Category Archives: Uncategorized

Why an effective Ambition Mechanism is vital to deliver the Paris Agreement

by Clare Shakya[1] and Benito Müller[2]

The Paris agreement agrees the overall ambition:

– limiting global warming to below 2oC and aiming for below 1.5oC, the rich countries providing at least $100 billion to help the poorer countries get onto a lower emission and climate resilient pathway.

But it does not specify how much each country needs to do to achieve this ambition

The ‘Nationally Determined Contributions’ (NDC)  of the Paris Agreement are – as the name implies – a statement of the actions individual countries have themselves undertaken to deliver.

So rather than starting with what is needed to combat climate change, the Agreement starts with what countries are prepared to do.  This is true for emission reductions, for finance and for all the other critical elements of the deal.

To achieve the overall ambition, the Agreement therefore relies on countries upping what they said they will do over time.

In order for this increase of actions to happen, the Agreement uses the idea of accountability[3] of each country to its peers and to the general public, which is meant to work as follows:

  • All countries agreed to develop their own climate action plans where they commit to action to reduce emissions and to adapt and (in the case of the richer countries) to support the poorer countries to do so.
  • All countries agreed to measure this and report back to peers, the international community, and civil society at home and across the globe.
  • It is then assumed, through the reporting and five-yearly Global Stocktakes[4] (GST) reviewing whether there is sufficient action, that the next national statement of climate action will be more ambitious.
  • Essential to building ambition, is the assumption that the public and peers demand more action, that global consensus for climate action grows – driven by people’s concern about the climate impacts they observe and by increased confidence that climate action supports growth and reduces poverty.
  • Through this demand, each countries’ climate plans get revised upwards regularly, measurement becomes more accurate, public awareness grows and expectations build.

So the world is meant to bridge the gap between the emission reductions needed to keep the rise of global average temperature to well below 2oC, aiming for the Paris aspiration of 1.5oC.

The good news is an agreement was reached … 

The first universal agreement on climate change was made. Countries engaged on a scale few expected. The speed at which it entered into force is unprecedented in the global fight to combat climate change. There is evidence of ambition increasing beyond Paris too.  Progress is being made on aviation emissions which were outside scope of Paris.

But…

  • It relies on pressure from public being able to drive increased ambition of governments.
  • It assumes that pressure from the public will increase slowly over time

The increase in ambition needed is significant – and action needs to be taken quickly.  The recent Oxford University 1.5oC Conference suggested that we could pass 1.5°C in a decade.  We can’t therefore wait for 10 years to increase our ambition. But the current NDCs collectively leave us still on course for warming by 2.7-3.6oC globally – which will translate into much greater impacts for many countries.

Currently…

 While the framework agreed in Paris does contain some of the elements required for an effective ambition mechanism – the synchronised reporting on the NDCs and collective reviews (GST) – in its current form, it will not be able to generate the needed raise in ambition.

What is missing is a synchronised timetable – ‘a mechanism’ – for ratcheting up ambition. The only action mentioned under the Paris Agreement is that countries “may at any time adjust its existing nationally determined contribution with a view to enhancing its level of ambition”. However, such ‘spontaneous’ updating is completely inadequate. What is needed are synchronised updating exercises, where expectation and pressure can be built for increasing ambition, for creating ‘virtuous ambition circles’.

Another major challenge is the institutional inertia of governments – once a commitment has been announced, it is difficult to revise it.  Yet, businesses and others making long term investments need to have a longer-term idea of what governments intend to do.  The public also need to understand whether their government intend to do enough to protect them, in order to start putting pressure on them to ratcheting up their government’s ambition.

So how do we make sure that the ambition mechanism works?

We need to make sure citizens across the world can not only track whether enough action is being taken – but also what governments intend to do, so governments collectively become more accountable for whether they collectively live up to what is needed, and individually carry their fair share of the action.

  • If some countries only provide new plans every ten years (like the EU prefers) with no mid-term update (i.e. after five years), why should others increase ambition every five years? All countries need to update their climate plans every five years, and give an indication of what the subsequent five year plan would achieve.
  • There should be a rolling five year timetable with synchronised timing for new contribution statements for the immediate future with an indication of longer-term ambition – a deadline every 5 years where citizens can demand action, where governments are held to account and where peers can apply pressure.

All this is not a challenging request to our climate negotiators going to Marrakesh.

All it requires is a simple decision in the rules being developed for the Paris Agreement to “request all Parties in 2025 to indicate a 2035 NDC and update their 2030 NDC, and to do so every five years thereafter”.[5]

But it is vital if Paris is to deliver its ambition.  Twenty-three  words that would provide a working Ambition Mechanism.  Twenty-three words that would help prevent catastrophic climate change.

Notes:

[1] Director of Climate Change Group, International Institute for Environment and Development (IIED), London, UK; clare.shakya@iied.org.

[2] Managing Director, Oxford Climate Policy, Oxford, UK; director@oxfordclimatepolicy.org.

[3] Transparency of Action and Support under the Paris Agreement

[4] The Global Stocktake Under the Paris Agreement: Opportunities and challenges

[5] The Paris Ambition Mechanism: Review and Communication Cycles – Options Note

Whatever happened to the Paris Predictability Problem? (Part II)

Unconventional Options for Enhancing the Predictability of Multilateral Climate Finance

by Benito Müller with Tosi Mpanu-Mpanu,*

* Chair of the UNFCCC Group of Least Developed Countries and Co-facilitator of the UNFCCC in-session Long-Term Finance Workshops.

Introduction and Background

Part I of this blog[1] was about the idea of joint replenishments for all entities intended to serve the financial mechanism of the Paris Agreement. The idea was tabled by the Group of Least Developed Countries (LDCs) in the final days of Paris, as a significant institutional finance outcome; however, in the end it did not make it into the Agreement. Replenishments are one, if not the only way in which (national) governments have traditionally been able to bind themselves to provide resources more predictably over a number of domestic budget cycles.

The aim of this sequel (Part II) is to look at alternatives to conventional national budget contributions to multilateral climate funds, not only to increase and diversify the funding base, but also to address the problem of how the predictability of (public sector) climate finance for developing countries can be enhanced.

Before turning to discuss options which we believe to be particularly interesting, not least in the context of the upcoming UN Climate Conference in Marrakech, we feel we need to set the scene by looking at the evolution of the international debate on Long-Term Finance (LTF) and clarifying the concept of ‘innovative finance’, which we believe is key in this context.

The Evolution of the UNFCCC Long-Term Finance Debate

The UNFCCC Long-term Climate Finance website has a useful archive of previous work in the area of long-term climate finance with all presentations and recordings of the UNFCCC workshops and events of the Work Programme on LTF from 2012/13 onwards. A thematic analysis of these events by Laurel Murray[2] reveals two trends.

  • For one it shows that the topical balance between raising resources and deployment of funds has, over time, shifted from 4:1 at the first Workshop on LTF (Bonn 2012) to 0:1 at the recent in-session workshop on LTF in Bonn.
  • Second, as concerns the topic of raising resources, the balance between raising public sector finance and mobilizing private sector finance has also shifted, from 2:1 (Bonn 2012) to 1:3 (in-session workshop on LTF, Bonn 2015[3]).

The gradual disappearance of the topic of providing (public sector) funds from the LTF debate is not only regrettable, it is, we believe, contrary to the spirit, if not the letter, of the original terms of reference of that debate, which stipulate that:

[T]he aim of the [LTF] work programme … is to contribute to the on-going efforts to scale up the mobilization of climate change finance after 2012; the work programme will analyse options for the mobilization of resources from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources and relevant analytical work on the climate-related financing needs of developing countries; the analysis will draw upon relevant reports including that of the High-level Advisory Group on Climate Financing and the report on mobilizing climate finance for the Group of Twenty and the assessment criteria in the reports, and will also take into account lessons learned from fast-start finance.[4]

While the debate on (pathways) of conventional public sector sources through budgetary contributions may have proven to be not the most fruitful way forward, this does not mean that there are no alternative (‘unconventional’/‘innovative’) sources of grant funding that could be usefully tapped – in particular, to enhance the predictability of financial support for climate change activities in developing countries. And the current LTF debate needs to be rebalanced to conform with this original aim, if it is to be of any real use to anyone.

Innovative Finance: What is it and why is it important?

In the context of providing financial support for climate change activities in developing countries (‘climate finance’), the term ‘innovative finance’ typically refers to (off-budget) earmarked public sector sources that are usually, but not always, related to combatting climate change, such as:

  • the auctioning of emission allowances in emission trading schemes;
  • carbon or other taxes;
  • a (2 per cent) share of proceeds from the Clean Development Mechanism (CDM), also adopted for the new market mechanism under the Paris Agreement.

As ‘public sector’ sources, these involve government decisions but, unlike conventional budgetary contributions (which, by and large, are determined purely politically) contributions based on earmarked sources of revenue are co-determined by political and other, usually market-based, parameters. The share of the source that is being earmarked will usually be politically determined, but the magnitude of the contribution also depends on the overall size of the revenue stream in question. Moreover, innovative finance is generally provided with a degree of automaticity that furthermore enhances its predictability.

To be clear, political decisions are not necessarily less predictable than markets. Indeed, if one is involved in the relevant decision-making processes – particularly as a powerful player – one might well prefer a purely political process. The problem from the vantage point of the developing country recipients is that they typically have very little, if any, say in the political processes that determine the relevant (conventional) contributions. This is why, for them, market-based uncertainties will be more palatable than those arising from the relevant political (developed country) processes: from the outside, markets appear more predictable than individuals.

Another characteristic of innovative finance, in this sense, is that it is generally used to provide grants, as opposed to loans or investments with profit incentives. For the purposes of this blog, we differentiate between ‘international’, ‘regional’, and ‘unilateral’ innovative finance sources, depending on whether the decision making involves all Parties to an international agreement (like the UNFCCC), just a few, or a single government. We also differentiate between national and sub-national governments.

