No Resolution in Sight for International Climate Finance

 

[[{"fid":"2744","view_mode":"default","fields":{"format":"default","field_file_image_alt_text[und][0][value]":"Flood water","field_file_image_title_text[und][0][value]":""},"type":"media","attributes":{"alt":"Flood water","height":"266","width":"400","style":"float:right","class":"media-element file-default"}}]]Some of the largest battles at November’s United Nations climate conference, COP22, broke out over climate financing – who pays for it, who gets the money, and who meets the requirements.

The stage for the financing challenges was set in 2009 when developed countries agreed to a target of raising $100 billion USD annually by 2020 in the Green Climate Fund (GCF).

However, this financial target was never rooted in an economic analysis that could consider the amount of funds to mobilize, the funds needed to limit warming to 1.5oC, and the funding mechanisms' intersection with potential projects.

Developed countries released a roadmap earlier this year to outline how to meet the overall target. A majority of these funds would be for mitigation projects. These countries are moving forward with raising capital for financing, creating mechanisms to fund projects, and disbursing funds in developing countries.

But this is all being done without an actual analysis of the monetary requirements for the task.

This example is symptomatic of broader tensions within the international climate community. A narrative has emerged that the urgency of climate change is so strong that we don’t have time to analyze what funds are actually needed and whether projects match the purpose. The lack of clear and thoughtful information gathering and processing further indicates the challenges ahead.

The Global Divide between Mitigation and Adaptation

Many of the fights about climate finance reflect the broader philosophical disconnect that exists between developed and developing countries. Disagreements over the allocation of funds to adaptation or mitigation are symptomatic of that disconnect.

Developed countries are willing to fund mitigation projects, as overall emissions reductions are the priority.

Developing countries, on the other hand, have different priorities. As their historic emissions are much lower than those of developed countries are, they want to be able to continue on their development trajectory. Obtaining funding to adapt to climate change is the priority of developing countries.

The split of countries into different groupings shows the relative intractability of the dialogue and demonstrates the challenges making it hard for meaningful cooperation to take root. Compromise at COP22 was elusive. Countries agreed to keep discussing financing at subsequent meetings.

Innovative Financial Mechanisms for Mitigation - Not Adaptation

One of the financial mechanisms discussed at COP22 was the World Bank’s Pilot Auction Facility (PAF). This mechanism funds projects to reduce methane emissions in developing countries. One example would involve capturing methane from landfills or dairy farms.

The projects use an innovative financing mechanism. Credits are competitively allocated based on an online auction. Payment is given when the project meets its emission reduction targets. The auction allows the most cost-effective mitigation projects to be funded because those investors who can buy into the auction have the lowest capital costs.

The World Bank has hosted two online auctions thus far. It plans to scale up the pilot projects. These auctions required initial capital funding of over $50 million from four donor countries. Organizers hope to leverage an equal amount from private financing. 21 projects have been funded by PAF, representing 14.4 million tons of avoided carbon dioxide emissions - which is equivalent to the energy consumption of 1.5 million United States households over one year.

Challenges during PAF’s Expansion

There are challenging questions to answer here. Does the auction process help address the global divide over adaptation and mitigation? Once PAF has been scaled up, will it help solve the challenges of climate financing? Does PAF detract from a holistic approach to climate financing for both adaptation and mitigation?

The pilot projects that have been funded under the PAF have uncovered a number of issues. The auctions were supposed to reveal the true cost of carbon, which includes the negative externalities associated with the combustion of fossil fuels.

However, the cost of carbon in auctions is between $2-3 per ton – nowhere close to the social cost of carbon estimated to be at least $37 per ton. Thus far, the market pricing has failed to bring the market cost of carbon in line with the true price.

Another challenge is the financial barrier to entry. Because companies need to pay upfront to enter the auction, the only entities that can afford to participate are those with dispensable capital. The inevitable exclusion of lower-capital entities exacerbates inequality in the market.

Finally, massive sums of public funds have to be leveraged for the auction to succeed. The dearth of private funds within the climate finance sector is a chief concern.

Purpose Is Critical for Climate Finance

An analysis of the Pilot Auction Facility shows us yet again that purpose is critical. The fundamental divides over the quantity of funding to raise and its allocation between mitigation and adaptation are critical questions that are being perpetuated but never answered.

The global community has not been able to agree upon a solution to this divide and that severely compromises the ability to make meaningful progress in addressing climate change.

The international regime is made up of a lot of different components, but they are not harmonized or evaluated for broader efficiency. We are told that now is the time to act and we must act fast, so we don’t have time to reevaluate the system that we have in front of us.

Fundamental changes to how the international climate finance process works is needed. The flaws in the climate finance system represents problems in separating adaptation and mitigation. And there is no economic analysis to adequately assess the real climate finance needs.

Consensus on values and adoption of a long-term view of the climate problem would help drive cooperation and better leveraging of resources. If we fail to take this approach, the solutions will continue to avoid the root causes of the climate problem.

Join our LinkedIn group to discuss this article. You may also email the author directly using our contact form.