competitive prices and with
comprehensive coverage as private actors are driven by different concerns. As the UN-DESA
notes: ‘In the absence of effective regulatory, policy and institutional frameworks, the record of
the private sector when it was left with providing the required financing, particularly to utilises
and essential services such as energy, has not been a satisfactory one’ (UN-DESA, 2009a: 171). It
is therefore questionable whether private sector instruments, such as disaster risk insurance and
weather derivatives at national, local and household levels (see UNEP FI, 2009: 18 – 20), are
appropriate tools to replace governmental adaptation measures and public investment in this
area. Although proponents for such instruments argue that they transfer adaptation risk to the
market, the premium for such moves in the long-term may prove financially disadvantageous to
LDCs compared with upfront investment in adaptation measures.
It follows that one of the main underlying concerns with market-based solutions to the climate
challenge, especially for LDCs, is that private investment and private sector participation often
According to the UN-DESA: ‘To accelerate private investment in mitigation, policymakers and public authorities
will need to apply incentives through regulatory frameworks, subsidies, guarantees and the financing of incremental
costs of switching technology, among other policy instruments’ (UN-DESA, 2009a: 169). These are difficult
requirements for LDCs to achieve given their lack of technical competence and institutional capacity as well as
financial resources to put such frameworks in place.
42
49
needs to be underwritten by significant public subsidy and state-backed guarantees as well as
being accompanied by a strong governmental role regulating the obligations of private actors. As
recent experience with the global financial crisis has demonstrated, the state is often called upon
to bail out the private sector if it fails to provide the goods and services and this failure risks
undermining national interests. Current initiatives for private sector financing and market-based
instruments effectively transfer climate change risks to the state. Redman, for example, points
out that many of the carbon finance projects supported through the World Bank’s carbon trust
funds have ‘crafted the rules of the investment game in a way that deflects financial responsibility
back onto trust fund donors, developing country project sponsors and the communities in which
the projects take place’ so that host governments and local project sponsors assume the risk of
failure if the projects do not generate the requisite offset credits promised (Redman, 2008: 37).
These are financial and environmental risks that LDCs can ill afford given their acute
vulnerability to climate change and the urgency of the climate challenge in these countries today.
6.
Towards A New International Agenda for Financing Climate Change Adaptation
and Mitigation in LDCs
a)
Equitable Framework and Compatibility with Global Climate Change Regime
The design of any international architecture to support climate change financing must be based
on the legal, moral and ethical principles of equity, justice and human rights and must be
consistent with the principles and legal obligations of the multilateral climate change regime, that
is, under the auspices of the UNFCCC (see sections 3 and 4). In order to fulfil the principles of
equity and common but differentiated responsibilities, the international community must
recognise the culpability of those who are primarily responsible for the crisis and the
vulnerability of those who bear the greatest burden of adjustment to the crisis. This means
framing international support mechanisms for climate change adaptation and mitigation based
on four critical criteria: a) equity and appropriate burden sharing; b) accountable, transparent and
representative governance; c) policy coherence with international trade and financial regimes and
national development strategies; and d) sustainability and predictability of financing.
The main premise of international support mechanisms for financing climate change must be
that of equity and this first criterion requires a consideration of two objectives which should
underpin financial flows and transfers of technology to developing countries, notably LDCs:
restitution and redistribution. A focus on these two objectives would be a significant shift
towards decoupling climate financing from the problematic framework of ODA as its basis. The
first objective reflects the historical contribution of developed countries to the climate crisis and
seeks to compensate developing countries for the adverse effects of climate change. This is
based on the ‘polluter pays principle’, a principle of international and municipal environmental
law which stipulates that those who caused environmental pollution and degradation must
compensate those adversely harmed by it (see discussion in section 4(a)).
The second objective seeks to redistribute both: a) the proceeds from the aforementioned
harmful activities; and b) the remaining carbon budget of the planet in an equitable manner. This
means that the creators and, often the beneficiaries, of patterns of production and consumption
which have caused global warming must redistribute the proceeds of their development based on
such pollution to those who have not created nor benefitted from this high carbon footprint.
Additionally, given that the current capacity of the earth to absorb carbon without catastrophic
consequences is also finite, the remaining atmospheric space must be shared equitably, meaning
that priority must be given to countries and communities which still require their use to meet
economic and human development needs.
50
In meeting this criteria, international support mechanisms must reflect the objectives, principles
and decisions made within the multilateral climate change regime, the UNFCCC, in recognition
of its role as the only international forum for climate change negotiations with near universal
membership. This would not only include framing financial support in accordance with the
aforementioned principles of equity and common but differentiated responsibilities established
in Article 3(1) of the Convention but also ensure that the policies and practice of bilateral and
multilateral funds established for climate change purposes are consistent with the norms – legally
binding or otherwise – of the UNFCCC. International financial support for climate change
should also take into account the obligations under Articles 3(2), 4(4), 4(8) and 4(9) of the
Convention to support developing countries that are particularly vulnerable to climate change
and those bearing a disproportionate or abnormal burden, including LDCs (see discussion in
sections 3(3) and 3(3)).