Varieties of Innovative Finance

As it happens, there is a plethora of examples of innovative finance of all kinds: international, regional, involving national and/or sub-national governments. Many of these were discussed in a 2008 paper ‘International Adaptation Finance: The Need for an Innovative and Strategic Approach’ [Müller 2008] which, in turn, formed the basis of an ODI paper ‘Innovative Carbon-Based Funding for Adaptation’. Given the blog format limitations, we refer the reader to these and subsequent references for more detailed and complete accounts of innovative finance instruments. The following listing is intended to just give an idea of the potential variety of instruments and to highlight a few options that we believe may be viable in the current circumstances.

International Innovative Finance

In climate change circles, probably the best known example of international innovative finance is the share of proceeds collected from projects under the Clean Development Mechanism (CDM) of the Kyoto Protocol where 2 per cent of the Certified Emission Reductions (CERs) generated by a project are set aside internationally and given to the Kyoto Protocol Adaptation Fund to be monetized on the relevant carbon markets.[5] The most important outcome of Paris with regards to addressing the predictability problem was that the new international market mechanism defined in the Paris Agreement also contains a provision for a share of proceeds ‘to cover administrative expenses as well as to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation.’[6]

However, other proposals have also been under discussion, some of them more successful than others. For example, at COP 12 in Nairobi (2006), Moritz Leuenberger, President of the Swiss Confederation proposed ‘a global carbon levy. Based on the “polluter pays” principle, it would be paid by each individual and each business in proportion to their carbon emissions. The revenue from this levy would then be directed towards adaptation measures worldwide.’[7]

The same year (2006) also saw the publication of an outline proposal for an International Air Travel Adaptation Levy (IATAL),[8] which at COP 14 (Poznan, 2008) was submitted to the UNFCCC by the Maldives on behalf of the LDC Group as the ‘International Adaptation Passenger Levy (IAPAL)’.

In 2007 there was also a UNFCCC workshop on investments and financial flows to address climate change[9] at which ‘Norway proposed that financial needs under the Convention could be financed through auctioning a share of assigned amount units of all Parties.[10]

Other (mostly carbon market-based) instruments have been discussed and some have even been considered by the International Civil Aviation Organization (ICAO)[11] and the International Maritime Organization (IMO)[12] in the context of reducing international aviation and maritime emissions. But none of them has made any real progress so far, and it is unlikely that they will do so in the foreseeable future, not least because international levies are regarded as anathema by many national treasuries.[13]

This is a shame because, to paraphrase the above-mentioned Norwegian submission, due to their genuinely international character international innovative finance instruments, such as the auctioning of allowances have the potential of overcoming domestic revenue problems.[[14]] We therefore see auctioning as one particular promising option to generate adequate, predictable and sustainable financial resources.

Fortunately, innovative finance can also be provided regionally and unilaterally (at national or sub-national level), which we shall now turn to.

Regional and Unilateral Innovative Finance

National Schemes

Among regional emission trading schemes the EU ETS is clearly one, if not the most, significant potential source of innovative climate finance: in the first quarter of this year, auctions across the EU ETS yielded a total of just over €1 billion,[15] 1 per cent of which would be tantamount to €40 million ($45 million) per annum. Moreover, the revenue from such auctions is expected to increase between now and 2020 with the share of allowances to be auctioned, even if allowance prices fail to increase.

Of course, a number of EU member states will reject the idea of earmarking a share of the auction proceeds for climate finance, on the grounds that they are not allowed to ‘hypothecate’ government revenue as a matter of principle. However, this principle is more honoured in the breach than in the observance,[16] as was pointed out in a 2008 paper on the subject of earmarking of EU ETS auction revenue:[17] most countries practise some form of hypothecation,[18] such as earmarking a share of national lottery revenue for certain good causes.[19]

As it happens, the EU ETS Directive itself provides for a de facto earmarking, namely ‘that at least 50 % of auctioning revenues or the equivalent in financial value of these revenues should be used by Member States for climate and energy related purposes.’[20] Some have actually used a significant proportion of their auctioning revenue for developing country climate finance.[21]

In other words, it should be possible for willing EU member states to use a small percentage of their ETS auction revenue to support developing countries, in particular the poorest and most vulnerable ones. Otherwise there is always, of course, the Norwegian idea: they could opt to allocate a small share of their (collective) allowances to, say, the Least Developed Countries Fund (LDCF), or to an intermediary that will monetize them on its behalf. After all, this is precisely what they did when allocating 300 million allowances to be monetized by the European Commission and made available for the co-financing of carbon capture and storage and of innovative renewable energy technologies, mostly in Europe under the NER 300 funding programme.[22]

Last, but by no means least in this discussion of innovative climate finance at the national level, it is worth keeping in mind the fact that this type of support of climate change activities in developing countries need not necessarily be related to emission mitigation schemes. As concerns potential revenue scales, one of the most promising initiatives must be the European Union Financial Transaction Tax (EU FTT), proposed by the European Commission, which has been taken up by 11 EU member states.

The EU FTT is to cover financial transactions between financial institutions. It will be collected by participating member states[23] and will represent a charge of 0.1 per cent against the exchange of shares and bonds and 0.01 per cent across derivative contracts, if just one of the financial institutions involved resides in a member state of the EU FTT. The proposal, which according to various estimates will yield between €10 billion[24] and €37 billion[25] annually, was approved by the European Parliament in July 2013, and must now be unanimously approved by the 11 initial participating states before coming into force.

According to a Guardian article[26] published during COP 21 in Paris: France, Spain and Belgium have already committed to earmark chunks of the tobin tax revenues for climate aid, a move which may help allay fears among some developing countries about the over-use of loans and private finance in a fund planned to raise $100bn a year by 2020. Pascal Canfin, the co-chair of France’s presidential committee for innovative finance, said that the announcement would add to momentum for a climate deal in Paris. ‘It is obvious that this tax could be a tool to provide more finance to the countries in need but it depends on the willingness of the participating countries to allocate the money for climate objectives,’ he said.

Unfortunately, the required unanimity among the participating members could not be achieved in Paris, and the decision has been postponed to the end of this month. What is interesting in this context is that the decision by the three members reported in the Guardian piece shows once again that earmarking national government sources for climate finance is possible if there is sufficient political will.

Sub-national Schemes

On 6 December 2015 at COP21 in Paris, Premier Philippe Couillard of the Canadian province of Quebec announced that his government would be contributing $6 million to the Global Environment Facility (GEF) operated UNFCCC Least Developed Countries Fund (LDCF).

At the announcement, former US Vice President Al Gore thanked the Quebec people as ‘becoming true heroes in the world’s effort to solve the climate crisis’ and setting an example that would reverberate to regions and countries around the world. GEF CEO Naoko Ishii referred to the contribution as ‘this ground-breaking commitment by Québec’ while the LDC Group press release spoke of a ‘historic and innovative pledge’.

On 10 and 11 December, other sub-nationals (the city of Paris and the three regions of Belgium), in turn, took the opportunity to announce contributions to the Green Climate Fund, with Wallonia pledging €7 million on an annual recurring basis until 2020.

As alluded to in the heading of another OCP blog: In Paris it became ‘chic’ for sub-nationals to provide multilateral support for climate change finance. Now it must become ‘de rigueur’!

But how? For one, the policy brief that launched the idea (‘Finance for the Paris Climate Compact: The role of earmarked (sub-) national contributions’) suggests the use of innovative finance involving a small but regular share of proceeds, which as mentioned above could be in the form of a share of auction revenue, or in the form of free allowances (to be monetized through the relevant auctioning/trading platforms by the LDCF or by a local intermediary on its behalf).

In practical terms Quebec could, for instance, decide to build on the Wallonia announcement and put its one-off 2016 contribution on an innovative regular footing by pledging 1 per cent of its auction revenue (about $5 million annually) to the LDCF, to match the annual conventional bilateral support until the end of the current trading phase in 2020 that Premier Couillard also announced in Paris.

As at the national level, some sub-national governments may find it more difficult to earmark a share of auctioning revenue than others. For example, California, Quebec’s partner in the Western Climate Initiative (WCI) also auctions a share of its trading scheme allowances (indeed it does so in joint auctions with Quebec). However, according to Assembly Bill 32 (AB 32) which governs the California Cap and Trade Programme (CCTP), the proceeds of the (State government) allowance auctions are subject to annual appropriations[27] and as such are facing the domestic revenue problem like any other conventional budgetary support. Moreover, a lawsuit by the California Chamber of Commerce against the State government auction portion of the CCTP is pending on the grounds that auctioning off allowances constitutes an unauthorized, unconstitutional tax.[28] California government allowance revenue is therefore not likely to provide the sort of predictable support we are trying to identify here. However, the CCTP does have an interesting feature that may well offer a way forward: its allocation of allowances to utilities ‘on behalf of rate payers.’

The Air Resources Board (ARB) allocates allowances ‘to prevent leakage and provide transition assistance’ to entities covered by the CCTP. To ensure that utility rate payers do not experience sudden CCTP-associated increases in their utility bills, the ARB allocates allowances to the utilities covered by the Program on behalf of their rate payers. The CCTP Regulation requires covered utilities to use the value associated with these allowances for the benefit of their rate payers, consistent with the goals of AB 32. They may not be used for the benefit of entities or persons other than their rate payers.[29] In other words, to quote The Wall Street Journal, ‘two pools of allowances are sold at each auction: one controlled by the utilities, which get all of their allowances free, and another controlled directly by the state. Investor-owned utilities are required to sell all of their allowances [for the benefit of their rate payers] and then buy back what they need to cover their own emissions. (It’s complicated.)’[30]

In sum, the CCTP uses (private sector) intermediaries to monetize allowances for the benefit of others. It thus stands to reason, particularly since the State government is currently engaged in looking at how the CCTP could be extended beyond 2020, that it should be possible for California to show some solidarity with the poorest and most vulnerable across the globe by using a similar arrangement on behalf of, say, the LDCF. Indeed, the long-term future of innovative multilateral funding from the WCI as a whole may well lie in a WCI-wide post 2020 application of this use of a share of proceeds monetised on behalf of the global poorest and most vulnerable by eligible local intermediaries.

