Climate Finance: Breaking the Deadlock in Climate Change Negotiations?

In December 2009 the Danish capital, Copenhagen, hosted a convention of approximately 45,000 participants including 120 Heads of State and Heads of Government, for the purpose of formulating an international response to the issue of climate change.1 The negotiations took place during the 15th Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC).

One year later - in Cancun, Mexico - 22,000 participants were expected to take part in COP 16. The conference was opened by Mexico’s President, Felipe Calderón, and 13 heads of state and heads of government were present in Cancun.2 The motto of the conference seemed to be ‘little steps at a time’, as if to contrast the failed strategy adopted by the Copenhagen assembly – which attempted to achieve too much at once.3 The central “little step” was presented by, among others, the Prime Minister of Norway, Jens Stoltenberg – the only western head of government present at the Cancun negotiations. Together with Ethiopian Prime Minister, Meles Zenawi, Mr. Stoltenberg served as Co-Chair on the High-Level Advisory Group of the UN Secretary-General on Climate Change Financing (AGF). On November 5th 2010 a comprehensive report on how to mobilise the financial resources necessary to mitigate and adapt to climate change was presented by the AGF. Members of the AGF expressed confidence that the report and subsequent agreements on the nature of the Green Climate Fund proposed in the Copenhagen Accord4 could break the inertia in the negotiations on climate change.5This article will argue that despite the benefits of an agreement on climate finance, mobilising the required financial resources strongly depends on working out a binding agreement on emission cuts in developed countries due to the nature of the proposed sources.

I - The Primary Objective

Financing is only one aspect in the global effort to prevent climate change. As defined in Article 2 of the UNFCCC, the primary objective of the negotiations taking place under the UNFCCC framework is the ‘stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system‘.6There is virtually universal consensus, as exemplified by the latest review of the Intergovernmental Panel on Climate Change (IPCC) that human-generated emissions are responsible for an increase in average global temperatures.7 This variation is estimated to amount to 4.0°C by 2099 but could be limited to 1.8°C, if sufficient action is taken immediately.8

A recent report by Sir Nicholas Stern,9 Head of the United Kingdom’s Government Economic Service, ‘estimates that if we don’t act, the overall costs and risks of climate change will be equivalent to losing at least 5% of global GDP each year, now and forever. If a wider range of risks and impacts is taken into account, the estimates of damage could rise to 20% of GDP or more’.10This calamitous prognosis of the problem is widely shared among the international community. Proposals for solutions and the division of responsibilities, however, continue to be heavily contested. The leading legally binding instrument that regulates emission cuts for individual countries is the Kyoto Protocol, which expires in 2012, and seems to have little prospect of being continued for the time being. Therefore, the contribution of agreements of climate finance to the negotiations on climate change needs to be assessed in terms of their role in the advance of international emission reductions.

II - A Step In The Right Direction

There are four major arguments supporting the idea of climate finance as an important step towards a comprehensive agreement on climate change. Firstly, climate finance plays a key role in propelling forward the domestic industry and technology in developing countries. Fundamentally, albeit not regulated by binding international agreements, climate finance fulfils vital social and economic functions. Secondly, in a similar vein, climate finance as proposed by the AGF, aims for large scale involvement of the private sector not only through carbon market schemes, but also through boosting the economies of developing countries with an injection of direct investment in innovation.11

Thirdly, climate finance provides incentives for developed countries to increase their emission reduction pledges by financing emissions reductions in developing countries in a form of benevolent competition. Many developed countries , along with the European Union, have repeatedly reiterated their intention of increasing their emission reduction targets ‘if other major emitting countries in the developed and developing worlds commit to do their fair share under a future global climate agreement’.12 Thus, an agreement on climate finance schemes, allowing the developing countries to reduce emissions, is likely to result in a palpable increase in the willingness of developed countries to further reduce emissions and thus facilitate the creation of an international incentive mechanism.

Finally, the progress made on climate finance in Copenhagen was characterised as ‘one of the few areas, where despite all procedural and political misgivings, real progress was made’.13 While the international media response to the Copenhagen Summit was generally negative, the agreements on climate finance can be seen as a symbol of partial success that has kept the negotiators in Cancun “in motion“. There is reason to believe that this glimmer of hope, combined with the further agreements reached in Cancun, may be a factor in preserving a moderate sense of optimism for COP17 in Durban, South Africa.

III - A Long Way Left To Go...

Whilst these are important contributions, there is still room for a more critical assessment of how recent climate finance agreements will impact emission negotiations. This can be grouped into two sets of arguments; criticism of the current finance agreements and more importantly, the dependence of climate finance on binding emission cuts.

