Climate finance and its impact on post-205 international development cooperation

The UN Conference on Sustainable Development in Rio de Janeiro, Brazil in June 2012 (Rio+20), called for Sustainable Development Goals (SDGs) in international development cooperation after 2015. The contents of the SDGs and their relationship with the Millennium Development Goals (MDGs) are still being widely debated under the auspices of the United Nations (UN). However, the concept of sustainable development first appeared in the 1980s, and the emergence of the SDGs is not a theoretical innovation but a new effort aimed at taking advantage of existing theories for guiding new practices. Under the conditions of rising tensions between environmental protection and economic growth, the essence is how to find a new golden balance. The threat of climate change is the biggest global environment challenge we face today and intensifies the conflicts between development and the environment to an unprecedented level. This is also the most important reason that drives the revival of the sustainable development concept. The upgrading of the MDGs – that focus on poverty reduction – to SDGs takes a more comprehensive perspective. The issue of climate change is fundamentally about development: how to integrate the governance of the two is the key challenge for post-2015 global development cooperation.

The rising tension between the environment and development brought about by the climate change threat is also reflected in the financing aspect. How to balance and coordinate climate finance and development finance will be an important issue for international development cooperation after 2015.

However, there is not yet an internationally agreed definition of climate finance. Broadly speaking, climate finance includes resources that catalyse low-carbon and climate-resilient development by covering the costs and risks of climate action, supporting an enabling environment and capacity for adaptation and mitigation, and encouraging research, development and deployment of new technologies (IMF et al. 2011). However, public climate

Yu Ye

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

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financing for developing countries has caught most attention in the literature on global climate politics, though the key for the design of any climate fund mechanism is to ensure that scarce public funds will be used in leveraging private funding (De Nevers 2011). According to the World Bank, the annual cost for mitigation in developing countries will average USD 140-175 billion by 2030 so as to contain global warming to less than 2 degrees Celsius by the end of this century. In addition, the annual resource demand for adaptation is expected to be USD 30-100 billion. However, currently developing countries are only receiving about 10 billion USD for climate finance every year (World Bank 2010). The sharp increase in demand for climate finance is set to bring competition with traditional development finance.

At the same time, global climate finance architecture is becoming increasingly fragmented (Nakhooda / Watson / Schalatek 2013). Both developing countries and developed countries have incentives to set up vertical climate funds, separate from traditional development finance, which has in effect resulted in the isolation of climate and development governance that is harmful for both the climate and development. Firstly, developing countries have been seeking external climate financing that is separate from official development assistance (ODA). The United Nations Framework Convention on Climate Change (UNFCCC) of 1992 stipulated that developed countries are obliged to provide “new and additional” resources for the “full incremental costs” borne by developing countries. Developing countries are of the opinion that climate finance is an ‘entitlement’ that they deserve instead of ‘aid’ or charity (WRI 2009). In order to differentiate climate finance and ODA, the UNFCCC established special climate funds, such as the Global Environment Facility (GEF) Phase I and Phase IV; the Special Climate Change Fund (SCCF); the Least Developed Countries Fund (LDCF); the Adaptation Fund (AF); and the newly established but not yet operational Green Climate Fund (GCF). These funds initiated a series of innovations in governance structures so as to empower developing countries in the allocation of resources. For example, the AF’s Executive Board makes decisions based on a ‘one-member-one-vote’ rule while developing countries hold the majority of the 16 seats.¹ This is a breakthrough, compared to the existing multilateral development agencies such as the World Bank.

1 UNFCCC Decision 5/CMP.2, Adaptation Fund, FCCC/KP/CMP/2006/10/Add.1, para.3;

UNFCCC Decision 1/CMP.3, Adaptation Fund, FCCC/KP/CMP/2007/9/Add.1, paras. 6, 12

Besides, the AF has created the mechanism of ‘direct access’, which means recipient countries can directly apply for the resources of AF and do not have to go to a third party, that is, implementing agencies such as the World Bank, UNDP (United Nations Development Programme) or UNEP (United Nations Environment Programme), as is the case with GEF.²

Secondly, developed countries also tend to strengthen climate aid including setting up special climate funds so as to meet the demands from some environmental NGOs for more measures to combat climate change and showcase their fulfilment of international responsibilities in providing financing as well. Relevant departments can also bargain for more budgets for themselves by having more resources for climate. While the climate funds under the UNFCCC have secured power for developing countries, they have weakened the incentives of Western donors to contribute resources.