Air Passenger Adaptation Crowdfunding – an unconventional alternative

As mentioned earlier, the idea of levying a small charge on air travel to support adaptation efforts in developing countries has been around for over a decade, but it failed to take off as an international instrument. In light of this, there was a 2011 proposal to transfer the idea to the national level (‘Solidarity Levies on Air Travel’), which was also not particularly successful. In 2013, the ecbi published an award-winning study ‘Crowdfunding for Climate Change’ and in 2012 the Adaptation Fund (AF) introduced a ‘Donate’ button on its website to receive crowdfunding donations.[31]

Given that the AF was the intended recipient of the original International Air Passenger Adaptation Levy, it does not take a great leap of imagination to arrive at the idea of using this crowdfunding tool on the AF website for soliciting voluntary contributions from air passengers – particularly as a number of airlines already provide a similar service on their websites for passengers to pay for offsetting their flight emissions.

Why should airlines provide the option for passengers to contribute to adaptation efforts in developing countries? Is there not a danger that this would be to the detriment of individual offset purchases? As it happens, it is indeed likely that some passengers who would otherwise have bought offsets would instead make an adaptation donation, but this is not a reason for abandoning the airline adaptation crowdfunding idea.

In light of the fact that since 2012 flights from, to, and within the European Economic Area have been under the EU Emission Trading Scheme, and since there remains a growing push for extending market-based measures in that sector globally,[32] it stands to reason – as argued by some airline sector spokespeople[33] – that since the industry is subject to emission reduction constraints, individual flight offsets by passengers are, if not redundant, then at least less important than they were in the absence of such industry constraints. This, of course, does not mean that the emissions permitted under these schemes are not still imposing adverse impacts that require adaptation actions, particularly by the poorest and most vulnerable. This is why individual offsetting should give way to individual solidarity though adaptation crowd funding.

What could be the scale of such voluntary adaptation air passenger crowdfunding? As there is, to our knowledge, no precedent, the only way to gauge its revenue potential is by looking at similar related instruments. And here the obvious candidate is, of course, voluntary flight offsetting.

For example, a 2011 ENDS Report (‘Airlines struggle to get carbon offsetters to come onboard’) surveying European airlines concludes that ‘most airlines achieve commercial passenger offsetting rates of below 1%’, and interestingly suggests that ‘take-up rates appear to be most determined by whether airlines offer carbon offsets at the point of ticket purchase’.[34]

It also quotes the managing director of one of the world’s largest offset providers as saying that most offsetting is done by businesses covering their corporate travel, and that – unlike in the case of leisure passengers – ‘here the appetite not only remains unabated, but is growing’, with more than half of their corporate clients using offsets to cover their travel emissions. If this is indeed a general trend, then a two-pronged approach to harnessing this potential revenue source could be in order by not only focusing on airline ticketing sites, but also directly at the corporate consumer, such as large corporations or business federations, as part of their CSR[35] schemes.

But what does all this tell us about the revenue potential of air passenger adaptation crowdfunding? The answer obviously depends on how contributions are specified. For example, 1 percent of corporate passengers donating 1 per cent of their ticket price would, according to Forbes, yield over $100 million annually. If, alternatively, one were to use a flat rate levy (say $6/$62 per international economy/business and first class ticket as used in the IAPAL scheme), then a 1 per cent uptake by passengers in general would yield between $80 million and $100 million annually,[36] again more than the Adaptation Fund pledges received in Paris. While this would by no means be sufficient to meet the global demand for adaptation finance, it would provide a much needed core flow of funding for the AF, which would enable it to continue doing the sterling work it has been doing under very difficult financial circumstances and play a key role in the post-Paris multilateral financial architecture, as argued some time ago in another OCP Blog (On the Virtues of Strategic Divisions of Labour: Some thoughts on strategies for the Green Climate Fund and the Financial Mechanism of the Paris Agreement)

Conclusion

After nearly two decades of conventional multilateral climate finance, it is clear that we have reached the limit of what we can get in predictably from national budgetary contributions. If we want more, we may need to reconsider the proposal which Laurent Fabius, president of COP 21, tabled in Paris on the penultimate night of the COP, namely ‘to establish a process for the consideration of new sources of finance beyond existing bilateral and multilateral sources, in accordance with the terms of reference to be developed by the Conference of the Parties, taking note of the need to abide by the principles of fiscal sovereignty and avoid incidence on developing country Parties.’[37]

Moreover, we may actually have to throw caution to the wind and look into how we can get additional innovative resources for multilateral funds from both subnational governments and non-governmental sources, such as the proposed crowdfunding from airline passengers.

To be quite clear, the point here is not to belittle the importance of national budgetary contributions for multilateral climate finance. Indeed, for the foreseeable future, the bulk of it will come from these conventional sources, with their well-known predictability limitations (at best four-year time horizon for GCF and GEF replenishments amounting to some single digit billions annually). The point is merely to emphasise that if we do wish to enhance predictability of climate finance, then we will need to look at alternatives to these conventional sources such as the ones highlighted above.

Endnotes

[1] The Paris Cycle-wreck: beyond (partial) salvage?

[2] Analysis, personally communicated, based on the agendas of the events in question.

[3] The topic was not part of the agenda of the 2016 in-session workshop.

[4] Paragraph 130 of Decision 2/CP.17 (Outcome of the work of the ADP).

[5] National budgets, or for that matter Treasuries, are not involved. As such, these funds are without any doubt ‘additional’, in the sense of ‘not displacing ODA’.

[6] Article 6.6.

[7] Moritz Leuenberger, ‘A Global Carbon Levy for Climate Change Adaptation’, IIED/ecbi Opinion Piece, December 2006.

[8] See also: Jim Giles, ‘Flying to new green heights: The pre­budget report is likely to tax low­cost flights, but only international cooperation can solve climate change’, theguardian.com, Wednesday 6 December 2006.

[9] With a presentation on ‘IATAL: a proposal for an International Air Travel Adaptation Levy’ by Laurens Bouwer.

[10] Norway, Finance – AWGLCA Norway’s submission on auctioning allowances. The presentation in question was given by Leif K. Ervik, ‘Carbon taxes and allowances, similarities and differences’. See also UNFCCC Technical Paper and CCAP Analysis.

[11] See, for example the presentation on ‘Market-Based Measures’ by the ICAO Environment, Air Transport Bureau at the Global Aviation Dialogues (GLADs) on Market-Based Measures to address Climate Change, Nairobi 14 April 2015.

[12] For example the Norwegian proposal regarding the Prevention of Air Pollution from Ships: A rebate mechanism for a market-based instrument for international shipping (IMO MEPC 60/4/55 29 January 2010). Another interesting, well-developed example is the International Maritime Emission Reduction Scheme (IMERS).

[13] For an account of the state of affairs in ICAO and WMO, see ‘Aviation, Shipping and the Paris Agreement

[14] The term ‘domestic revenue problem’ – see Müller (2008), p.8 – refers to the fact that funding collected through domestic revenue channels are usually taken to belong to the jurisdiction in question, and as such face difficulties in being sent abroad.

[15] EEX (Transitional Common Auction Platform) €701m; Germany: €191m; UK: €113. Source: EC DG Clima, Auction Reports.

[16] The breach is usually sanctioned by declaring the revenue source ‘off budget’.

[17] Benito Müller, ‘To Earmark or Not to Earmark?: A far-reaching debate on the use of auction revenue from (EU) Emissions Trading’, Oxford: OIES EV43, November 2008.

[18] In the UK, for example, earmarking precedents include the Climate Change Levy initially used to fund a number of energy efficiency initiatives such as The Carbon Trust, and the Renewables Obligation, under which payments for shortfalls are earmarked to be paid back to suppliers.

[19] Indeed, some national lottery funding has already been used to provide climate finance for developing countries, e.g. the Dutch Post Code Lottery, having funded the Climate Group’s ‘Bijli – Clean Energy for All’ project.

[20] European Commission (2014), Progress Towards Achieving the Kyoto and EU 2020 Objectives, COM(2014) 689 final.

[21] Germany, UK, Finland and Denmark [Source: European Commission (2014)].

[22] The NER 300 funding programme is a mechanism in support of innovative renewable energy technology development and Carbon Capture Storage (CCS) demonstration projects. It is financed by the auctioning of 300 million allowances from the new entrants’ reserve of the EU ETS. Two calls for proposals were launched under this programme.

The second call, awarded in July 2014, was funded from the sale of the remaining allowances and unused funds from the first call. 18 renewable energy and 1 CCS projects were selected and will receive €1 billion in total, which will generate private investments for a total value of almost €900 million. In total, the two calls will provide € 2.1 billion to 39 projects (38 in the field of renewable energy and 1 CCS project).[Source: European Commission (2014)]

[23] ‘Taxation will take place in the Member State in the territory of which the establishment of a financial institution is located, on condition that this institution is party to the transaction, acting either for its own account or for the account of another person, or is acting in the name of a party to the transaction.’[Proposal for a COUNCIL DIRECTIVE on a common system of financial transaction tax and amending Directive 2008/7/EC]

[24] ‘Canfin, a former French development minister said that the proposed fund would generate a minimum of €10bn to €15bn (£7.2bn to £10.8bn) a year.’ [‘Final decision on financial transaction tax expected in June’, Arthur Neslen, 8 December 2015, The Guardian.]

[25] Dorothea Schäfer und Marlene Karl, ‘Finanztransaktionssteuer Ökonomische und fiskalische Effekte der Einführung einer Finanztransaktionssteuer für Deutschland’, Deutsches Institut für Wirtschaftsforschung, 2012.

[26]Final decision on financial transaction tax expected in June’, Arthur Neslen, 8 December 2015, The Guardian.

[27] ‘The Legislature and Governor appropriate proceeds from the sale of State-owned allowances for projects that support the goals of AB 32.’[www.arb.ca.gov/cc/ab32/ab32.htm]

[28] Ann Carlson, ‘Breaking News: California Chamber of Commerce Sues over AB 32 Auction’, Legal Planet, 13 November 2012.

[29] Source: ARB, Allowance Allocation.

