The United States should continue its progress toward approval of a new fund for global mitigation and adaptation.
by Richard Caperton and Andrew Light
As this year’s U.N. climate summit in Durban comes into the home stretch we continue to hear good things about the development of the final implementing document for the Green Climate Fund (GCF).
This is good news for those interested in an outcome in Durban that could impact mitigation and adaptation efforts through this decade. The GCF is part of the pledge made in the Cancun agreements to mobilize $100 billion annually by 2020 for mitigation and adaptation efforts world wide. While the Fund itself is not tasked with mobilizing all of this financing it will nonetheless be a key component of those efforts.
Confidence that the GCF will also come together is also good new for those observing the evolution of the U.S.’s negotiating position the past two weeks. While the U.S. had approved the agreement at the Cancun summit last year to create the fund, recently its confidence in the fund had been in question.
In Cancun an official “Transition Committee” of 40 countries had been created to meet over the course of the last year to create an implementing document to make the GCF a reality. The “TC,” as it came to be called, met four times, with the last meeting to the west of here in Cape Town in mid-October. At that meeting the U.S. dissented in the final hours with the other members of the TC and, along with Saudi Arabia, withheld its consent to the implementing document.
Because this U.N. process operates under a defacto consensus process many parties were concerned that the failure of the TC to come to consensus in Cape Town would mean disaster in Durban. If the TC had come to consensus then one interpretation of the marching orders for the group was that the 194 parties in the full U.N. meeting of the Conference of the Parties of the UNFCCC (COP) would simply adopt it and move the decision forward. But without consensus among the TC, many experts thought that this could lead to an outcome where the work of the TC would be put in jeopardy as other parties picked over the draft until it was changed so dramatically that agreement was no longer possible. Hoping for the best the co-chairs of the TC sent their draft document on to the COP.
While a few questions remain, it now looks like the U.S. is getting closer to approving the Green Climate Fund. In his press conference today in Durban, U.S. Special Envoy for Climate Change said he was “confident” that the despite lingering questions the fund would get done. While the U.S. had objected in Cape Town that they were concerned both about the relationship established by the implementing document between the COP and the governing board of the GCF, and the license of the GCF to engage and mobilize private finance, we argue that the current draft document is sufficient to overcoming these concerns.
Over the last two years, CAP has talked with clean energy companies, global investors, international development advocates, and environmental leaders about the new fund. Our research has found that a successful Green Climate Fund will have several characteristics, including:
- The Fund’s management will have independence from the UNFCCC bureaucracy to make the most cost-effective funding decisions.
- It will be specifically designed to attract large amounts of private capital.
- There will be a variety of financial tools that allow the Fund to provide targeted supports that meet the specific needs of each funding recipient.
- The Fund will have a trustee capable of managing billions of dollars in accordance with the strongest possible accounting standards.
- Both adaptation and mitigation funding will be available.
- The fund will be performance based and data driven.
Our conclusion is that there is no way a Fund without these characteristics will play a significant role in mobilizing $100 billion per year. If the Fund has to seek approval from the revolving set of climate negotiators that make up the COP meetings from year to year to use a limited set of tools (for example, just grants for adaptation projects) to disburse money that only comes in from public sources (primarily, donations from developed countries like the United States), it simply will not work. A Fund that worked like this would be a wasted opportunity.
Fortunately, though, the draft text of the fund describes an institution that does not have to work like this. The proposal creates a Fund where an independent management can use a wide variety of tools to attract both public and private capital, and can use that capital to finance both adaptation and mitigation projects.
In fact, the proposed Fund meets all of the criteria for it to be a success. The proposal is an exciting opportunity to build a Fund that will mobilize large amounts of capital to help the world avoid the most catastrophic effects of climate change. For reasons discussed below, we are optimistic that the Fund will be successful, if the negotiators in Durban allow it to move forward.
First, the proposed Fund creates a management system that insulates decision-making from the cumbersome United Nations bureaucracy. It does this by creating a Board, and then putting the Board in charge of a secretariat, who are tasked with the day-to-day operations of the Fund. While the COP is technically in charge of the Board, they have not built in tools that you would expect to see from an organization that expected to exercise significant control over the Board or the Fund’s operations. For example, the proposal does not have a procedure for removing someone from the Board, nor does it list specific decisions that have to come before the COP.
Second, the proposed Fund can help draw private capital into international climate finance. Not only is the Board specifically authorized to create “instruments or facilities” beyond just grants and low-interest loans, the proposal clearly states that, “The Fund will seek to catalyze additional public and private finance through its activities.” CAP has previously proposed financial instruments like policy insurance, loan guarantees, and equity investments that will attract private investors to this market, and we are glad to see that the proposed Fund would allow those tools.
Third, the new tools that the Board creates are not just useful for bringing in private capital, but are also good ways for the Fund to use public money efficiently. Consider a renewable energy project: if the project will bring in money by selling power, it may be able to pay money back to its funders. In this case, the Fund could be better off by providing a loan to the project instead of a grant. This is a simplified example that shows how having a variety of tools at its disposal can help the Fund get the most bang for its buck.
Fourth, the Fund will be working with billions of dollars every year, and has selected a trustee who will be able to manage that money competently. The World Bank – who the proposal names as the trustee for the first three years of the Fund – has the relevant expertise to fill this role. Then, the Fund will be able to select a new trustee, which will allow commercial banks to bid on providing this service.
Finally, every aspect of the proposed Fund is designed to meet the needs of both adaptation and mitigation investments. The Board will ultimately decide how much money is directed toward each type of project, but the proposal instructs them to make these decisions using a “results-based approach.” That is, the Fund must be used cost-effectively.
There is a legitimate concern that the proposed Fund is not sufficiently proscriptive to ensure that it actually does all of these things. While it is true that the Board will ultimately be responsible for making the Fund a success, there are examples where a Board has been given significant freedom and worked well. For instance, the language that creates the financial mechanism of the Montreal Protocol (which eliminated ozone-depleting CFC’s from our economy) leaves virtually all decisions up to an executive committee, and this mechanism has worked well.
Negotiators are now working around the clock to resolve the final problems on the GCF. We believe that the U.S. should resolve its final differences, move forward, and turn to the next task of selecting a governing board for the fund. Already Germany has announced that it will donate 40 million Euro for the initial capitalization of the fund and has offered to host it. Switzerland is moving in the same direction.
The Green Climate Fund is off to a good start and with a push out of Durban could move quickly to becoming a key component in the realignment of global institutions to tackle climate change.
Richard Caperton is Director of Renewable Energy Finance and Andrew Light is a Senior Fellow and Director of International Climate Policy at the Center for American Progress.