Developing Countries Ask For New UNFCCC Financial Architecture

By Martin Khor, Third World Network, , 6 June 2008

Developing countries have put forward concrete proposals for establishing a new financial mechanism and “architecture” under the UN Framework Convention on Climate Change (UNFCCC) to take charge of the transfer of financial resources to assist the developing countries to address the climate change challenge.

Many countries, including Bangladesh (for the LDCs), China, India, Barbados (for small island developing states), Argentina, the Philippines, Malaysia and Saudi Arabia, called for a new financial mechanism and new funds relating to various areas (adaptation, technology, mitigation, etc), which would be under the authority and guidance of the UNFCCC’s Conference of Parties (COP).

It was the first time in recent years that so many developing countries and their groupings had put forward such concrete and systemic proposals on the Convention’s financial mechanism, said a long-time participant of the UNFCCC process.

Several of the countries referred to the large amounts of funds which are being planned for organisations outside the UNFCCC, particularly the World Bank, and said that these funds should instead by placed under the Convention, which is the body in charge of cleat change negotiations and the implementation of the outcomes.

China notably stated that funds provided to organizations outside the Convention would not be counted as being in fulfilment of the developed countries’ commitments under the UNFCCC to provide financial resources to developing countries to help them take action on climate issues. India concurred with this view.

The Philippines said climate-related funds should be placed in the Convention and not other institutions, and if we are not serious (in making outside funds comply with the Convention’s principles and priorities) it did not see what future there would be for the Bali Action Plan.

The proposals of developing countries were made on 5 June at a workshop on investment and financial flows, which is an official part of the meeting of the ad hoc working group on long-term cooperative action (AWG-LCA) under the Convention. The group is tasked with implementing the Bali Action Plan and coming up with a decision by the end of 2009.

Besides the members of the G77 and China, other countries providing proposals included Mexico, South Korea and Switzerland, while Japan, the EU and US also spoke.

The first workshop presentation was by Bernaditas Muller of the Philippines, on behalf of the G77 and China. She said the G77 and China had identified basic principles under which they would like to work in the context of enhancing financial resources (a major element of the Bali Action Plan).

Muller (who is coordinator of the G77 and China in the AWG-LCA) said that at the first AWG-LCA meeting in Bangkok, members of the group had spoken about establishing various funds, such as an adaptation fund, a technology fund and a risk insurance fund. The G77 and China believed that this enhanced action should be guided by the following principles:

* Operate under the authority and guidance of and by fully accountable to the Conference of Parties of the UNFCCC.

* Have an equitable and balanced representation of all Parties within a transparent system of governance.

* Enable direct access to funding by the recipients.

* Ensure recipient countries’ involvement during the definition, identification and implication of the actions.

Muller said Group is developing a proposal based on the above principles, which take into account various provisions of the Convention, including Articles 4.3, 4.4., 4.7, 4.9 and in accordance with article 11.

Bangladesh on behalf of the LDCs, said the investments of today determine the extent of climate change tomorrow. It put forward “principles and an architecture of a future funding mechanism.” These included: (1) Adequacy of funds, to meet the needs of adaptation, mitigation, and technology transfer; (2) The equity principle; (3) Likely sources of funding should be from developed countries in implementing their commitment under Article 4.3, and other possible sources include a levy on airline travel, an international fuel levy, an extension of the Adaptation Fund’s levy to other mechanisms, venture capital and the carbon market.

Barbados, on behalf of the small island developing states (SIDS), represented by Selwin Hart, said the funds for adaptation were inadequate. Any resources must be additional to traditional ODA. Referring to financing that is market-based, it said that markets don’t work well in small economies. Financing for mitigation is more readily available and easier to access than for adaptation (for example the private sector is not interested to build a seawall or restore coral reefs).

Barbados put forward a shared vision on adaptation financing in the UNFCCC: (1) New and additional funds above the current commitments on ODA and 0.7% target; (2) Predictability: and stability in funding, which should be sourced from assessed contributions from developed countries and levies of carbon markets; (3) The funds should be in the form of grants rather than loans (as SIDS have to adapt to climate problems caused by emissions and lifestyles of other countries). This should also be consistent with the polluter pays principle; (4) Priority access should be given to the most vulnerable countries; (5) The governance should be under the UNFCCC.

The SIDS also advanced these specific proposals: (1) Establish a Convention adaptation fund. The aim is to implement Convention articles including 4.3 and 4.4, in line with the polluter pays principle. Access to recipients should be direct. Governance should be under the authority of the COP; (2) Establish an insurance mechanism; (3) Set up a Technology Fund; (4) We also support a Mitigation Fund.

The SIDS also stated that there are many bilateral and other instruments, but they
are not under UNFCCC. These should be channelled through Convention process.