[30] How Cap-and-Trade Is Working in California: Carbon Program May Hold Lesson for Other States, by Alejandro Lazo, 28 Sept. 2014.

[31] In 2009, the AF received a small contribution from students of a German High School, followed by one from the World Development Movement (a British NGO) in Cancun in 2010. The AF Board wanted the trustee to receive such small private donations. However, the acceptance of individual small donations increases the transaction costs, as the trustee has requirements related to conducting due diligence on the donors of such contributions. For this reason, the AF Board considered ways to make it simpler to receive such contributions, and decided in July 2011 to:

  1. a) Pursue the option to enter into a partnership with a third party (UN organization, foundation, NGO, etc.) that would raise funds through on-line donations on behalf of the Adaptation Fund. The Trustee would then receive funds into the trust fund as a donation from that entity;
  2. b) Request the Board Chair to formally invite the UN Foundation to enter into such a partnership with the Board, and to initiate discussions to that effect.[AF Board Decision B.14-15/2]

A partnership agreement with the UNF was established in November 2012, with the establishment of the ‘Donate’ link between the AF and the UNF websites being announced at the nineteenth meeting of the AF Board in December 2012. [Source: AF Secretariat]

[32] The International Civil Aviation Organization (ICAO) agreed in 2013 to develop a global market-based mechanism to address international aviation emissions by 2016 and apply it by 2020. This agreement followed years of pressure from the EU for global action.

To allow time for the international negotiations, the EU ETS requirements were suspended for flights in 2012 to and from non-European countries.

In the period 2013-2016, only emissions from flights within the EEA fall under the EU ETS. Exemptions for operators with low emissions have also been introduced.

Under the amended law, the Commission will report to the European Parliament and Council on the outcome of the 2016 ICAO Assembly and propose measures as appropriate to take international developments into account with effect from 2017. [Source: European Commission, ‘Reducing emissions from aviation’]

For recent developments see: European Commission, ‘Consultation on market-based measures to reduce the climate change impact from international aviation’.

[33] A BA spokeswoman said that UK passengers could be paying for the environmental impact of their flight three times: through voluntary offsets, the EU ETS, and the UK’s air passenger duty (APD), which the UK Treasury is consulting on. A spokesman for the International Air Transport Association (IATA), which manages an offsetting programme for numerous airlines, echoed this: ‘There is evidence passengers may be more reluctant to voluntarily offset where they feel they are already being hit with an environmental tax … The [UK] government has in the past presented APD in this way.’[GreenAironline.org (2016)]

[34] The ENDS Report also mentions a July 2007, UK House of Commons Environmental Audit Select Committee report dealing with passenger offsetting and urging the UK government to make it compulsory for airlines to provide the option to offset at the point of purchase, and recommending to do it on an ‘opt out’ basis.

[35] Corporate Social Responsibility

[36] IAPAL was estimated to yield between $8 and $10 billion annually.

[37] Paragraph 57 in Proposal by the President: DRAFT PARIS OUTCOME, Version 2 of 10 December 2015 at 21:00.

‘Maillot Jaune’ for the Dynamic Contribution Cycle

by Benito Müller

The Paris Agreement has all the key elements of the Dynamic Contribution Cycle, but it fails as it stands to harness fully their potential to ‘ratchet up’ country contributions. However, this can easily be remedied.

In August 2014, a number of senior developing country negotiators developed an idea for sequencing contributions in the Paris Agreement at the tenth anniversary ecbi Oxford Fellowships and Seminar. They published it as “A Dynamic Contribution Cycle” (DCC), with Xolisa Ngwadla (South Africa) and Jose Miguez (Brazil) as lead authors.

The DCC idea was submitted to the UNFCCC on 6 November 2015 as part of the Views of Brazil on the Elements of the New Agreement under the Convention applicable to All Parties (for a summary, see below). The submission states that ‘the agreement itself must provide for the procedures to enhance ambition over time, … . Brazil recognizes it is important to avoid “locking in” contributions in the long term. It is also important to avoid that successive cycles of contributions become subject to renegotiations and political bargain. With a view to addressing these issues, Brazil proposes a “dynamic contribution cycle”, based on ten-year periods, with two five-year contribution terms. The purpose of this approach is to allow the adjustment of contributions with a view to enhance ambition, while providing long term perspectives for Parties and stakeholders.

How did the DCC idea fare in Paris?

As elaborated in a recent OCP/ecbi Discussion Note on A Dynamic Ambition Mechanism for the Paris Agreement , the idea proved to be a key influence on what might be called the “Contribution Framework” the Paris Outcome. The Discussion Note analyses this Contribution Framework with respect to certain key ambition features of the DCC proposal, namely:

  • accommodation of the fact that once contributions are inscribed, they are in many cases politically “locked-in”,
  • provision of shorter-term predictability though the inscription of the five-year term contributions with a medium-term indication of how the contributions are going to evolve (thus avoiding being caught by surprise every five years).

The communication and updating cycle of theContribution Framework is divided into two tracks due to different time-frames envisaged for the initial Nationally Determined Contributions (NDCs): paragraph 23 of the Paris Outcome Decision defines a five-year time-frame track (or “§23 track” for short), and paragraph 24 a ten-year time-frame track (“§24 track”), depicted in Figure 1 (a) and (b), respectively.

Figure 1 Mk 2

  • The §23 track begins in 2020 with the communication of five-year 2025 and 2030 NDCs. This is followed in 2025 with communications of five-year 2035 NDCs, 2040 NDCs in 2030, and so on every five years.
  • The §24 track begins in 2020 with the communication of ten-year 2030 NDCs. In 2025, they are to be nationally reviewed and updated (or left as they are). In 2030, new ten-year 2040 NDCs will be communicated, to be nationally reviewed and updated in 2035, and so on.

The Contribution Framework thus uses the key ambition tools of the DCC, but divided between the two tracks, with the result that the rolling medium-term time horizon is only used in the §23 track, while synchronised updating is confined to the §24 track.

Enhancing theContribution Framework

The shortcoming of the §23 track, i.e. its failure to incorporate a synchronised updating process, can be remedied by simply adding every five years the request to update the next NDC, as illustrated in Figure 2.a.

Figure 2 Mk 2

The situation may seem more problematic in the case of the §24 track, where the issue is not updating but the lack of a running medium-term time horizon. But again, this can be fixed.

To explain this in concrete terms, take the case of the EU NDCs. Given the INDC submission, it stands to reason that the EU will adopt a §24 track ten-year time-frame for its NDCs, beginning with a 2030 NDC of a 40% reduction with respect to the 1990 base-line between 2021 and 2030, meaning that the average annual EU emissions over that time-frame will not exceed 60% of 1990 emission. The problem with the §24 track as it currently stands is that there may be no communicated medium-term indication as to how the EU NDC is going to evolve after 2030 until 2030, when a new NDC will have to be communicated. Given the Kyoto Protocol experience,[1] this is  sub-optimal as regards ambition and durability of the Agreement, but fortunately it can also easily be remedied.

The crux of the matter is: what is to happen in 2025?

According to §24, there is  a communication or updating of NDCs every five years. But which is it to be? Following the EU’s original ‘mid-term review’ idea, one could expect  an updating of the 2030 NDC. While this, on its own, would be sufficient to satisfy §24, it is important to keep in mind that the language of §24 does not imply that one could not simultaneously do such an update and communicate a new NDC! Indeed, it would be perfectly possible to communicate a 2035 NDC with a ten-year time frame, a reduction of, say, 60% below 1990 benchmark, in the sense of average annual emissions between 2026 and 2035 not exceeding 40% of 1990 levels.

In other words, it is possible to make mid-term communications of  new  NDCs under a ten-year time-frame track because there is no reason, in principle, why time-frames cannot overlap, as illustrated in Figure 2 (b).

Conclusion

In negotiation terms, the full potential of the DCC ambition tools could be harnessed simply by requesting all Parties in 2025 to communicate a 2035 NDC and update their 2030 NDC, and to do so every five years thereafter.

It is in this sense that we are pleased to see the DCC proposal to have emerged with the yellow jersey (‘maillot jaune’) from the ‘Tour de Paris’.

Maillot Jaune

[1] One of the main shortcomings of the Kyoto Protocol was precisely that there was no ex-ante indication on the ambition of the second commitment period until the first one was about to expire, which led disruptive uncertainties, and indeed speculations that there will be no second period at all.


The Brazilian Submission

The Dynamic Contribution Cycle

Brazil proposes a “dynamic contribution cycle”, based on ten-year periods, with two five-year contribution terms. The purpose of this approach is to allow the adjustment of contributions with a view to enhance ambition, while providing long term perspectives for Parties and stakeholders. 

Brazil DCC Figure

Each 10 year cycle includes a 5 year contribution term, followed by a 5 year indicative[1] Before the end of the each contribution term, the indicative term would be either confirmed or adjusted upwards, and an additional indicative term would be communicated for the following period.

After confirmation, during the first half of each contribution term, the Aggregate Consideration Process referred below would be conducted taking into account both 5 year terms, with a view to inform Parties when adjusting and confirming their subsequent term. The second half of each contribution term would be dedicated to allow countries to conduct their national processes to adjust their NDC for the subsequent contribution term, as well as to communicate the next indicative term. Under this approach, the cycle would be as follows:

  • In 2015, Parties communicate an intended contribution, pursuant to decision 1/CP.19.
  • Before 2020, all Parties confirm or adjust upward their NDC for the period
    2020-2025 and communicate an indicative contribution for the period 2025-2030.
  • Between 2020 and 2023, the COP conducts the first Aggregate Consideration Process as described below. The outcome of the Process is a set of decisions or recommendations to be taken into account by Parties when adjusting their NDC for the next 5-year term (2025-2030) and communicating the indicative NDC for the subsequent 5-year term (2030­2035).
  • Between 2023 and 2025, Parties make adjustments to their NDC at the national level, as appropriate, register their confirmed NDC for the term 2025-2030 and communicate a new indicative contribution for the term 2030-2035.
  • Between 2025 and 2028, the COP conducts the second Aggregate Consideration Process, restarting the cycle.