Donors prefer to deliver their resources for climate purposes through traditional channels that they can keep control of. Countries such as Japan, the United Kingdom, Germany, Norway and Australia have established their own bilateral climate funds. They have also initiated vertical climate funds under multilateral development agencies, such as the Climate Investment Fund (CIF) under the World Bank. They can secure more influence over the allocation of resources under these Western-dominated multilateral agencies compared to those funds under the UNFCCC. In addition, donors also contribute to recipient countries’ national climate funds, for example, the Indonesia Climate Change Trust Fund, the Amazon Fund of Brazil, and the Bangladesh Climate Change Resilience Fund. Despite all these new funds and initiatives, OECD countries are facing sharp criticisms for their under-performance in climate-financing duties. On the one hand, their contributions on climate are still calculated as ODA, instead of ‘new and additional’ to their existing ODA, not to mention that the targeted 0.7% ratio of ODA in relation to gross national income (GNI) has never been fulfilled by most donors. On the other hand, too little money has been channelled through the UNFCCC. The four climate funds under the UNFCCC (i.e. the GEF Phases I and IV, SCCF, LDCF and AF) only received a little more than USD 2.7 billion, covering 9.1% of the total climate funds in the world, in which the most innovative AF only received 0.4% of the total.³

2 UNFCCC Decision 1/CMP.3, Adaptation Fund, FCCC/KP/CMP/2007/9/Add.1, para.29 3 Author’s calculation based on data: http://www.climatefundsupdate.org/global-trends/

Yu Ye

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

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Comparatively, the size of the CIF under the World Bank reaches USD 6.2 billion, which is larger than the total of all UNFCCC climate funds. The GCF, established after the 2009 Copenhagen Conference, got the support of developed countries. The Copenhagen Accord stated that

...developed countries commit to a goal of mobilizing jointly USD 100 billion a year by 2020 to address the needs of developing countries. This funding will come from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance.⁴

However, the sources of financing are unclear in a world of tight fiscal conditions.

In sum, climate financing is far from being sufficient, and the global climate finance architecture comes increasingly in the shape of dual and parallel structures (Dobson 2011). The essence is about power struggles between donor and recipient countries, as well as competition between climate and other development goals. The negative impact of the separation is clear:

It aggravates the fragmentation of the global development architecture and increases the management costs of recipient countries. According to statistics, climate funds have become the second largest driving force after health with regard to vertical funds. During the 2000s, the total number of climate funds increased 22 % while the funds for climate and the environment in a broader sense increased 49 % (Castro et al. 2009). To some extent, the reallocation of very scarce resources to climate-sensitive areas and sectors will worsen the situation of the core development sectors, such as education and other basic areas in Africa (Brown et al. 2010). The erosion of traditional development finance deserves serious attention. South-South cooperation can fill some gaps, but emerging economies insist on their complementary roles.

From this perspective, the significance of SDGs as the guiding principle for post-2015 international development cooperation lies not only in raising awareness of the environmental and sustainable aspects of economic growth and mobilising more resources for sustainable development, but also in rebuilding mutual trust and coherence of environment and development governance, avoiding the isolation of climate governance, and ensuring the harmonious development of the economy, environment and society.

Looking ahead for post-2015 international development cooperation, all

4 http://unfccc.int/resource/docs/2009/cop15/eng/l07.pdf

stakeholders, including developed and developing countries, private sectors, civil societies and international organisations, need to work together for this. Major powers must assume special responsibilities. The expected UN conference on Financing for Development should address these issues.