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Climate Finance

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To successfully tackle climate change, a significant amount of funding needs to be secured in the coming years. The launch of the Green Climate Fund and the recent pledges made by the USA and China are promising steps, but much more needs to be done to enable swift and sustained climate action.

Budgeting for climate change, and the role of parliaments and parliamentarians in this process, comes with many challenges.  In addition to issues concerning coordination, reporting and so on, two principal problems stand out. 

Firstly, most countries – and in particular developing countries - are struggling to secure sufficient funding to undertake necessary mitigation and adaptation efforts.  The World Bank puts the cost of combating climate change in developing countries alone at USD 100 billion a year.  While a wide range of financing mechanisms is being made available (see below), the current flow of funds is still too weak to meet the growing needs.  In short: there’s a money problem.

Fair Share: Climate Finance to Vulnerable Countries

Major funding gaps exist where climate action is concerned.  This is especially so for many of the countries most vulnerable to climate change.  Ethiopia’s climate change strategy calls for annual spending of $7.5 billion, but available national budgetary resources are in the range of $440 million per year.  (Eshetu et al., 2014). Uganda’s draft climate change policy is estimated to cost $258 million per year, but here too current public spending sits at around $25 million per year (Tumushabe et al., 2013).

These are two of many examples.  Without significant increases in available climate finance, action on climate change – both adaptation and mitigation – will fall far short of what is needed. 

Source: http://www.agora-parl.org/resources/library/fair-share-climate-finance-v....

Secondly, much of the climate finance that is secured is disbursed directly to implementing agencies and institutions.  This essentially means that these funds are not managed as part of the budget, and are not subject to parliamentary approval or oversight.  While there are good arguments for such ‘direct’ climate finance strategies, the bypassing of parliament erodes public approval and scrutiny of these expenditures.  Not knowing what funds are being disbursed to different departments, or how these funds will be spent, also makes it very difficult for parliament to establish expenditure projections and develop appropriate and effective budgets. 

This section will discuss these issues in more detail, and will outline how parliaments can strengthen their role in climate finance.  First, it will provide an overview of the prevailing climate finance mechanisms that parliamentarians may wish to explore. 

1. Climate finance: finding the money

‘Climate finance’ is an umbrella term used for the wide range of finance mechanisms that provide capital flows in support of low-emission, climate-resilient development and investments.  These climate finance instruments draw on a combination of local, national and international sources of funds and have varying strategies, distribution mechanisms and beneficiaries.  Given the diversity of these funds, navigating potential sources of funding and assessing eligibility requirements is a complex task for any country.  

Coordinating the projects and programmes funded through such climate finance instruments, and ensuring that climate change is tackled in a coherent, strategic manner, is more complicated still. 

To scale up climate finance and to streamline access to these funds, the UNFCCC has created the Green Climate Fund (GCF).  The GCF aims ‘to make a significant and ambitious contribution to the global efforts towards attaining the goals set by the international community to combat climate change.’ It will also ‘provide simplified and improved access to funding, including direct access, basing its activities on a country-driven approach’.  It was formally established at the Durban COP in 2011 and is put forward as the key mechanism to help developing countries tackle climate change.  The original agreement called for a mobilization of USD 100 billion a year by 2020, in a mix of public and private funding.  While targets have not been reached, recent pledges by the USA and China are cause for (cautious) optimism. 

Several large climate finance mechanisms have been in place for some time, some of which can point to significant results.  The main ones are listed below; for a more comprehensive overview of climate finance sources, with detailed information on available funding and eligibility, please visit the Climate Finance Options portal (see below). 

  • The Global Environment Facility (GEF)

The Global Environment Facility is a partnership for international cooperation where 183 countries work together with international institutions, civil society organizations and the private sector, to address global environmental issues. Since 1991, the GEF has provided $12.5 billion in grants and leveraged $58 billion in co-financing to support activities related to biodiversity, climate change, international waters, land degradation, and chemicals and waste in the context of development projects and programs.

  • The Adaptation Fund

The Adaptation Fund was established to finance concrete adaptation projects and programmes in developing countries that are parties to the Kyoto Protocol and are particularly vulnerable to the adverse effects of climate change. Over the past three years, the fund has dedicated more than US$ 232 million to increase climate resilience in 40 countries around the world.

  • Climate Investment Funds

The Climate Investment Funds (CIF) provides 48 developing and middle income countries with urgently needed resources to mitigate and manage the challenges of climate change and reduce their greenhouse gas emissions.  Since 2008, the CIF champions innovative country-led investments in clean technology, renewable energy, sustainable management of forests, and climate-resilient development. Fourteen contributor countries have pledged a total of $8 billion to the CIF, which is expected to leverage an additional $55 billion from other sources.

Beyond the (largely) public funds made available through these instruments, private contributions to climate action are increasing.  Private funding is critical, because public finance alone will simply not stretch far enough to allow for the necessary climate actions.  Securing and further strengthening private investments can be achieved by leveraging public funds, for example through public-private partnerships, seed funding, or loan guarantees.  Building supportive policy frameworks that enable such strategies and that optimise the flow of climate finance is an important way for parliamentarians to help avoid the 4°C scenario.  To date, however, the political will to prioritise low-carbon development has not been sufficiently cemented. 

2. Budgeting for climate change

The need for more climate finance has been widely accepted and (careful) commitments on the part of the global community have been made, most notably in the form of the Green Climate Fund.  Given the expected increase in climate finance, a major concern in the years to come will be how to spend these funds most effectively.  What needs to be done to deliver a sound national response to climate change?  And how can policy-makers, and in particular parliamentarians, assist in doing this?
UNDP has begun working with countries in Asia to help them undertake a Climate Public Expenditure and Institutional Review. This means they are looking through their national b

udgets to identify where climate change is already influencing allocations. With a better understanding of exactly how much and where existing national budgetary resources are going, more informed choices can be made about how and where to channel additional resources, such as those from international climate funds.