The Aggregate Consideration Process

During the implementation phase of the new agreement under the Convention, the COP shall regularly assess the aggregate effect of the NDC towards achieving the objective of the agreement, with a view to inform Parties in adjusting their NDC towards enhancing ambition in all pillars of the Convention.

The Aggregate Consideration Process will assess the progress towards the goal of holding the increase in global average temperature below 2°C, as well as the adequacy, scale and predictability of the delivery of means of implementation to developing countries for the implementation of their NDC. The assessment of the adequacy, scale and predictability of the delivery of means of implementation to developing countries would consider the aggregate level of pledges and actions, including south-south initiatives, to support the implementation of the NDC of developing country Parties, in relation to the aggregate level of support required, as informed through the NDC and included in the registry referred to in Means of Implementation.

The first session of the Aggregate Consideration Process shall start in 2020 and finish no later than 2023. The outcome of the Process would be a set of decisions or recommendations to be taken into account by Parties when adjusting their NDC, in accordance to the cycle outlined above in section Dynamic Contribution Cycle

The Aggregate Consideration Process shall be conducted consistent with science and on the basis of equity and be guided by:

  • A Technical Paper from the Secretariat based on the latest inventories, the information provided in the registries/schedules referred to in sections Mitigation, Adaptation and Means of Implementation, as well as in national communications and other communication channels agreed by the Convention;
  • The most recent IPCC assessment report;
  • Each country’s share in the global average temperature increase, and
  • The contribution of each country to limit the increase in global average temperature below 2°C.

Beyond the general topics above, it may not be necessary to detail all aspects of the Aggregate Consideration Process in the agreement itself. The agreement may mandate the COP to agree, before 2018, on the modalities and procedures of the aggregate consideration process, including, as appropriate, the adoption of a simplified methodology for each country to calculate its share in the global average temperature increase.

[1] Because the expression “intended NDC” has been associated with the proposal of a ex-ante review prior to Paris, we have preferred to use the expression “indicative contribution” to highlight this is a different approach. Nevertheless, both expressions refer to a similar concept, i.e. a NDC that is yet subject to changes.

Whatever happened to the Paris Predictability Problem? (Part I)

The Paris Cycle-wreck: beyond (partial) salvage?

Benito Müller

In my last blog (‘Finance in Paris’) I lamented the weak finance outcome of the recent UN Climate Conference in Paris. In this two-part blog, I want to strike a slightly more upbeat tone by looking at and reconsidering two ideas that emerged after the May 2015 publication of the OCP/ecbi Think Piece: ‘The Paris Predictability Problem: What to do about climate finance for the 2020 climate agreement?

Part I is about the (so-far) sadly ill-fated idea of a joint replenishment cycle for the financial mechanism of the Paris Agreement. The second idea from the May Think Piece (which will be dealt with in Part II) involves a shift in the paradigm of multilateral finance towards the inclusion of sub-national contributions. As indicated in the title of another recent OCP blog In Paris it became “chic” for sub-nationals to provide multilateral support for climate change finance. Now it must become “de rigueur”!’ – this idea has been rather more successful than the former.

The key point of ‘Finance in Paris’ was that obsessing about ‘collective quantified goals’ regarding overall flows of public and ‘mobilized’ private sector climate finance is chasing after ill-defined figures, leading to mutual assured unhappiness and acrimony; which is not only unhelpful to the process but positively counter-productive.

As well-intended as Gordon Brown and Hillary Clinton may have been – both in the run up to and at Copenhagen, when tabling the (in-) famous $100 billion target – the time has come to refocus the discourse on the much more modest and mundane issue of providing predictable public sector support, starting with public sector contributions to the financial mechanism. As a collective quantified goal,[i] ten billions of public sector funds in the hand is worth more than hundreds of billions in the private-sector-mobilizing-pathway-MRV jungle!

Indeed, this was one of the reasons why the senior developing country negotiators attending the 2015 ecbi Oxford Fellowships came up with the idea of the Paris Replenishment Cycle (see below) combining a focus on such public sector funding targets (in the form of replenishment envelopes) with a new institutional arrangement that could have been the institutional signature outcome of Paris.

But before I turn to the depressing saga of what happened to this idea in Paris, a few words about the other key motivation behind the idea, namely the ‘Paris Predictability Problem’.

The Paris Predictability Problem and some related strategic issues

This term was first used in the above-mentioned OCP/ecbi Think Piece which, among other things, argued that by far the most pressing problem with international climate finance for developing countries is ‘predictability’ (or rather the lack thereof) in the longer term.

Three of the four multilateral funds established by the UN climate change regime – the Least Developed Countries Fund (LDCF), the Special Climate Change Fund (SCCF) (both operated by the Global Environment Facility, or GEF), and the Kyoto Protocol Adaptation Fund (AF) – have, for some time, experienced problems in raising the resources necessary to fund a backlog of fundable projects in the pipeline. This is because they are relying on voluntary contributions which have not been sufficiently forthcoming,[ii] particularly since the arrival of the new and more glamorous Green Climate Fund (GCF).

But why, one might well ask, should these small niche funds be kept afloat? The short answer is: Because they would have to be resurrected if the financial mechanism is to deliver climate finance at scale! At a GCF COP 21 side event on Beyond Paris: GCF Looks Ahead Gabriel Quijandria, former GCF Board Co-chair, announced that ‘the Board’s aspiration is to expand its investment portfolio to USD 2.5 billion in 2016.’ While it is regrettable – as stated[iii] by Héla Cheikhrouhou, Executive Director of the GCF – that Paris has not delivered more clarity about the evolution of contributions to the GCF and the other UN Funds, it stands to reason that if a significant share of new multilateral funding for adaptation[iv] is indeed to flow through the GCF, then $2.5 billion would have to be a floor figure for the expected longer-term annual GCF throughput.

Staffing Intensities

As shown in the figure above,[v] this would, in all likelihood, require between 500 and 800 administrative staff. Where should they be housed? Of course, one could try to do all the necessary work in-house at the GCF headquarters in Songdo. However, as I have argued again and again over the last five years (most recently in ‘On the Virtues of Strategic Divisions of Labour’) there should, and I believe must, be a division of labour between the GCF as wholesale agent, and other funding entities as specialized retailers. Such a division – be it in-country (preferably) through Enhanced Direct Access, or through designated international funds, in particular those that will be serving the financial mechanism of the new Paris Agreement – is necessary if the GCF, and ipso facto the financial mechanism, are to function at the required scale.

But such a division of labour can only happen if all the funds involved have a viable funding basis. The LDCF, SSCF, and AF received pledges in Paris which just about cover their backlogs,[vi] but voluntary contributions such as these are not a viable basis for serving the new Agreement, as was acknowledged by Minister Pa Ousman Jarju of The Gambia in a letter just after Paris. Political high-stake events, such as Paris, tend to loosen voluntary purse strings, but such contributions are highly unlikely to be repeated for some time to come.

The good news is that the need for enhanced predictability is being acknowledged beyond the confines of the recipients. Thus, in his plenary statement after the adoption of the Agreement, Miguel Arias Cañete, EU Commissioner for Climate Action & Energy, promised that ‘the European Union will scale up its level of financial support as of 2020 and make it more predictable’[emphasis added].

I do not know how the EU intends to do this, but I do fear a golden opportunity was missed in Paris, which brings me back to the 2015 ecbi Fellows’ idea of the Paris Replenishment Cycle.

The Paris Replenishment Cycle

As mentioned above, the idea of a joint replenishment of all the funds serving the financial mechanism of the new agreement – and not just the GCF – was developed in Oxford last August and it was published in an OCP/ecbi Concept Note in early October. This was followed by a Discussion Note on ‘Procedural Arrangements for the Paris Replenishment Cycle’ with a one-page Summary Brief which contains the following succinct and I believe perfectly clear description of what such a joint replenishment could look like:

Stage I: Principal Reviews and Guidance

  • Each of the funds serving the FM undergoes an independent performance review (akin to the Overall Performance Studies of the GEF), which is to feed into the periodic Review of the FM under the aegis of the Standing Committee on Finance (SCF).
  • The outcome of this Review will provide the basis for formulating Principal Guidance (drafted by the SCF) to these funds for the next replenishment period.

In keeping with its core mandate to ‘assist the COP in exercising its functions with respect to the financial mechanism … in terms of improving coherence and coordination in the delivery of climate change financing, … [and] mobilization of financial resources’,[vii] the SCF could also play a facilitative role in the proposed subsequent two replenishment stages.[viii]

Stage II: Establishing the Paris Replenishment Envelopes

  • The funds in question produce costed programming scenario options for the next replenishment period.
  • The SCF convenes a process to consolidate these scenarios on the basis of the Principal Guidance, with the particular view of improving coherence and complementarity between them.
  • The executive bodies of the funds each adopt a programme of work for the next replenishment period; these jointly determine the target envelope for the replenishment.

Stage III: Pledging Rounds

  • The SCF organizes a series of pledging rounds with the view of soliciting pledges and ‘instruments of commitment’ sufficient to reach the target envelope established in Stage II.

I continue to maintain that this is a pragmatic, down to earth idea about how to enhance the coherence, complementarity and indeed longer-term viability of the financial mechanism. So what went wrong?

The Paris Cycle-wreck and prospects for (partial) salvage

In the final days of the Conference the LDC Group, supported by AOSIS, put forward the idea of a Paris Replenishment Cycle three times for inclusion in the Presidency’s text, but to no avail. Initially, they asked for the establishment of such a joint replenishment cycle as complementing to the decision in the draft text that ‘a significant share of new multilateral funding for climate change actions should flow through the Financial Mechanism of the Convention and the funds serving the Agreement’ [para. 54 in draft Decision V2] – which incidentally also did not make it into the final outcome. The last attempt, at 1 a.m. on Saturday morning, the LDCs’ request was merely for a COP decision to consider the idea at COP 22 in Marrakech, but that was also rejected.

I have been told that one reason given for this course of events was that the proposal had been tabled very late in the day. Was it really only lack of time to familiarize oneself with the idea – which after all would have been possible under the final proposal by the LDC Group – or were there other motives and reasons at work?