In ensuring that international support mechanisms are not incompatible with the fundamental
principles of the UNFCCC, climate finance must be therefore additional to existing
commitments for official development financing and must not impose new conditionalities on
recipient countries, particularly those which may impact on obligations of developed and
developing countries within the UNFCCC and the Kyoto Protocol. This means a strict
adherence to the provisions of Article 4(3), 4(5) and 4(7) of the UNFCCC (see sections 4(2) and
4(3)). The need for additional funding also raises questions about the modalities of climate
financing and in the case of LDCs, financing should not impose further financial responsibilities,
notably loans which will raise the debt burden of these countries.
In order to facilitate compliance with the global climate change regime and given that the
UNFCCC remains the only international framework for multilaterally negotiated rules on climate
change regulation, it is argued here that the majority of climate financing should be placed within
the organisation. It is only when funds are located within the policy and institutional framework
of the treaty and under the direct authority and guidance of the parties to the Convention, that is
the COP, can financial flows be monitored for the purposes of implementing the provisions of
the Convention (see discussion below). On this note, attempts to shift towards a parallel climate
framework for long-term cooperative action on climate change, as envisaged by proponents of
the Copenhagen Accord, should be resisted as many of the provisions of the Accord are
inconsistent with the agreed commitments under the Convention (South Centre, 2010: 3).
b)
Accountable, Transparent and Representative Governance
Governance is a crucial component in designing an equitable framework to support international
climate change financing. As this paper has demonstrated, many of the deficiencies with the
current architecture of climate financing stem from the fragmented and unrepresentative nature
of in which climate funds are administered and regulated. The conflicting and overlapping maze
of bilateral and multilateral funds with differing objectives and modalities for financing multiple
climate change initiatives in developing countries have contributed to the inefficiency in the
mobilisation and utilisation of scarce resources (see discussion in sections 4(b) and 5).
This is compounded by the asymmetrical structures of decision-making governing most of these
funds, leading to developed countries and international financial institutions serving effectively as
gatekeepers to funding urgently required by developing countries, especially LDCs. The
governance deficit within this architecture has led to financing being disbursed through means
and mechanisms which do not reflect the needs and priorities of recipient countries and which
impose greater burdens, both financially and administratively on these countries. Representative
51
governance structures giving equal voice to recipients as well as financier countries are also
critical for identifying and tackling the scope and scale of challenges facing developing countries
in the context of climate change as well as in light of their economic and human development
needs.
Any legitimate effort to reform the current architecture for climate financing must therefore be
placed within a cooperative framework providing for adequate representation for both
developed and developing countries and establishing clear guidelines for accountable and
transparent supervision of financial flows related to climate change adaptation and mitigation.
Developed countries must be accountable for meeting their commitments, whether made within
the UNFCCC or outside it and developing countries must be correspondingly accountable for
the use of financial resources committed. More importantly, it is imperative that a system of
monitoring and reporting be put into place to map the myriad of financial flows so that these
flows are measurable, reportable and verifiable in the context of developed countries’ obligations
under the UNFCCC. Financial flows through various channels need to be recorded and verified
in a systematic manner to enable compliance with Convention obligations and implementation
of COP decisions to be tracked and monitored.
In this manner, developing countries’ calls that the UNFCCC’s financial mechanism serve as the
central vehicle through which scaled-up financing is channelled to developing countries must be
given serious consideration. Towards this end, if implemented, the G77 and China’s proposal
that a new financial mechanism be established under the UNFCCC and that any funding pledged
outside the Convention should not be regarded as fulfilment of developed countries’ obligations
under Article 4(3) of the UNFCCC (G77 and China, undated: 1; see discussion in section
5(b)(iii)) would stem the proliferation of funds and prevent further fragmentation of financial
resources. The proposed new financial mechanism operating under the authority and guidance of
and fully accountable to the COP, would mean that financing would be placed within a much
more representative decision-making and accountability structure and make financial resources
compliant with the provisions of the UNFCCC (ibid).
The establishment of a new financial mechanism under the Convention would not negate the
establishment of funds outside it but will reduce the incentives for developed countries to do so
and encourage them to enhance the capacity of the financial mechanism to better ‘handle the
potential financial flows and associated administrative and logistical matters’ (South Centre,
2009a: para 20). It will also strengthen the link between financial resources and developing
countries’ commitments under the Convention as well as scaling up implementation of assistance
to LDCs and other vulnerable states while reducing the possibilities for double-counting and
mixing of ODA and climate financing (ibid: para 27 – 29).