What’s in a budget?

It is important to think of budgeting as a process rather than an event, and to bear in mind that budgets are not drawn up from scratch at the start of each annual budget cycle.  Existing commitments such as funds earmarked for longer-term projects and policies, civil service operations and debt payments tend to take up the majority of the available revenue.  The so-called ‘discretionary resources’ that remain available are, naturally, subject to intense political debate. 

Further complicating the issue is the fact that funding for climate change adaptation is most needed in developing countries, where it must compete with other much-needed investments in health care, education, infrastructure and so on. For these reasons it is especially important to consider how such other investments and expenditures can be as climate-friendly as possible.  Examples include maximizing the energy efficiency standards of new public buildings such as hospitals and schools, tackling emerging energy needs by investing in green energy solutions, integrating climate projections in the design of new infrastructure projects (for example by avoiding future flood-prone areas) and investing in climate-resilient crops to meet growing food requirements.  For more on this, please take a look at the law-making and representation sections. 

Lastly, a more controversial potential source of funding for climate action is the enormous stream of subsidies that flows towards the fossil fuel industry.  Despite increasingly concerted efforts on the part of key international players, the introduction of carbon taxes and the scaling back of fossil fuel subsidies continues to prove difficult.  Fossil fuel subsidies are still estimated at nearly half a trillion USD per year - a figure that dwarfs the investments required for large scale renewable energy projects. 

VIDEO: Parliamentary Action on Renewable Energy - how to end fossil fuel subsidies

This video, produced for the joint UNDP – Climate Parliament Parliamentary Action on Renewable Energy project, concentrates on the huge fossil fuel subsidies that help prop up dirty and outdated coal, oil, and gas industries around the world, thus contributing to the destruction of the climate.

Every day, all around the world, vast sums are changing hands in the huge river of money that makes up the global financial system. Currently, far too much of this cash is flowing into the pockets of fossil fuel industries, fuelling dangerous climate change. We need to divert these fossil fuel subsidies to investing in clean, green, renewable energy from sun, wind and water.

http://www.agora-parl.org/interact/blog/video-parliamentary-action-renew...

National Climate Funds

A growing number of countries is establishing national funds to access and manage climate finance.  The UNDP Guidebook on National Climate Funds defines these as mechanisms that support countries to collect, direct and oversee finance for climate change projects and programmes. The functions and operations of an NCF can vary widely:  

“Designing an NCF requires carefully considering its objectives and then crafting a structure that supports the achievement of these objectives. Many NCFs deliver a common set of services, however the exact components and structures to deliver the services vary greatly according to national circumstances and priorities. In other words, the way in which the fund’s components are designed shapes how the NCF delivers its support. For example, an NCF capitalized by international and national public finance will collect and blend resources differently that an NCF that relies only on private finance. Tailored fiscal tools and mechanisms will be required to access and channel public and private sources effectively.”

NCFs are managed independently and thus fall outside of the scope of the national budget. An important advantage of such a ‘separate’ fund is that it safeguards an exclusive and concerted investment in climate change, as the available resources are not subject to competition with other sectors.  It also allows for more targeted action and more long-term planning, both of which are important to successful mitigation and adaptation efforts. 

While NCFs offer many benefits, some important considerations should be made.  As pointed out above, establishing separate funding streams for climate change action will make it more difficult for parliaments to develop appropriate and effective national budgets. Additionally, questions of accountability are inevitably raised as transparency and reporting standards tend to fall short of those set for the national budget. 

In most cases the establishment of an NCF will pass through parliament, giving parliamentarians important leverage to influence their design.  Where possible, then, parliamentarians should insist on the highest possible transparency and reporting standards, and should call for appropriate legal provisions.  This will not only improve coordination and information sharing, it will also be critical in ensuring accountability mechanisms sufficiently strong to attract the necessary funding.

3. What Parliamentarians can do

Parliamentarians play a key role in the budget process and can use their powers and privileges to shape policy frameworks that encourage strengthened, more sustainable and more transparent climate finance flows. 

Depending on the specific rules in effect, a parliamentarian may have the ability to directly or indirectly influence the content of the state budget to encourage more resources and incentives for development of renewable resources. If parliament allows individual members to move amendments to the state budget, this is an excellent opportunity to, at the very least, spur debate about the need for more funding for climate action.

Where parliament does not allow members to move amendments to the state budget, individual parliamentarians can still influence the content of the budget, albeit indirectly. By working with their parliamentary group, a parliamentary committee or civil society, they can build political pressure for allocation of state funds or revisions to the tax code to encourage development of renewable resources. Such revisions should form part of a wider ‘value for money’ strategy that parliaments and parliamentarians pursue in maximizing the use of public funds. Through public consultations and hearings, it is possible to garner enough media and public attention to encourage the executive to respond to a parliamentarian’s points with adequate budget allocations.

The role of parliament shifts once the budget passes. A parliamentarian can then work with those parliamentary committees that have a mandate to scrutinize government expenditures, such as a Public Accounts Committee or Budget and Finance Committee, to ensure the allocated funds are properly spent. This can be done by organizing public hearings that explore whether the government is delivering on its commitments made when the budget was passed.

Where greater detail as to the costs and expenditures is required, it may be advisable to engage the independent state auditor (also known as the auditor-general) to conduct a detailed investigation of the government’s actions in the development of renewable resources.