World Bank’s Climate Funds Proposal Distorts UNFCCC Principles

By Celine Tan, Third World Network, 28 May 2008

The World Bank’s revised climate investment funds (CIF) proposals reflect a poor understanding of the international climate change regime and remains inconsistent with the principles of the United Nations Framework Convention on Climate Change (UNFCCC) despite claims to the contrary.

According to a key developing country negotiator in the UNFCCC who has been involved in the process since its inception, the Bank’s new proposals, which were discussed at their third design meeting in Potsdam, Germany on 21-22 May, reflect a selective reading of the multilateral climate change agreement and ignores the negotiating history of the Convention.

The negotiator, who is head of delegation of a developing country at the UNFCCC and who has led the G77 and China in climate negotiations in the past, said that the World Bank claims consistency with the UNFCCC, but in fact, the new CIF proposals demonstrate limited knowledge of the treaty provisions and, in some cases, distort the meaning of obligations under the Convention.

Notably, the Bank’s assertion that the “UNFCCC recognises the need for financial resources to be provided to developing countries to assist them in meeting the costs of mitigation and adaptation measures” is inaccurate.

According to the negotiator, “developing country parties to the UNFCCC do not need assistance’” in the conventional understanding of the term. Instead, it is the legally binding obligation of developed country parties to provide the necessary “new and additional” financial resources to meet the costs incurred by developing countries to implement all their obligations under the Convention, and not just for mitigation and adaptation. Financial resources are therefore obligations of developed countries under the UNFCCC and not considered as development aid.

“The provision of financial resources to developing countries, as well as transfer of technology, are commitments of developed country parties to the Convention, so there is no donor-donee relationship within the Convention. This flows from the application of the principle of common but differentiated responsibilities which is reflected in the Convention, from its preamble, to the objectives, principles, commitments, implementing articles and the functions of all the main bodies of the Convention”, said the negotiator.

Forty countries had reached an agreement to create the climate investment funds at a meeting in Potsdam, Germany last week. The World Bank had sought to justify the creation of the climate investment funds after it came under heavy fire from developing countries and civil society groups since the draft proposals were leaked in February this year.

Specifically, in order to address criticisms that the funds were inconsistent with the provisions of the UNFCCC and threatened to undermine negotiations under the Convention, the new proposals for the Strategic Climate Fund (SCF) and the Clean Technology Fund (CTF) now include four introductory pages reciting various provisions of the UNFCCC and reiterating the funds’ consistency with the UNFCCC process.

Both fund proposals now incorporate references to the United Nations as “the appropriate body for broad policy setting on climate change” and state that the multilateral development banks (MDBs) as implementing agencies of the CIF “should not pre-empt the results of the climate change negotiations” with climate change actions to “be guided by the principles of the UNFCCC”.

However, the language here implies recognition of the UNFCCC principles as merely guidance for policy agendas of the CIF rather than as binding internationally negotiated commitments of state parties which must be respected. They also demonstrate a lack of familiarity with the principles negotiated under the Convention and the legal status of commitments under the UNFCCC.

Additionally, the Bank mistakenly conflates the UN with the UNFCCC, with the UNFCCC being a negotiated, internationally binding treaty separate from the UN as a general entity. Developing countries have argued that financial resources disbursed in fulfilment of obligations of developed countries under the UNFCCC should be placed under the authority (and not just guidance) of the Convention’s Conference of Parties (COP).

The fact that the CIF will not come under the authority of the UNFCCC COP in itself is a reflection of the climate investment funds’ inconsistency with the UNFCCC provisions and in disregard of developing countries’ demands under the Convention.

Although Article 11 of the UNFCCC (used by the World Bank to justify the CIF) states that “developed country parties may also provide and developing country parties avail themselves of financial resources related to the implementation of the Convention through bilateral, regional and other multilateral channels”, the developing country negotiator points out that the parties had decided that such funding “through channels outside the Convention’ should be consistent with the policies, programme priorities and guidance provided by the parties”.

Furthermore, developing countries under the Convention have called strongly for “direct access” to any funds established for the purposes of meeting obligations under the UNFCCC and not access mediated by secondary institutions, such as MDBs and other agencies, because “in the end, countries do the implementation, not the institutions”, said the negotiator.

The negotiator expressed surprise that proponents of the climate investment funds claimed that there was an absence of similar instruments providing financing for climate change activities to be financed by CIF resources: “There already exist within the Convention a number of mechanisms and processes for identifying needs, setting programmes and priorities, setting eligibility criteria, conducting needs assessments (vulnerabilities, technologies, financial), capacity building and mechanisms for reporting, measuring and verification, which we must all strengthen rather than set aside so that another institution which claims it knows the Convention than the Parties do can do it”.