China made a formal presentation, putting forward a proposal on the elements and
structure of multilateral funds operating under the Convention.

Represented by Ms. Huang Wenhang of the Finance Ministry, China said the Convention and the Bali Action plan require developed countries to commit to give financial resources that are new and include grants. Existing funding is very limited, with $3.3 billion by the GEF in 1991-2010, $90 million in the Convention’s special climate change fund, $180 million in the Convention’s LDC fund including new pledges and an estimated $37 million in the Kyoto Protocol Adaptation Fund.

These compare with the estimates of finance needs, including $65 billion in 2030 for mitigation estimated by the UNFCCC secretariat, and an Oxfam estimate of $50 billion per year for adaptation. There is a huge gap between needs and available resources, said China.

China added that scaling up of funding is needed. If it remains at the same level, it will not meet the future requirements for adaptation and mitigation.

China then proposed the establishment of a set of new funds under the UNFCCC. The new financing would have the following elements: (1) The source of funding is the implementation of developed countries’ commitments under UNFCCC; (2) The scale of funding should be a certain percentage of the GDP of developed countries, for example 0.5% of GDP, in addition to existing ODA; (3) The funds would be used to enhance mitigation, adaptation, R&D in technology, and technology transfer; (4) Any funding pledged outside the UNFCCC shall not be regarded as being in fulfilment of commitments by developed countries under article 4.3 of the Convention.

China also proposed the following coordinated funding arrangements: (1) In the design, there would be the establishment of a number of specialized funds, including an Adaptation Fund and a Multilateral Technology Acquisition Fund; (2) On Governance, (a) The Fund would be established under the authority and guidance of and fully accountable to the COP, (b) There would be equitable and balanced representation of all parties in the governance, (c) There would be easy access and low management costs.

Japan asked China to explain its statement that any funds outside the UNFCCC cannot be counted as part of developed countries’ implementation of their Article 4.3 commitment. Would this mean China wants to make UNFCCC an aid agency?

China responded that the UNFCCC is not an aid agency, but it is the most appropriate forum to discuss climate change. The developed countries have an obligation to developing countries in the Convention. If Japan wants to pledge its money outside the Convention, that should not be counted as fulfilling part of its commitment under the UNFCCC.”

India, represented by Mr.Surya Sethi, presented a comprehensive analysis of the status of climate financing, which he showed fell far short of financing needs, such as the Stern estimate of 1% of world GDP which in 2007 translates to $540 billion.

He said the World Bank group is not in a position to handle the funds required. Any funding structure of the international financial institutions will remain outside of the UNFCCC. The funding mandate of the IFIs is economic development and the capacity of these should not divert to climate change. The IBRD disbursement in 2007 is minus $6.2 billion, which means they receive more than they disburse. No wonder the World Bank wants to expand to climate change, he said.

India said that alternative means for predictable resource flows is needed. We need a new global fund, capitalised by developed countries at a level of 0.3% to 1% of GDP, said India.

India proposed the establishment of a new financial architecture in the UNFCCC. It should have the following elements:

* It must operate under the guidance and must be accountable to the COP.

* There would be balanced representation in the governance.

* Direct access by parties to the funds.

* It should be demand driven, with recipients involved in definition of needs.

* It should be funded by developed countries and may accept other resources from the market and other sources.

* It should be organized in functional windows for technology, venture capital for emerging technologies, and a fund for research and development.

* Other funds should be integrated under the Convention.

* A Board would govern, and there should be a professional secretariat, aided by technical committees. This design was achieved under the Montreal Protocol, and under the Kyoto Protocol’s adaptation fund.

* The unifying force of the various funds to be set up is a common governing architecture which is under the control of COP. Each window will grow under this architecture.

Argentina proposed the establishment of a multilateral fund, as a framework and an umbrella system. It can cover various areas including adaptation and technology. It will develop financial resources of existing funds that exist and that may come up in future. It can include elements mentioned by China and other countries.

Malaysia welcomed the idea of establishing a new funding mechanism. It should be under COP. It should also enable direct access by recipients. This mechanism will be assisted by expert or technical panels. Funding will be by Annex I parties to fulfil their commitment in accordance with Article 4.3, and additional sources can be determined. The fund should complement the existing funds. Competing mechanisms outside the UNFCCC poses a serious challenge to the Convention and this is cause for concern.

Philippines said the finance commitment was not being implemented, there has been inadequate funding and the agreed full incremental cost has not been given to developing countries. The Convention’s parties had also decided that consistency must be ensured between the principles and priorities of the COP with bilateral and other funds on climate operating outside the Convention and that they must not impose new conditionalities.

