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A deep dive into climate finance

Ari Huhtala's picture

What does climate finance really mean? Do we mean dedicated funds mobilized by donors in the carbon market, or do we mean funds actually used for mitigation and adaptation action? Definitions and publications abound, but the Climate Policy Initiative (CPI) has now taken the bull by the horns and launched two initiatives with an attempt to lend clarity. Last week, Director of the CPI Venice office, Dr. Barbara Buchner, was a guest speaker at the World Bank’s Washington DC office.

There have been a plethora of reports on climate finance by UN agencies, IFIs and think-tanks, but by far the most comprehensive attempt is a report The landscape of climate finance, launched by CPI last October. It describes the flows of finance, including the sources, intermediaries, instruments, channels, and end-users. After presenting estimates of current flows based on available data, describing the methodology, and discussing the sources of data, the paper offers recommendations on how to improve future data-gathering efforts.

CPI research suggests that at least US$97 billion is being provided to support low-carbon, climate-resilient development activities, US$55 billion by the private sector while at least US$21 billion comes from public budgets. Most of the flows can be classified as ``investment’’ or more generally including ownership interests.

Intermediaries such as bilateral and multilateral financial institutions play a key role in distributing climate finance - 40% of the total funds are handled by them. Dedicated climate funds channel a small but growing portion of finance (currently US$ 1.1-3.2 billion). A relatively small share, less than US$3 billion, is provided by carbon markets and voluntary/philanthropic contributions.

An optimist might suggest that the total figure is close to the US$100 billion promised by developed countries in the Copenhagen Accord, but life is not that simple. There are the politically sensitive questions of additionality, share of private sector funds of the total, etc.

Another noteworthy, and alarming, finding is the very small share of adaptation (5%) in this total volume of climate finance. Mitigation activities tend to attract more private sector participation, as they offer stronger incentives through established business models. Adaptation, on the other hand, is often a public good and needs to be provided through public sector accounts. Tracking adaptation is complex as it is often an integral part of development finance, but CPI’s report provides strong evidence that a grave imbalance remains to be corrected.

Cooperation between institutions such as OECD DAC, MDBs, UNFCCC, etc. to harmonize tracking methods has begun, and the World Bank is playing an active part in this important work. A valuable contribution will be the effective operationalization of the system of tracking adaptation and mitigation of climate co-benefits in its portfolio, starting July 2012. This will provide transparent data on trends in financial commitments to climate action and hopefully a methodology that also other institutions can build on.

Barbara also introduced the San Giorgio Group, a new working group of key financial intermediaries and institutions actively engaged in green, low-emissions finance led by the CPI and the World Bank Group. Given the scarcity of systematic, ‘on-the-ground’ information, the Group analyzes, through case studies, the role of public finance in supporting the expansion of climate finance. Cases under detailed scrutiny cover a variety of implemented projects including solar water heaters in Tunisia, offshore wind power in Denmark, climate policy lending, adaptation, environmental bonds, concentrated solar power, etc. The ultimate goal of this process is to ensure that the financing of green and low-emission development becomes more than just a marginal phenomenon.

Developing countries expect the Copenhagen, Cancun and Durban commitments to be met and developed countries are making efforts to respond. There is an apparent lack of trust in the transparency of figures currently available. The picture of climate finance remains patchy and the lack of comprehensive information on all climate finance elements is an impediment to negotiation, analysis and improvement of financing instruments. This is a good start and will hopefully contribute to increasing trust and transparency.

 

 

Comments

Did CPI mention the Green Climate Fund? Maybe its development came a little too late to include in the analysis. Also, initial lessons in assessing the success of the different (adaptation) funds are already available. For more on the latter, please watch recordings of these Durban side events:http://ow.ly/942IY, and a recent webinar we hosted: http://ow.ly/942G4. Regards, Andrew Moderator, Climate-Eval

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