The negotiator also pointed out that the Bank has made a serious error in its proposals when referring to the Global Environmental Facility (GEF) as “the financial mechanism of the Convention” when the GEF is only “an operating entity” of the financial mechanism of the UNFCCC. Although the GEF remains the only entity under the mechanism at present, this does not preclude the parties to the Convention designating another facility as an operating entity to carry out the task of providing financing under the treaty.

Developing countries have consistently rejected the notion that GEF is “designated as the financial mechanism of the Convention” as the Bank asserts, because “we do not believe that it fulfils an important criterion of the financial mechanism – that it has an equitable and balanced representation of all parties within a transparent system of governance’“.

The GEF, like the proposed climate investment funds, has a system of governance that is not under the authority of the UNFCCC COP and remains contingent upon donor contributions. Although the GEF is supposed to come under the guidance of the COP, the guidance remains to be interpreted by the GEF trust fund committees and implemented according to their interpretation.

Similarly, while the revised CIF proposals allude to the UNFCCC, they do not locate the CIF within the framework of the Convention. The proposed governance structure of the CIF, while revised from earlier drafts which gave donor countries overriding control over the funds and now provides for equitable representation from donor and recipient governments on the respective trust fund committees, remains problematic for this reason.

According to the negotiator, under the Convention, “it is a balanced representation of all parties” and not based on pre-selection of representatives. “If you have a balanced representation of donor and recipient countries, then you have already chosen the donors and recipients.”

This highlights the fundamental flaw with the Bank’s climate investment funds which is that they have been designed and promoted by donor countries with considerable stealth and speed and without significant input from developing countries. Stakeholder comments were only invited on the blueprint drafted by Bank staff and approved by potential donor countries. There was no opportunity to discuss whether or not the Bank was the most appropriate institution to be helming this initiative.

The UK, US and Japan view the CIF as a key G8 deliverable and hope to announce the funds at the G8 summit in Hokkaido, Japan in July. According to the World Bank, the three countries have pledged a total of $5.5 billion to the funds and are inviting other donors to join them in establishing the funds. The UK government, for example, has already pledged 800 million pounds sterling ($1.5 billion) to capitalise the climate investment funds through its Environmental Transformation Fund International Window (ETF-IW). These resources will be disbursed primarily through concessional loans rather than grants, another source of criticism from developing countries and civil society groups.

The new draft proposals for the CIF insist that the initiative “will be an interim measure designed for the MDBs to assist in filling immediate financing gaps” pending an agreement for a financial mechanism under the UNFCCC. According to the SCF and CTF proposals, the climate investment funds will include specific sunset clauses “linked to the agreement on the future of the climate change regime” and that the funds “will take necessary steps” to conclude their operations “once a new financial architecture [under the UNFCCC] is effective”.

However, this means that the sunset clauses will be contingent upon the establishment of a UNFCCC fund or funds with no explicit specification of a date for the conclusion of such funds. “A sunset clause that does not specify when the sunset is meaningless,” added the developing country negotiator.

Moreover, there is evidence that many such “interim” funds established under the auspices of the World Bank have expanded rather than shrunk over the years, such as the Prototype Carbon Fund (PCF) aimed at providing a temporary instrument for pioneering carbon transactions while the Clean Development Mechanism (CDM) – the Kyoto Protocol’s mechanism for carbon trading – was being developed and made operational. According to a report by the Washington-based think tank, the Sustainable Energy and Economy Network (SEEN), nine years on and $2 billion later, “the World Bank’s carbon portfolio has expanded to 11 funds and carbon financing has become a mainstream’ part of its overall lending program”.

There is also no guarantee that the resources from the CIF will be transferred to a UNFCCC fund. The new proposals merely state that upon termination of the SCF and CTF, the trustee (in this case, the World Bank), “will endeavour to transfer donors’ pro-rata shares to another fund which has a similar objective as the [SCF or CTF] as determined by the Trust Fund Committee[s]” unless the donors choose to have their shares returned.

Consequently, while the new proposals allude to the UNFCCC, they reflect a poor understanding of the status and terms of the Convention and their implications for developed and developing country parties to the treaty. Moreover, the concerns which have been raised by developing countries and civil society groups about the design of the funds and the nature of the process by which they have been proposed, have not been seriously taken into account.

Primarily, the proposed funds continue to be premised on an aid framework for climate financing placing climate change financing on a donor-recipient platform for engagement rather than as resources disbursed to meet commitments under international law. The creation of the CIF also supports the World Bank’s increasing encroachment into climate change financing and policymaking, a role which has been heavily criticised given its track record on the environment.

According to Bank documents, the Strategic Climate Fund will be comprised of targeted programmes aimed at providing financing to pilot new approaches to reduce carbon emissions and create greater climate resilience in developing countries while the Clean Technology Fund is aimed at accelerating transformation to low-carbon economies through cost effective mitigation of greenhouse gas emissions and the development and deployment of “clean technologies” in developing countries.


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