One of the purported successes of the talks in Cancun last year was the creation of the Green Climate Fund (GCF). This year the GCF’s Transitional Committee (TC) was created, with forty members, twenty-five of which are from developing countries. The TC is tasked with no less than designing the GCF itself. It must be an institution that is capable of handling vast sums of “new and additional” funding from the $100 billion promised annually by 2020, and that can target investment across many different fields of climate change related investment.
The GCF as a “recipe for failure”
The TC has agreed on some guiding principles, one of which is that the GCF should be designed in a way that subordinates private sector finance to public sector funding. This is the approach favoured by many developing countries and is line with the GCF’s objectives of providing more direct, reliable and streamlined access to climate finance. Last week, however, Bloomberg New Energy Finance (BNEF) released a white paper that forcefully argues the TC’s current approach is “a recipe for failure.”
The paper’s author, Michael Liebreich, claims that the GCF will never be able to raise a large portion of the $100 billion from the public sector. This, Liebreich states, is because many of the donor countries are under extreme fiscal strains and because many would face political difficulties in passing the revenue raising mechanisms in to law.
Liebreich argues that instead efforts should be focussed on the creation of a Green Climate Finance Framework (GCFF). The GCFF would raise approximately ninety percent of funds from the private sector, channelling money through existing financial mechanisms, whilst investment is largely used to target mitigation or, more specifically, infrastructure projects. The GCF still exists in Liebreich’s scenario, but plays a smaller role, administering the funds needed to leverage private sector money – in this case subsidising the gap left between the cost of clean and dirty energy.
A more complex issue
Liebreich’s arguments are compelling, but there are four immediate objections. First, although donor countries are indeed facing fiscal constraints, the funds they are capable of contributing is unclear. The ambiguity surrounding availability, or willingness, of funding is part of a larger problem: the lack of follow through on financial commitments by developed countries.
It seems premature – or even far-fetched – to state unequivocally at this stage that donor countries are incapable of providing the finance, although the author is correct to draw attention to the difficulty in ensuring the pledged funds are in fact received and spent, and to reaffirm the contention that the private sector will have to play a non-negligible part.
Second, many in the TC may disagree with the sentiment that a large majority of GCF expenditure should be on mitigation. Adaptation is under-funded yet considered equally important as mitigation by developing countries. Moreover, adaption activities are far less likely to be funded by the private sector on a large scale, since they are unlikely to generate revenues – if any at all – of the same scale, stability and longevity as mitigation projects. As the role of the private sector increases in the GCF, the available funding for adaptation decreases.
Third, the guiding principles of the GCF – which reflects the sentiment of those creating the fund – states that recipients wish to use the funding to promote ownership of climate activities within their countries. Although this can be interpreted in many different ways, one is to say that recipient countries wish to ensure the money is spent in a way that does not entrench dependence on foreign money and expertise.
However, since the majority of programmes and projects in a GCFF would be financed and/or owned by private investors, likely to be overseas investors, and that capacity building and technology transfer are both understandably unlikely to be funded by the private sector, domestic ownership of climate change related activities is significantly undermined.
Finally, a guiding principle of the GCF is the desire to make delivery of finance results-based, whilst ensuring it is not wholly conditional on results. Clearly, the delivery of finance by the private sector is based almost entirely on results, and thus runs contrary to the sentiment of those participating in the creation of a climate finance mechanism.
There is no reason why a GCFF cannot be created; indeed it is a good idea. However, suggesting that it should replace the GCF entirely – and therefore that the majority of the $100 billion should come from the private sector – would result in only a sub-section of the types of projects in need of funding, receiving funding. Moreover, it opposes the sentiment and guiding principles of those attempting to create a climate finance mechanism, in that it reduces the domestic ownership of emissions reductions activities and ensures that delivery of finance is almost entirely conditional on results.