I believe that there were probably elements of both, but I also feel that to dwell on the latter would not be productive at this stage, which is why I propose to treat it as spilled milk and to move on to the question of whether the idea could be salvaged, at least in stages. As it happens, by dropping Stage III, the process described above would, in my mind, still be very useful.

  1. Whether or not all the funds serving the financial mechanism will eventually get replenished, it makes sense that they have a common principal review and guidance cycle. This may necessitate a synchronization of the review and planning cycles of the funds in question and of review of the financial mechanism, but that should not be an insurmountable obstacle, particularly if it then allows for the provision of multiyear Principal COP Guidance for all the funds in question. Note that the role of the COP would be exactly the same as it is at present.
  2. The first and the last activity in Stage II are simply programming activities which will happen in any case. It would thus make perfect sense for the SCF to facilitate a dialogue between the different funds with a view to implementing the Principal Guidance in order to enhance coherence and complementarity between the funds serving the financial mechanism. Note here that the SCF would have only a facilitative function in this process.

Could this sort of ‘Paris-light’ cycle of principal reviews and guidance with coherence and complementarity facilitation be salvaged from the Paris Cycle-wreck? In light of the fact that the finance spokespersons of both G77+China and AOSIS are reported to have announced that they would reserve the right to table some of the items that were dropped from the draft finance decision during the Paris end-game at the next COP or SBI (Subsidiary Body for Implementation), and given the support by AOSIS for the LDC submissions during these final days, I could imagine that this might be one of the items to be resurrected. At the same time, it would make sense to raise the idea, in particular with regard to Stage I, in the upcoming deliberations on an initial GCF replenishment at the GCF Board.

Of course all this would not solve the predictability problem of the small Convention funds, but it would be a very useful enhancement of the financial mechanism. The small funds would have to look for alternative sources of more predictable income, such as the ones I will discuss in Part II.

Notes

[i] As I emphasized in ‘Finance in Paris’, this not to say that countries should be prevented from showcasing how much they are doing in mobilizing private sector investments in this context. They can and should do so as part of their National Communications. The point here is simply that these overall flows should not be used to set targets.

[ii] The LDCF and the SCCF have always solely relied on voluntary contributions. The AF was meant to be replenished by innovative finance derived from the Clean Development Mechanism (CDM) but this has unfortunately almost dried up due to a lack of demand from developed countries.

[iii] See Megan Rowling and Valerie Volcovici ‘Green Climate Fund seeks clear role in post-2020 climate aid’, Thomson Reuters Foundation, 11 December 2015.

[iv] Paragraph 100, Cancun Agreements.

[v] This figure graphically summarizes the findings of David Ciplet, Benito Müller, and J Timmons Roberts ‘How many people does it take … to administer long-term climate finance?’, ecbi Policy Report, October 2010, according to which it takes on average between 250 and 400 people to administer $1 billion, thus $2.5 billion entails 500 to 800 people.

[vi] In the case of the LDCF, for example, $252 million has been pledged in the run up to Paris, which is very close to meeting the current, near-term demand for resources as requested in the 33 project and programme proposals that have been recommended for approval by the GEF Secretariat. However, at present about $69 million is sought towards 13 new project proposals that have been endorsed by LDCs’ operational focal points and formally submitted for review by the Secretariat.

[vii] Paragraph 112, Cancun Agreements.

[viii] Note that the procedures proposed here are based on well-established, tried and tested procedures used in the replenishments of the GEF Trust Fund and other multilateral funds.

Finance in Paris

Non à la Nouvelle Haute Couture Impériale!

by Benito Müller

Almost a month has passed since the Paris Agreement was adopted and the time may have come – after the initial despair in some NGO press conferences and the official euphoria – to step back and reflect dispassionately, to the extent possible, on the outcome of the Paris negotiations.

Reactions were polarized. This was mainly due to very different expectations about what is achievable and what should be achieved, something well captured in George Monbiot’s Guardian op-ed  conclusion:

‘So yes, let the delegates congratulate themselves on a better agreement than might have been expected. And let them temper it with an apology to all those it will betray.’[1]

I fully agree with Monbiot that the negotiators, in particular the French Presidency and the UNFCCC Secretariat, deserve praise for having avoided the complete procedural meltdown of Copenhagen, but I also contend that we should not let ourselves be blinded by this victory over the process with regard to the substance of the Paris outcome.

How should we judge this substance? In light of the vastly diverging subjective expectations with which we went into these negotiations, the most ‘objective’ benchmark might be a comparison with the substantive outcome of the Copenhagen fiasco, namely the Cancun Agreements.[2] I also believe that such comparisons should be divided according to substantive (‘thematic’) areas, and my focus here will be on three finance issues, namely institutional arrangements, public sector finance, and what has become known as ‘collective quantified goals’. The following are, in my view, the main outcomes regarding these issues:

Institutional Arrangements

  • Cancun: Decides to establish a Green Climate Fund, to be designated as an operating entity of the financial mechanism of the Convention
  • Paris: The Financial Mechanism of the Convention, including its operating entities, shall serve as the financial mechanism of this Agreement.

Public Sector Finance

  • CancunTakes note of the collective commitment by developed countries to provide new and additional resources, …, approaching USD 30 billion for the period 2010–2012,
  • Paris: Developed country Parties shall biennially communicate … as available, projected levels of public financial resources to be provided to developing country Parties.[emphasis added]

Collective Quantified Goals

  • Cancun: Recognizes that developed country Parties commit, …, to a goal of mobilizing jointly USD 100 billion per year by 2020 to address the needs of developing countries;
  • ParisAlso decides that, …, developed countries intend to continue their existing collective mobilization goal through 2025 …; prior to 2025 the Conference of the Parties serving as the meeting of the Parties to the Paris Agreement [CMA] shall set a new collective quantified goal from a floor of USD 100 billion per year, taking into account the needs and priorities of developing countries.

As regards institutional arrangements and public sector finance, the Paris outcome is clearly weaker than that of Cancun – although, in fairness, there was never any serious expectation that there would be a new fund in the Paris finance package. However, the absence of any figure for public sector funding in the Paris outcome is a genuine step backwards, at least from a recipient perspective.

What about the collective quantified goals for overall global flows? Well, as concerns the existing (extended) goal, it is difficult to say whether a recognition of a commitment to a goal is a stronger outcome than a decision that someone (else) intends to keep it (assuming that one understands what it means). What is remarkable is the fact that a successor to this goal is meant to be set multilaterally by the CMA, something which I would not have believed possible, given the resistance of some Parties to the idea of ‘COP interference in setting financial targets’.

The problem with these collective quantified goals for North-South mobilized finance flows relates to what a recent New York Times article described as “Wild West accounting”,[3] namely the fact that there is no, and I fear there will never be, an agreement on how to define/measure them. I also maintain that the pursuit of such fuzzy targets is extremely unhelpful for the process.  All it does is poison the atmosphere and create the opportunity for mutually assured unhappiness, if not acrimony, with one side claiming to have achieved the goal and the other denying it (without a way to verify objectively).[4] This is why I have not been very enthusiastic about the climate finance ‘narrative’ having ever since Copenhagen focused more and more on these fuzzy global flow targets and the whole intractable MRV discussion surrounding them.

To conclude: we must be humble and discard the emperor’s new clothes (or, in this case, ‘haute couture’) by admitting that the Paris finance outcome was (lamentably) weak, and by stopping to pretend that the ‘Copenhagen narrative’ in terms of targets for mobilised overall financial flows is helpful for the process.[5] Instead we should try and look for ways to genuinely enhance the predictability of public sector contributions to international climate finance.[6]

Although we missed the chance to do so in Paris, this is not the end but just the beginning of tackling what a recent Brookings briefing referred to as The unfinished agenda of the Paris climate talks: Finance to the global south.

But more of this in my next blog.

Notes:

[1] Grand promises of Paris climate deal undermined by squalid retrenchments, The Guardian, 12 December 2015.

[2] Strictly speaking, there was no COP outcome regarding the Bali Action Plan negotiations. The ‘Copenhagen Accord’, drafted by heads of government and tabled for approval by the COP was ultimately merely noted by it. However, all the key aspects, at least concerning finance, were later incorporated into the Cancun Agreements, which is why the latter can legitimately be seen as the outcome of Copenhagen.

[3] “Billions in Climate Aid Pledges Have ‘Wild West’ Accounting”, New York Times, 11 December 2015.

[4] Indeed, if one were a cynic one might be tempted to conclude that it was precisely because of their fuzziness that it was acceptable for these targets to be set by the CMP.

[5] NB: This is not to say that Parties should be disallowed from showcasing their private-sector mobilization achievements. But they can do so in their National Communications, without there being a collective quantified goal.

[6] Ironically, the potentially most significant concrete Paris outcome in that respect was not even listed in the article on finance, but in the one on the newly established market mechanism: “Art. 6.6. The Conference of the Parties serving as the meeting of the Parties to the Paris Agreement shall ensure that a share of the proceeds from activities under the mechanism referred to in paragraph 4 of this Article is used to cover administrative expenses as well as to assist developing country Parties that are particularly vulnerable to the adverse effects of climate change to meet the costs of adaptation.”

 

 

In Paris it became ‘chic’ for sub-nationals to provide multilateral support for climate change finance. Now it must become ‘de rigueur ‘!

by David Robinson[1]

  • At COP21, Quebec announced Cdn$25.5 million of climate finance for developing countries, including Cdn$6 million through the multilateral LDC Fund.
  • Al Gore thanked the Quebec people; he said they were “becoming true heroes in the world’s effort to solve the climate crisis” and setting an example that would reverberate to regions and countries around the world.
  • He was right. The Quebec model immediately became chic in Paris: the Brussels, Flanders and Walloon regions of Belgium, in addition to the city of Paris, all announced multilateral climate finance pledges.
  • Other subnational governments are now considering following Quebec’s lead; a contribution to multinational climate finance may soon be de rigueur  for the wealthy cities and regions of the world which are signatories of the Under2MOU.