The Copenhagen Accord spells out the commitment of developed countries to mobilise $100bn per year by 2020 to support mitigation and adaptation action in developing countries through the Green Climate Fund as well as to provide $30bn of ‘Fast Start Finance’ through International Financial Institutions (IFIs) between 2010 and 2012.14As established in the Accord, the above numbers became the reference point for the work of the AGF as well as the Cancun negotiations. However, a comparison to the estimated needs of developing countries quickly shows that the amounts promised are insufficient, even if they could be achieved within the timeframes set in Copenhagen. The Stern Report estimates the costs of combating climate change at 1% of global GDP per year.15 Taking the 2008 data1 into consideration, this means $605bn.

The World Development Report estimates the annual financing requirements for developing countries at $264bn to $563bn by 2030 for mitigation alone.17 There is also the question of whether the amounts promised in Copenhagen are provided additionally to current aid flows or are partially the result of finance redirections.18 In this context, the second point of criticism levelled against the current state of agreements scrutinises the flows channelled through IFIs and multilateral development banks. The governments of developing countries express grave concern as to the proposals put forward by the AGF in relation to the large proportions of climate finance resources channelled through institutions such as the International Monetary Fund (IMF) and World Bank. Apparently, they dread a potential decrease in the level of control to be exercised in the distribution of such funds.19 Finally, the focus on private sources of climate finance in the AGF report is seen by organisations such as the World Wide Fund (WWF) as a potential opportunity for governments of developed countries to reduce the amounts of public finance required from them to meet the Green Climate Fund’s goals.20

Apart from criticism of the finance agreements, the main factor limiting the potential of developed countries to cause a breakthrough in the negotiation process is the inherent dependence of climate finance flows on an international agreement on binding emission cuts. The AGF estimates that international auctioning of emissions allowances and domestic or regional emissions trading schemes could mobilise between $2bn and $70bn by 2020, depending on the volume of the carbon market, the carbon price and the percentage of emission allowances auctioned.21 Additionally, carbon market offsets implemented through structures similar to the Kyoto Protocol’s Clean Development Mechanism could provide $8bn to $150bn, depending on the carbon price as well as on ‘the demand for and supply of emissions reductions commitments, and on carbon market mechanisms.’ 22

While these two methods are by far not the only sources considered in the AGF report, they have the greatest potential to raise the financial resources required to meet the commitments made in the Copenhagen Accord. However, they are also most heavily dependent on binding emissions reductions. Carbon markets operate on the principle that if the amount of emissions is limited in any given country, emissions become an asset that can be traded in a national or international market and taxed by government agencies. This is also recognized by Workstream 8 of the AGF, a subgroup analysing the options for carbon markets: ‘The most important determinant of carbon market flows is the global level of mitigation ambition: higher levels of mitigation ambition are likely to drive higher carbon market flows’.23

Some of the other proposed sources in the AGF report (i.e. private finance leveraged through carbon market offsets and development bank instruments which could deliver between $30bn and $40bn for every $10bn in additional resources) depend on finance raised through the two mechanisms outlined above and thus, by extension, on the levels of emission cuts in developed countries.24 In conclusion, the finance agreements made so far can be seen as a step in the right direction and as a force propelling the negotiations forward. However, especially in light of the criticism of the current state of agreements on climate finance, it is unlikely that the negotiations in Durban as well as during the intercessional conferences in Bonn over the course of the next year will be able to circumvent the need for a comprehensive, binding agreement on emission cuts. This conclusion is mainly dictated by the belief that such an agreement is a prerequisite to financing an adequate response to climate change.