Referring to recent initiatives outside the Convention to set up new climate funds, she remarked that if we are not serious about this issue, she did not see what future there would be for the Bali Action Plan. There are funds out there. They should not be put in bodies that impose conditionality on developing countries. They should be put in the hands of the parties of the Convention.

South Africa, on behalf of the Africa Group, emphasized the group’s support for the G77 and China’s principles presented by Philippines. The scale of funding for adaptation must be scaled up 2 or 3 times. There is need for assessing costs, planning, NAPAs, implementation for adaptation, mitigation technologies, wider deployment of existing technologies and R and D for new technologies.

Brazil said there was a need for funds to be in compliance with UNFCCC. It stressed the need for a fund with a governance structure that is fair and transparent and reinforces the COP’s capacity to guide climate change.

Saudi Arabia said there was a need to bring all the ideas of the funds together. There is need for a solid structure in UNFCCC where all the initiatives can be put together in a structure, as laid out by the G77/China principles. The goal is to bring under one umbrella a solid new architecture. It would operate under the authority and guidance of the Convention and be fully accountable to the COP.

Mexico pointed to the unpredictability of current funding and the need to overcome the atomization of current financing in many funds. The current financial system is totally insufficient to sustain the scale of actions needed.

It proposed a World Climate Change Fund covering mitigation, adaptation, and technology. All countries would contribute to it, with contributions to be agreed multilaterally and could be determined by criteria like Greenhouse gas emissions, population and GDP size, as well as the polluter pay principle, equity and efficiency and each country’s capacity. The Fund should mobilize no less than $10 billion a year, with $200 billion by 2030.

Mitigation activities to be supported should yield measurable, reportable and verifiable mitigation results. Activities to be funded include forest, agricultural soils, biofuels, energy, green buildings, lower-emission vehicles.

Korea, represented by Raekwon Chung, advanced a proposal on carbon credit for NAMA (nationally appropriate mitigation actions) by developing countries, supported by finance that is measurable, reportable and verifiable. In this scheme, mitigation can be initiated by developing countries even without finance and technology, similar to a unilateral CDM.

He suggested that Annex I countries undertake a deeper emission reduction target to facilitate more funds. Instead of developed countries offering to contribute to funds, they could instead buy credits for NAMA.

Switzerland presented a proposal on a “funding scheme for Bali Action Plan”. It proposed a global carbon dioxide levy of $2 per ton of carbon dioxide, in accordance with common but differentiated responsibilities. There would be three pillars in the scheme. Overall revenues would be $48.5 billion, with $18.4 billion to a multilateral adaptation fund or MAF (with a $9.2 billion prevention pillar and a $9.2 billion insurance pillar), and $30.1 billion going to national climate change funds.

High income countries will transfer 60% of their levy to the MAF, medium income countries 35% and low income countries 15%. Countries with below 1.5 ton of carbon dioxide emission are exempted from payment; Switzerland said these would mainly be LDCs.

Brazil commented that the Swiss proposal had taken current emission rather than historical responsibility on board when choosing who to tax. Switzerland replied historical responsibility was counted if the future emissions is counted but not so in relation to past emissions.

Germany, for the European Union, said the challenge is to stabilize greenhouse gases at 450 ppm, restrict temperature rise to 2 degrees and to reduce emissions. Finance is required for a transition to a low carbon economy. Most funds for mitigation will be from the private sector and this won’t change in future, but pubic funds are still needed to catalyze and leverage private investments.

In mobilizing financial flows, the main tool is the price of carbon as the carbon market is delivering a significant part of the flows. On innovative financing, the EU can discuss auctioning of carbon allowances and a levy on bunker fuel.

Norway proposed a scheme for “financing adaptation by auctioning” in which a small percentage of asset value can be auctioned or sold to finance adaptation. The task can be given to an international bank.

The United States, commenting on other countries’ remarks on the World Bank climate funds, said that the clean technology fund under this is not meant for unmet contributions under the Convention. It will be supportive of the objectives of the Convention. It is hosted at the World Bank as it will provide rapid disbursement of funds and leverage other funds.

As the private sector gives most investments, the issue is how governments can encourage private sector flows to clean technologies. Countries with an enabling environment, open markets and respect for IPRs will attract more clean technologies.

Surya Sethi of India, responding to Japan and US relating to the World Bank climate funds, said that the funds to developing countries for climate must come in the form of resource transfer or grant. “If I borrow money I have to return it and it is not funding my full additional cost,” said India. “Any mechanism must ensure the full incremental cost must be met and it won’t be met by loans even if these are concessional.”

The Chair of the AWG-LCA, Luiz Machado of Brazil, said the discussion had been rich, there were some areas of convergence and some new and innovative ideas. This was a very valuable brainstorming, which could be used for discussing future work. A contact group of the AWG LCA will further take up the finance issue.


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