At the same time, should developed countries choose to channel financing outside the
Convention, these funds would also have to be designed with similar governance arrangements
in mind so as to ensure that developing countries’ priorities are represented first and foremost
above developed countries’ interests and foreign policy objectives. Should funds be delivered via
multilateral institutions, such institutions should also ensure that the access and operational
policies relating to climate-specific financing should be consistent with the principles and
decisions undertaken in the UNFCCC and the Kyoto Protocol and their operations be subject to
COP oversight.
c)
Policy Coherence with International Trade and Finance Regimes and National
Development Strategies
52
As discussed extensively in this paper, LDCs are highly susceptible to the adverse effects to
climate change and lack the capacity to transit towards more sustainable economies on account
of their multiple vulnerabilities, existing structural weaknesses and external economic constraints.
Consequently, for these countries (and developing countries in general), climate change finance
policy must be integrated within a wider development strategy, both nationally and
internationally. There needs to be a holistic and integrated approach to climate change regulation
and adaptation which is also geared towards tackling the source of their vulnerability to climate
change and structural and external constraints on their ability to bridge the financing gap.
Inasmuch as the mobilisation, administration and delivery of climate finance needs to be
coordinated, so too do the funded strategies and measures need to be integrated. The current
haphazard approach to climate change adaptation and mitigation measures, particularly in LDCs
where the challenge is most keenly felt, can only at best bring about incremental change and is
reactive rather than proactive in delivering the changes necessary to confront the climate
challenge. The UN-DESA has proposed an alternative approach to tackling climate change by
shifting away from existing policy approaches to economic and human development and
building up climate resilience by through ‘realizing higher levels of socio-economic development’
(UN DESA 2009a: 80 – 81). This link between development strategies and climate change policy
is crucial for LDCs as removing structural obstacles to their economic and human development
would assist in reducing their vulnerability to climate change and contribute towards meeting the
broader challenge of transiting towards a carbon-constrained economic reality.
However, as also extensively discussed in this paper, LDCs are unable to realise these
developmental objectives without international support and cooperation. This includes not just
support in climate-related arenas but also in other international regulatory regimes, such as trade
and finance. International economic rules and governance mechanisms which constrain the
capacity of LDCs to utilise the policy tools available to them domestically to overcome their
economic and institutional vulnerabilities would need to be assessed in light of their impediment
to countries’ adaptive capacity and ability to shift towards a sustainable growth path. Regard
should also be paid to obligations that require financier countries to take fully into account the
economic and social development and poverty reduction priorities of developing countries and
in this respect, finance provided should not undermine these priorities (see Article 4(7) of the
UNFCCC).
Consequently, international support mechanisms for climate financing should be designed to
address the multiple stresses that LDCs face in meeting the multiple challenges of climate
change, economic and social development and not to exacerbate such pressures through the
imposition of more onerous conditionalities or by reducing financing of non-climate-related
development investments. The proposed decoupling of ODA from climate financing made in
this paper should not mean that ODA should be reduced in non-climate-related areas or that
climate change should not be taken into account when mobilising or disbursing other forms of
ODA As mentioned previously, a significant amount of resources is needed just to climate-proof
existing development projects and investments in developing countries and these needs would
have to be met. Meeting developmental challenges would be much more difficult given the
unpredictability of climate impacts and these must be factored into the design of any vulnerable
sector of the economy financed by mainstream ODA.
Climate exigencies should also be taken into account when considering LDCs’ compliance with
other rules of international economic law, including their obligations under bilateral and
multilateral trade and investment regimes. Crucially, the rights of LDCs and other developing
countries to utilise flexibilities within trade, investment and intellectual property rights regimes,
53
including the right to suspend their obligations under respective treaties, should be respected.
Where international economic rules are strict and binding, climate change should constitute a
legitimate e reason to revisit these rules and if necessary, to renegotiate them in light of the
urgency of the climate challenge in the context of LDCs and other vulnerable states.
d)
Sustainability and Predictability of Financing
The most crucial element in crafting a new agenda for international financial support to tackle
climate change in LDCs is the sustainability and predictability of financial resources. Given the
scale of the financing challenge, it is critical that international climate financing is sufficiently
adequate and that these financial flows are sustainable and predictable. As discussed in section
2(c), LDCs are inherently more susceptible to economic shocks due to their dependence on
primary commodity markets and low-skill manufactures as sources of income. Additionally, they
are also highly reliant on ODA and oil-importing LDCs face further vulnerability to fluctuating
oil prices. The requirement for a stable source of climate finance to buffer the unpredictable
impacts of climate change and shift to climate-friendly economic investments is therefore more
pressing for these countries.