On December 5, Action Day at COP21 in Paris, the Premier of Quebec, Philippe Couillard, announced the province’s contribution of Cdn$25.5 million of climate finance for the developing countries, including Cdn$6 million for the Least Developed Countries Fund (LDCF) managed by the Global Environment Facility (GEF).

The significance of the announcement was captured by Al Gore’s address to the press conference, in which he expressed “deep gratitude, admiration and congratulations” for Quebec’s initiative.  He said that he “could not find adequate words to describe how significant this [initiative] is” because it is illustrates how the wealthy regions of the world are able to reach out in partnership especially to the least developed countries to enable them to participate fully in solving the global climate crisis. He stressed the importance of the Cdn$6 million being channelled through LDCF to the countries that need the assistance the most. “Here Quebec is showing the way.”  He ended by saying that the people of Quebec were “becoming known as true heroes in the world’s effort to solve the climate crisis” and that their gesture “will reverberate with other regions and nations around the world”.

Quebec’s announcement was followed by announcements of pledges from Belgian regional governments to the multilateral Green Climate Fund (GCF):  €500,000 from the Brussels Capital Region, the Flanders Region €3.5 million, and the Walloon region €7 million (per year until 2020).  The city of Paris also announced its own contribution of €1 million to the GCF.

Where do we go from here? One logical next step would be for other members of the Western Climate Initiative (which offers administrative support to the GHG emissions trading scheme that includes Quebec, California, Ontario and Manitoba) to consider following Quebec’s example.

Why stop there? By the end of the COP, over 120 states and regions had joined the Under2MOU, which was launched in 2015 by California and the German State of Baden-Württemberg with the aim of galvanising action among regions to limit warming to below 2ºC.  Under it, signatories from developed and developing countries commit to either reducing greenhouse gas emissions 80 to 95 percent below 1990 levels or limiting per capita annual emissions to less than 2 metric tons by 2050. In other words, this is a club of regions that want to be more ambitious than any global climate agreement could ever be. New members joined the club before the COP, but many regions announced their adhesion in Paris. The signatories of the pact now represent more than 720 million people and $19.9 trillion in combined GDP, equivalent to more than a quarter of the global economy. To date, the focus has been on domestic mitigation. However, if it becomes de rigueur  for the signatories from wealthy nations to follow the example of Quebec, Paris and the Belgian regions in contributing multilateral climate finance, this would involve a fundamental transformation of global climate and development finance.

On behalf of Oxford Climate Policy, I would like to congratulate Premier Couillard and Minister Heurtel for their groundbreaking announcement. It was an honour, a privilege, and a pleasure for us to have been able to help bring the idea of subnational contributions to multilateral finance to fruition.

[1] Managing Director, David Robinson & Associates, and Senior Research Fellow, Oxford Climate Policy, david@davidrobinsonassociates.com.

For more on the author’s views on COP 21 and its implications click here

On the Virtues of Strategic Divisions of Labour

Some thoughts on strategies for the Green Climate Fund and the Financial Mechanism of the Paris Agreement

Benito Müller

1. Background

After three years of intense work, focusing initially on internal governance matters – such as adopting Board Rules of Procedure (2013), followed in 2014 by a focus on the Initial Resource Mobilization, and in 2015 on ‘getting a project on the ground’ by Paris – the Green Climate Fund (GCF) Board has now, some would say ‘finally’, turned to considering the matter of formulating GCF strategies.

At the tenth meeting last July, the Board requested[1] the Accreditation Committee to work on a ‘Strategy on Accreditation’, and introduced a new agenda item ‘Strategic Plan for the Fund’ inviting the members to submit inputs ‘in order for the Secretariat to produce a progress report on the strategic plan for consideration by the Board at its eleventh meeting.’ This is not to say that strategies have not featured in the previous Board deliberations at all, but they have appeared mainly in the context of discussing the strategies of other entities. The only reference concerning a strategy of the fund – other than the above-mentioned two – in the Decisions of the tenth meeting, for example, is to its ‘strategic objectives’ in the context of the Fund’s risk appetite methodology. Strategic objectives are, of course, important but there is more to having a strategy (strategic plan) than having such objectives. Indeed, the aim of this blog is to highlight certain elements that are of key importance but which seem to be in danger of being left out of the GCF strategy discussions.

At the eleventh meeting earlier this month in Zambia, the Secretariat presented reports on the progress of both the Strategy on Accreditation, and the Strategic Plan.

2. The Strategy on Accreditation

The focus of the accreditation strategy report was almost entirely on procedural improvements, such as accelerating the process, and developing priority criteria, if applications continue to outnumber the processing capacity. Again these are important issues, but they are not really strategic. As it happens, the report does refer in passing to a number of questions as having been raised by observers that actually are strategic, namely whether ‘the current pool of accredited entities [could] achieve the following objectives of the GCF: allocating 50 per cent of resources to adaptation; allocating 50 per cent of adaptation resources to SIDS, LDCs and African States; leveraging large volumes of private climate finance; and maintaining a geographical balance.’

These are questions not about process but about the outcome of the accreditation procedures, with respect to certain distributional aspects, and ultimately about (distributive) fairness. Given that currently 100 per cent of the medium, and 80 per cent of the large accredited entities are international, while 80 per cent of the current disbursement potential lies with international entities, it stands to reason that they ought to be addressed as a matter of urgency. There are other equally important strategic ‘architectural’ questions which observers have raised, but which are not mentioned in the report, namely:

  • Is there need for an overall cap on the total number of accredited entities?
  • Is there a strategic aim regarding the distribution of accredited entities (by type, size, geography, etc.)?

As alluded to in a number of previous blogs (A case for Jumping the Queue!GCF Direct Access Accreditation: A Simple StrategyAccess to Green Climate Fund: In Desperate Need of a Strategy), I believe that these are the real strategic accreditation elephants in the Board room that should be faced head-on in the Fund’s accreditation strategy.[2]

3. The Strategic Plan

I wholeheartedly support the idea of a strategic plan for the GCF. However, I think it is again absolutely key that certain ‘architectural’ considerations take centre stage, in particular the issue of what is to be administered ‘in-house’ (in Songdo) and what is to be left to others, or ‘outsourced’.

We have for some time supported the view that the GCF should ultimately outsource all ‘retail’ activities – that is, to use the GCF terminology, micro projects (less than $10 million) – and only keep ‘wholesale’ programmes to be administered in-house, so as to avoid the scenario that the Economic Council in post war West Germany wished to avoid when establishing KfW in 1948, namely to create: ‘a large institution entrenching itself with a huge bureaucracy and encroaching on the territory of the established banks. The KfW is to be a small and unbureaucratic body with a small management board, a capital distribution agency that passes on capital from domestic sources, from international sources or from counterpart funds as quickly as possible.’ [3]

Outsourcing could be to national implementing entities under the (enhanced) direct access modality, or to international implementing entities as part of international access. Before turning to discuss these options, let me briefly comment on a common concern in this context, namely that outsourcing is inefficient, because it is seen to merely add additional administrative layers which ‘all want their cut’. Well, this is indeed a danger, but it is not inevitable. It really depends on how the outsourcing is structured. Proper outsourcing means delegating responsibilities which should then no longer be catered for in-house. If it were otherwise, i.e. if outsourcing was necessarily less efficient than in-house management, why would so many private sector firms choose to outsource a large variety of activities?

3.1. Division of Labour through Outsourcing to the National Level: Enhanced Direct Access

I am convinced that this can best be achieved by emulating the KfW experience in Germany through Enhanced Direct Access, as envisaged in the Pilot Phase launched at the tenth Board meeting. This is why I am particularly pleased to find that in Decision B.11/03 the measures to be considered in the Strategic Plan should inter alia focus on ‘ensuring that the GCF is responsive to developing country needs and priorities, while ensuring country ownership, [and] enhancing direct access […].’

Not everyone shares my view on this, of course. The Mayor of Songdo, for example,[4] envisages the GCF HQ being home to 8000 staff members from around the world, which would be theoretically in keeping with administering in-house $30 billion annually.[5] When I say ‘theoretically’ I mean that I do not think it would actually work. Not only has it proven to be difficult to recruit personnel for the GCF Secretariat,[6] it is highly unlikely that a centralized ‘in-house’ business model would be able to attract $30 billion worth of projects on an annual basis. Decentralization and devolution of decision making is, to my mind, as essential to achieving paradigm shifts as is finding the right type of projects and programmes to fund.

These retail decisions must be outsourced, and they should predominately be outsourced to in-recipient-country institutions through what has been referred to at GCF Board level as ‘signature access modality’ of Enhanced Direct Access

3.2. International Division of Labour

As it is highly likely that there will be a demand for internationally funded micro projects for many years to come,  such projects would under a ‘GCF wholesale model’ need to be catered for by an international division of labour, either through outsourcing or through some form of explicit or implicit understanding between the GCF and other international funders.

It is therefore particularly interesting to see that this is precisely what has happened in the recently approved fifth project proposal, the KawiSafi Ventures Fund (see Appendix below for more details), to be managed by a private sector company based in Delaware, US which will approve individual micro investments (up to $10 million) to SMEs in Rwanda and Kenya.[7]

If a private sector entity can be used for such purposes, there should, to my mind, really be no reason why international public sector entities could not serve the same purpose. What springs to mind are the other funds created by the international climate regime, in particular the Adaptation Fund (AF) and the Least Developed Countries Fund. Why these two funds in particular? I believe they could both serve as boutique expert retailers in a particular specialized market segment.

The Adaptation Fund has a proven track record, not only in funding concrete micro adaptation projects, but also in pioneering the direct access modality and managing an innovative finance resource (a 2 per cent share of proceeds from CDM activities). At the moment it is facing considerable financial uncertainty because its innovative resource has all but dried up due to circumstances beyond its control. While there are voices which say that the AF should be closed (and its business transferred to the GCF), this would obviously be completely contrary to a wholesale-only business model for the GCF. It would, to my mind, be extremely unwise to let the AF go under at this stage, because it would then only have to be re-created if the GCF is to follow the strict wholesale model, for there will always be a demand to have concrete micro adaptation projects funded through international channels..

