Negotiations are approaching their final stage here in Cancun, and the scope of an agreement on financing for climate change mitigation and adaptation is becoming clearer. As expected, negotiators appear to be limiting the finance agreement to the structure of a climate fund, pushing decisions on actually raising money to next year’s meetings. CAP’s Richard W. Caperton has the story.At issue is the so-called “climate fund” that was part of the Copenhagen Accord. The Accord called for developed countries to create a fund that would direct $100 billion in climate finance to developing countries each year. The details of where the fund would be housed, how the money would be managed, and — most important — where the money would come from were left up to future negotiators. This week, negotiators in Cancun are delving into these issues.
As recently as yesterday, there was an unexpected attempt to specifically identify at least one source of revenue for the fund. The working draft of the agreement on Long-Term Cooperative Action included a proposal to place a price on the carbon emitted from the international shipping and transportation industries. This language directed the international governing bodies for maritime shipping and international aviation to set “global emission reduction targets on a scale consistent with the long-term global goal” set forth in the agreement. In addition, this language directed that any revenues from this new policy would be directed to climate change mitigation and adaptation in developing countries. The UN High Level Advisory Group on Climate Change Financing estimated that this proposal would generate revenue of $6-$12 billion, which would be a substantial commitment to the $100 billion annual target set in the Copenhagen Accord.
This development would have far exceeded our expectations for outcomes from this meeting. The items being discussed in Cancun come out of a series of interim sessions that have happened since last year’s meeting in Copenhagen. The last of these sessions happened before the Advisory Group’s report was released in November. This timing means that negotiators have not had the opportunity to formally discuss innovative sources of finance before arriving in Mexico last week.
Recognizing the challenge of adding new items to an agreement at this stage, the maritime and aviation language has been removed in the most recent draft of the agreement. The United States and other countries raised concerns that they could not commit to a system of international taxation. This is a Constitutional issue in the United States, making US negotiators extremely wary of the proposal. The issue is not black and white, however, and the US may be able to agree to this proposal in future agreements. This proposal deserves to be back on the table in South Africa, along with every other item from the Advisory Group’s report.
The areas where we are more likely to see some sort of agreement surround the legal structure of the climate fund, and some details about who will be in charge. These details are included in the current negotiating text (see here for a recent draft of the agreement on Long-Term Cooperative Action), although critical elements are still undecided. For example, negotiators still have to decide how much of the contributions to the climate fund will come directly from contributions from developed countries, and how much of these contributions should flow directly through the fund versus through bilateral or multilateral agreements.
The following is a summary of important decisions still to be made, with options presented in the draft:
- Where will the fund be housed? The first option is to establish a fund under the Convention, and the second option is “that a new fund will be established”, with no mention of the Convention. At issue is the level of independence from the UNFCCC. The UNFCCC does not have significant institutional financial expertise, which should potentially preclude it from managing a $100 billion fund. It’s worth noting that not housing the fund in the UNFCCC opens the option of housing it at the World Bank — which would be contentious, to put it mildly.
- Who will be on the governing board? The first option is for a board made up of an equal number of developed and developing countries, while the second option calls for a board with “equitable and balanced representation” of all of the parties. The implications of “equitable and balanced” would ultimately determine the split between donors (developed countries) and recipients (developing countries) on the board.
- Who will be the trustee of the fund? The first option makes the World Bank the trustee for one year, while the second option calls for the trustee to be selected via a competitive bidding process. The trustee’s role will likely be defined as just handling the financial operations of the fund, while funding decisions would be made by the governing board. In forming the Montreal Protocol to eliminate CFC’s and save the ozone layer, the organizers found that the World Bank’s fees were higher than private banks, indicating that the World Bank may not win in a competitive bidding.
- Who will begin designing the operations of the fund? The first option calls for a committee with “balanced and equitable” representation to design the fund, with broad discretion about the decisions this committee would make. The second option calls for open meetings led by finance ministers to establish the fund and prepare it.
The US should focus on making sure that the fund is soundly managed and makes cost-effective financing decisions. These decisions would best be made by a body with both finance and climate experience. This board would have to work with a trustee who would actually manage the money and perform the “banking” operations like designing instruments and collecting payments. The World Bank could be very effective in this role, but there’s no reason not to open a competitive bidding process.
The most important thing for negotiators to do on finance this week is to lay the groundwork for a fund that will stand the test of time and be up for the challenge of fighting climate change. It appears that the negotiators are still serious about doing exactly that.
— Richard W. Caperton is a Policy Analyst with CAP’s Energy Opportunity team.