For LDC, public financing would have to serve as the bulk of financing for climate-related
activities as it represents a much more stable and predictable source of finance. The need for
strong governmental action to operationalise a strategic and integrated climate policy also means
that such financing must primarily be channelled through the state in these countries, both to
shore up the capacity of the state to respond to the climate challenge and also to ensure that
climate actions do not disrupt wider developmental objectives. Instruments used to deliver
climate financing must therefore be geared primarily towards public investment and the
development of public services. There should also be targeted and enforceable financial
commitments by developed countries in this regard, such as a defined budgetary contribution to
climate financing (see discussion in section 5(a)(i)) on the part of developed countries, and
compliance with these targets.
In terms of the provision of international public financing to LDCs, again it is imperative that
international support mechanisms for climate financing move away from the ODA framework as
a basis for financing. Using ODA to fund climate change activities can result in budgetary
uncertainty and compromise the ability of LDCs and donors to separate climate finance from
other development needs. ODA also subjects climate-related financial flows to the same
limitations of aid flows, including the lack of compliance with commitments, lack of coherence
and inherent problems of conditionality (see discussion in section 5(b)). LDCS already face
significant political and economic pressures of complying with donor policy prescriptions due to
their dependency on ODA as a source of government revenue. To impose link ODA with
climate financing would further inhibit their ability to negotiate with bilateral and multilateral
donors, especially IFIs, on other finance matters. Where ODA can play a role – that is in
delivering finance for existing developmental challenges such as meeting the MDGs – developed
countries should be required to honour financial commitments already made in the multilateral
fora.
Although there is a role for the market – in terms of mobilising additional resources as well as in
providing climate-related goods and services – market-based solutions cannot form the bulk of
the LDCs’ response to climate change financing and the international community should support
this approach. Where market-based solutions are harnessed, it must be accompanied by strict
regulatory and institutional safeguards to ensure that the risk of market failure is minimised if not
eliminated. LDCs cannot be made to absorb the risks posed by reliance on unpredictable and
54
unsustainable forms of financing climate change action (see discussion in section 5(b)(iv)).
Instead, where market instruments are used to supplement public financing, priority should be
given to more predictable mechanisms, such as carbon taxes, over more volatile instruments,
such as carbon trading. Initiatives such as levies on international aviation and shipping or using
proceeds from an international currency tax should be explored as alternatives to carbon finance
as a source of revenue for developing countries, particularly LDCs.
7.
Conclusion
Finance is central to the global fight against climate change, both in designing and implementing
appropriate adaptation strategies as well as mitigating future GHG emissions to prevent global
warming. The scope and scale of such financing is substantial and international cooperation is
sorely needed, particularly in the context of assisting least developed countries and other
vulnerable states cope with the adverse effects of climatic changes. Finance is also integral to
securing any future global deal on climate change regulation and climate change governance as
mitigation efforts by LDCs and other developing countries can only take place when supported
by financial and technological support from developed countries who are historically responsible
for the climate crisis and who possess the higher capacity to provide such resources. For the
international community to effectively tackle climate change there must be adequate and
responsive international support mechanisms through which financial and technological
resources are channelled to LDCs and other developing countries to support their adaptation
and mitigation efforts.
As this paper has extensively discussed, LDCs, like most developing countries, do not currently
possess the financial resources, technological capacity and institutional frameworks to support
the measures for a large scaling up of investment in carbon-friendly economic activities and
building up climate resilience ‘at a speed commensurate with the urgency of climate challenge’
(UN-DESA, 2009a: v). Their ability to generate such financial resources and develop the
requisite technological and institutional capacity without international support is also limited
given their structural constraints and failure of the international community to honour existing
commitments to finance in these and other areas of international development (see ibid). This
gap needs to be bridged urgently and effectively.
However, the critical issue at stake is not just a question of much money is committed to meet
the financing needs of LDCs but also how that money will be mobilised and through what
channels it is administered and disbursed. Additionally, there are questions of what strategies
should international climate financing should support to generate the most efficient and effective
returns. As the UN-DESA maintains: ‘The key issues with regard to finding the right financing
framework are: first what measures will be most effective in both mobilising the required amount
of resources and steering investments in the desired direction; and second, how the costs should
be distributed across nations and populations’ (UN-DESA, 2009a: 152). Thus, the efficacy of
financial resources to shore up their adaptive capacity and transit towards a more sustainable
growth path will depend largely on the design of international support mechanisms for climate
financing.
A key element in the new agenda for international climate change financing has to be a
movement away from an aid-based framework of financing towards a more equitable partnership
reflecting the respective rights and responsibilities of the international community vis-à-vis the
cause and effects of climate change. Towards this end, the original political and legal compact
established by the United Nations Framework on Climate Change (UNFCCC) based on the
wider international consensus on sustainable development achieved at the Rio Summit in 1992
55
must form the basis of current and future discussions on climate financing. Any attempt to
reinterpret the basis of this compact and shift the balance of obligations between developed and
developing countries must be resisted on grounds of climate equity and justice.
56
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