Endnotes

1. United Nations Framework Convention on Climate Change (2009), Meetings Archive, The United Nations Climate Change Conference in Copenhagen, 7-19 December 2009, http:// unfccc.int/meetings/cop_15/items/5257.php (accessed 24.11.2010)
2. The presidents of Bolivia, Ecuador, Georgia, Guyana, Kiribati, Nauru, Palau and South Africa and prime ministers of CAR, Grenada, Norway, Samoa and Vanuatu attended COP16 in Cancun. Source: United Nations Framework Convention on Climate Change, Meetings Archive, http://unfc-cc.int/ resource/docs/2010/cop16/eng/inf01p01.pdf and http:// unfccc.int/resource/docs/2010/cop16/eng/inf01p02.pdf (accessed 05.12.2010)
3. Eckert, W. (2010), ‘Klein-Klein in Cancun‘, Tagesschau.de, http://www.tagesschau.de/ausland/klimakonferenzcancun100. html (accessed 07.12.2010)
4. United Nations Framework Convention on Climate Change (2009), Draft Decision -/CP.15 ‘Copenhagen Accord’, http:// unfccc.int/resource/docs/2009/cop15/eng/l07.pdf (accessed 05.12.2010)
5. Manuel, T. and Stern, A. (2010) ‘Climate finance plan could break talks inertia’, Guardian.co.uk http://www.guardian. co.uk/environment/cif-green/2010/nov/08/climate-financedeal- cancun (ac-cessed 24.11.2010)
6. United Nations Framework Convention on Climate Change (1992) ‘United Nations Framework Convention on Climate Change’ http://unfccc.int/resource/docs/convkp/conveng. pdf (accessed 07.12.2010)
7. Intergovernmental Panel on Climate Change, Fourth Assessment Report: Climate Change 2007, Synthesis Report, http:// www.ipcc.ch/pdf/assessment-report/ar4/syr/ar4_syr.pdf (accessed 24.11.2010), pp. 36-41
8. Intergovernmental Panel on Climate Change, Fourth Assessment Report, p. 45
9. Sir Nicholas Stern was also one of the members of the AGF
10. Stern, N., Review on the Economics of Climate Change, H.M. Treasury, UK, October 2006, http://www.hm-treasury.gov.uk/ stern_review_report.htm (accessed 24.11.2010), Summary of Conclusions, p. vi
11. United Nations (2010), Report of the Secretary-General’s High Level Advisory Group on Climate Change Financing http://www.un.org/wcm/webdav/site/climatechange/ shared/Documents/AGF_reports/AGF%20Report.pdf (accessed 24.11.2010) p. 8
12. European Commission (2010) ‘What is the EU doing on Climate Change?’ http://ec.europa.eu/clima/policies/brief/ eu/index_en.htm (accessed 07.12.2010)
13. Schalatek, L., Bird, N. and Brown, J. (2010) ‘Where’s the Money? The Status of Climate Fi¬nance Post-Copenhagen’, Climate Finance Policy Briefs http://www.boell.org/downloads/ HBF-ODI_ClimateFinace_Post-Copenhagen_WhereIsTheMoney. pdf (accessed 24.11.2010)
14. United Nations Framework Convention on Climate Change (2009), Draft Decision -/CP.15
15. Stern, N., Review on the Economics of Climate Change, Summary of Conclusions, p. vi
16. World Bank, Gross Domestic Product 2008, World Development Indicators Database, 19 April 2010, http://siteresources. worldbank.org/DATASTATISTICS/Resources/GDP.pdf (accessed 24.11.2010) p. 4
17. World Bank, World Development Report 2010: Development and Climate Change, http://siter-esources.worldbank. org/INTWDR2010/Resources/5287678-1226014527953/ WDR10-Full-Text.pdf (accessed 21.11.2010), p. 260
18. Schalatek, Bird and Brown (2010) ‘Where’s the Money?’ and Maxwell, S. (2010) ‘Climate Change: Going beyond the Politics in Climate Finance’, eGovmonitor, http://www.egovmonitor. com/node/39653 (accessed 06.12.2010)
19. Marston, A. (2010) ‘World Bank drawing in Climate Funds?’, Bretton Woods Project http://www.brettonwoodsproject. org/art-567228 (accessed 06.12.2010) and Schalatek, Bird and Brown (2010) ‘Where’s the Money?’ p. 3
20. World Wide Fund for Nature (2010) ‘ Don’t pass climate finance to private sector’ http://wwf.panda.org/wwf_ news/?194735/Dont-pass-climate-finance-back-to-privatesector (accessed 07.12.2010)
21. United Nations (2010), Report of the Secretary-General’s High Level Advisory Group, p. 22
22. United Nations (2010), Report of the Secretary-General’s High Level Advisory Group, p. 27
23. United Nations (2010), Report of the Secretary-General’s High Level Advisory Group on Climate Change Financing, Work Stream 8, http://www.un.org/wcm/webdav/site/ climate-change/shared/Documents/AGF_reports/Work_ Stream_8_%20Carbon%20markets.pdf (accessed 25.11.2010) p. 1
24. United Nations (2010), Report of the Secretary-General’s High Level Advisory Group on Climate Change Financing http://www.un.org/wcm/webdav/site/climatechange/ shared/Documents/AGF_reports/AGF%20Report.pdf (accessed 24.11.2010) p. 6.