Policy commentary

Climate Negotiations and International Finance

Feb 7, 2011 | Nigel Purvis, Kurt Stephenson

At the United Nations climate negotiations in Cancun in 2010, developed countries officially pledged $100 billion per year by 2020 in climate finance to developing countries, and a Green Climate Fund was established to oversee a significant portion of the financing. What is the significance of these developments and what major challenges remain?

One major area of progress at the last round of global climate talks, held in December 2010 in Cancun, Mexico, was the official adoption of a climate finance pledge by developed countries to mobilize $100 billion per year by 2020 in public and private funding for mitigation and adaptation in developing countries. A second was the establishment of an international “Green Climate Fund” that is expected to deliver a significant portion of this financing, which so far has mostly flowed through bilateral foreign assistance programs and multilateral development banks, like the World Bank.

While climate finance has been an important part of several prior United Nations climate negotiations, what happened in Cancun marks the first time a concrete number has been officially agreed on by all participants in the negotiations. Indeed, climate finance is one of the primary diplomatic tools at the disposal of developed countries for spurring action by developing countries and progress in climate negotiations. With this kind of support, developing countries can achieve green growth and emissions reductions by deploying clean energy, improving efficiency, reducing deforestation, and adapting to climate impacts.

Developing countries, however, see climate financing primarily from an equity standpoint. They believe that the largest historical emitters, developed countries, have the responsibility to assist them because of their disproportionate contribution to the climate problem. International climate finance—flows from the global North to the global South—reduces the cost of action in developing nations in ways that accelerate solutions and make outcomes fairer.

In the past, developed countries have conditioned international financial support for developing nations on the successful conclusion of new international climate agreements. In the 2009 Copenhagen Accord, developed countries pledged to mobilize $100 billion per year by 2020 only if a global agreement could be negotiated. The breakthrough came in Cancun, where enough progress was made in other areas of the negotiations for developed countries to formally include this pledge in the conference’s outcomes. This step gives the $100 billion pledge official status as a part of the ongoing negotiations towards a new global agreement.

In exchange for this pledge, developed nations sought concessions from developing nations regarding “transparency,” the official shorthand for measurement, reporting, and verification. Their goal was for developing nations to provide enhanced reports on their greenhouse gas emissions and actions to reduce emissions, and be willing to discuss those reports with the international community. Only when developing nations agreed to these enhanced transparency procedures was the agreement on financing able to move forward.

In addition to achieving diplomatic objectives, by helping developing nations finance these reductions, developed nations can also help reduce the overall economic cost of achieving national and global emissions reduction targets. This is evident in analyses of recent cap-and-trade proposals by the U.S. Environmental Protection Agency, which consistently found that allowing international offsets—a form of climate finance—substantially reduced the cost of these proposals.

Beyond Transparency

The Cancun agreement on finance represents an important step forward but unresolved questions remain about where the money will come from and where it will go. While some international climate funding is flowing now even before the new climate agreement is finalized, it is nowhere enough to meet the Cancun pledge of $100 billion. To date, donor governments have made concrete pledges totaling $9 billion per year for the period 2010–2012. Norway, with a population of only 5 million, has shown great leadership by negotiating separate pay-for-performance bilateral agreements with Indonesia and Brazil, worth over $1 billion each, to help two of the world’s largest emitters reduce their deforestation.

Moving forward, developed countries will need to figure out how they are going to increase these modest sums toward their share of the $100 billion pledge and make the political case domestically that these investments are worthwhile during a time of concern about budget deficits. Also, there has been some disagreement over what investments would be counted toward the $100 billion. For example, there are concerns that offsets such as those in the EU Emissions Trading System could be counted toward mitigation pledges by both developed and developing countries, obscuring progress on global emissions targets. New sources under consideration include fees on fuels used in international civil aviation and shipping, and increasing World Bank and other development bank lending for clean energy.

The first major question is where will the money go? At a basic level, climate finance can support a broad range of projects. In the energy sector, climate funds are going toward the higher upfront and ongoing costs of renewable energy projects compared to traditional fuels, through mechanisms such as the World Bank’s Climate Investment Funds. Support is also flowing to a diverse range of climate-friendly activities, such as programs to deploy compact fluorescent light bulbs in Bangladesh, build the capacity of domestic energy service companies in China, and introduce bus-rapid transit systems to new countries.

In the forest sector, financing could be dedicated to building institutional capacity to implement forest-sector policy reforms or developing deforestation measurement and monitoring systems, or be delivered as direct payments based on emissions reductions achieved.

Financing for climate adaptation also serves a variety of needs, including the protection of urban areas from rising sea levels, the development of flood- and drought-resistant crops, and the creation of new insurance products that could help protect vulnerable people from an increased rate of natural disasters that some expect will come with rising temperatures.

The next question is how will the money be allocated? In some cases, a country may provide financing for certain types of projects in other countries. The “pay-for-performance” approach included in the Norway-Indonesia and Norway-Brazil agreements is a relatively new model for delivering climate financing, with the funding flowing from government-to-government only after deforestation and emissions actually decline. In other cases, private organizations could contract with one another to provide financing for an emissions reduction or abatement. A third possibility is that a centralized institution would receive investments and choose projects in which to invest.

Finally, how will countries ensure funding is spent efficiently and effectively? This will be essential both to maintaining political support for funding in developed countries and for getting the largest emissions reduction impact for a given amount of financing. Institutions that currently deliver climate financing—including bilateral foreign assistance programs and international development banks—currently follow their own standards for reporting and measuring outcomes. The Cancun Agreements called for the development of common reporting frameworks on international climate finance for the international community, with specifics to be fleshed out over the coming year.

Indeed, in 2011 the discussion is likely to focus more on designing the institutional structure for the “Green Climate Fund” that was established in Cancun and the other international processes that create transparency in the delivery of climate finance. The Cancun Agreements created a transitional committee for the fund that is supposed to deliver recommendations on the fund’s design to the United Nations climate change conference in South Africa in the fall of 2011. Countries will grapple with issues such as the nature of membership on the fund’s governance board, the method for developing countries to access funding, and what the types of projects or programs will be prioritized. Debates over fund governance are likely to stretch on for several years, however, potentially delaying the critical task of mobilizing and delivering urgently needed funding.

Nigel Purvis is a visiting scholar at Resources for the Future and president of Climate Advisers.
Andrew Stevenson is a research assistant at Resources for the Future.