The LDCF is facing similar problems with regards to securing funding for its pipeline of fundable projects. The most recent draft guidance to the Global Environment Facility (GEF) – which manages the LDCF – by the Standing Committee on Finance (to be considered and approved by the COP in Paris) ‘requests the GEF to carry out a technical review of LDCF programming priorities with a view to identifying possible alternative roles for the LDCF in the evolving climate finance architecture, in consultation with relevant stakeholders, particularly the UNFCCC LDC Group, and focus on:

  • piloting concrete climate change activities particularly relevant for LDCs;
  • enhancing longer-term institutional capacity to design and execute such activities.’

I believe that with such a realignment of programme priorities, the LDCF would have a viable niche market which would deliver genuine value added to the poorest and particularly vulnerable countries.

Of course, it makes no sense to agree on a division of labour, if there is no funding to carry out the agreed tasks. This is why one would need to ensure that all these specialized retail funds are adequately and predictably funded. In some cases, this could happen by getting at least part of the required funding directly from the GCF as a division of labour through outsourcing. In the longer term, possibly the best way forward for the funds that will be included in the financial Mechanism of the new agreement, could be similar to that proposed by a number of senior developing country negotiators in a recent Concept Note on A Paris Replenishment Cycle.

4. Summary

It is imperative that the recently launched GCF strategic planning process focus not only on strategic objectives and the like, but also on institutional and governance architecture, and in particular on enhancing complementarity, effectiveness, and efficiency through a division of labour between the GCF as wholesale agent, and other funding entities as specialized retailers, be it in-country (preferably) through Enhanced Direct Access, or through designated international funds, in particular those that will be serving the financial mechanism of the new Paris Agreement.

Appendix. The Acumen KawiSafi Ventures Fund

The KawiSafi Ventures Fund will be comprised of portfolio companies in the clean energy sector in East Africa and is targeting an ecosystem approach to investing in small to medium enterprises that serve bottom-of-the-pyramid customers.

The Fund will invest in approximately 10–15 companies (with capital including $20m lent by the GCF). In accordance with Acumen’s accreditation for micro on-lending and/or blending (loans and equity), the Fund will not invest more than $10 million in a single portfolio company.

A Technical Assistance Facility (TAF) funded by grant capital ($5m from GCF) is to be established to augment the Fund’s investment strategy of building profitable, scaling, and socially responsible businesses that serve bottom-of-the-pyramid markets and provide a financial return to the Fund and its investors.

Acumen Capital Partners LLC, a wholly owned for-profit private sector subsidiary of Acumen, based in Delaware, will be the Manager of the Fund. All due diligence and deal execution of Fund investments will be led by an Investment Team member. The Managing Director of the Investment Team will review Acumen’s entire pipeline of potential investments, to ensure that all available investment opportunities consistent with the Fund’s investment criteria are appropriately considered for investment from the Fund.

The Investment Committee of the Fund (the ‘IC’) is the core decision-making body for the Fund and controls all decision gates in the investment process prior to its final approval or rejection of a deal and in connection with exits. The primary responsibilities of the IC will be to:

  1. Approve/reject deals at key decision gates in the investment process and at exit;
  2. Review current pipeline, post-investment management activities, and deal outcomes;
  3. Review investment and portfolio performance against annual goals and recommend potential corrective action, if necessary;
  4. Review and provide guidance on global investment and portfolio management strategy.

The IC will typically meet at least two or three times per prospective investment prior to the final meeting at which a deal is approved or rejected. The IC will be comprised of up to five members. Initially, the IC will include: Jacqueline Novogratz, CEO of Acumen, Sachin Rudra, Chief Investment Officer of Acumen, C. Hunter Boll, formerly Managing Director of Thomas H. Lee Partners, and the Managing Director of the Fund.

Source: Funding Proposal Summary (GCF/B.11/04/Add.05/Rev.01)

Notes

[1] Decision B.10/06

[2] The authors of the Report are aware of these issues. After all, they suggest, in Next Steps: ‘The strategy may also include further information based on the accredited entities and accreditation of applicants, such as the distribution of the types of entities, access modalities (for subnational, national and regional entities under direct access and international access) and application criteria (size of an individual project or activity within a programme, fiduciary functions, and environmental and social risk and impact category), in an effort to inform the further development of the accreditation strategy with regard to the types of partners the GCF requires in order to achieve its objectives.’

[3] Alfred Hartmann, Finance Director of the Economic Council, as quoted in Heinrich Harries, Financing the future: KfW – the German Bank with a Public Mission, Frankfurt a.M.: Fritz Knapp Verlag, 1998.

[4] See A Delhi Vision for the Green Climate Fund Business Model Framework.

[5] See How many people does it take … to administer long-term climate finance?

[6] Green Climate Fund directors warn it faces staffing crisis.

[7] Strictly speaking, this is classified as a ‘direct access’ activity implemented by a ‘regional accredited entity’ (i.e. Acumen). However, given that the intention behind having regional (enhanced) direct access entities was to have the decisions taken by people selected by the recipient countries in question, I think that, in light of the proposed composition of the Investment Committee (see the Appendix), this should more accurately be classified as falling under the international access modality.

A case for Jumping the Queue!

Why national entities submitting an EDA pilot proposal should be prioritized in the GCF Accreditation Strategy

Following the Green Climate Fund (GCF) Board meeting in Barbados (October 2014), I argued that the GCF was in  desperate need of a strategy and proposed a simple strategy for accrediting direct access entities based on the following two elements:

  • A time limit of five years on accreditations (for all entities), with the possibility of renewal, depending on re-nomination by the recipient country and GCF Board approval.
  • A limit on the number of entities that can access the GCF directly to one or two per recipient country.

In July 2015, the Board decided that the accreditation of an entity to the Fund is valid for a fixed term of maximum five years and that re-accreditation will be decided by the Board.[1] It also requested the Accreditation Committee to work on a strategy on accreditation for consideration by the Board at its eleventh meeting (November 2015), examining efficiency, fairness and transparency of the accreditation process, and the extent to which current and future accredited entities will enable the Fund to fulfil its mandate.[2]

The first of these decisions will allow the Board to periodically review existing accreditations in light of this strategy. The key questions now are what should be the objectives of such a strategy and how could they be achieved, in particular given the current state of accreditations?

What strategic objectives?

I believe that for reasons of efficiency and fairness, the strategy will need to pursue two strategic objectives, namely:

  1. achieving a fair balance between international and direct access entities, and
  2. ensuring that the GFC is not suffocated by overwhelming numbers of accredited entities.

What Fair Balance?

According to the GCF website, there are currently (as of 22 July 2015) 20 accredited entities: 11 international, 4 regional and 5 national. With respect to a head-count, it could be argued the current accreditations are balanced (55% international, 45% direct access). But is this really the right measure as concerns having a fair share in GCF access?

I do not think it is. There are other, more important, parameters to be taken into account. For one, there is the balance of the distributions within size categories.[3] In this respect, the currently accredited entities are by no means evenly distributed – 100% of the medium, and 80% of the large accredited entities are international. Most of the funding is likely to flow through international entities if this remains the case. A simple quantitative index, based on the definitions of the different size categories,[4] estimates that 80% of the current disbursement potential lies with international entities.

Another factor that needs to be taken into account when judging the balance of accreditations is the distribution of capabilities (fiduciary standards). In that respect, international access also clearly dominates both with respect to grant giving and on-lending entities, regardless of whether measured in terms of numbers or funding potential.

These imbalances of the status quo will need to be addressed. This means, in particular, that the strategy will have to take all these parameters into account, and not merely the overall numerical distribution of the entities.

How to re-balance?

Imposing a strategic limit on the number of direct access entities per country (two to three, as suggested above) – with a concomitant cap on international entities (preferably in terms of aggregate disbursement potential) – is likely to have the longer term effect of countries choosing entities at the larger end of their spectrum, which can genuinely serve as ‘national’ implementing entities.

In the short-term, one way of redressing the existing imbalances is to prioritize the accreditation of nationwide direct access entities by letting them jump the queue. [5]  There are currently over 80 entities in the accreditation queue. At the present rate of accreditation, this means that, under a strict first-come-first-served system, any new applicant will have to queue for over two years until they are even considered for accreditation.

I think this will be particularly unhelpful in the context of the Enhanced Direct Access (EDA) Pilot Phase, as it will essentially disqualify any entity that has not already applied for accreditation from participating in the Pilot Phase. Granting top priority accreditation to nation-wide entities submitting an EDA pilot proposal, would thus have the added benefit of incentivizing participation in the EDA Pilot, which after all, is a signature access modality of the Fund.

Notes:

[1] Decision B.10/07, (b), (c).

[2] Decision B.10/06, (r).

[3]  GCF size categories are defined in terms of the maximum total projected costs for an individual project or an activity within a programme:

Micro: up to $10 m; Small: up to $50 m; Medium: up to $250 m; Large: more than $250 m.

[4] Using the fact that the size categories are defined by a multiplication by 5, the entities are assigned the following disbursement potential indicators: 10 (Micro); 50 (Small); 250 (Medium); 1250 (Large).

[5]  N.B. ‘priority accreditation’ is not the same as ‘fast track accreditation’! The latter involved a simplified procedure; the former is merely jumping at the head of the queue.

 

 

A Momentous Event

The Launch of the GCF Enhanced Direct Access Pilot Phase

by Benito Müller

The first, and possibly most momentous decision to be adopted on the final day of the tenth Green Climate Fund (GCF) Board meeting (Songdo, 9 July 2015) was the approval of the terms of reference (TOR) for, and therewith the launch of,[1] a five year pilot phase on enhanced direct access (EDA Pilot). It was the crowning moment in the sometimes arduous three-year process[2] of operationalizing the direct access paragraph in the GCF Governing Instrument (GI), which mandated the Board to consider additional modalities that further enhance direct access, including through funding entities with a view to enhancing country ownership of projects and programmes.[GI, para. 47]

According to the approved TOR, the EDA Pilot will initially aim to provide up to US$ 200 million for at least ten pilots, including at least four pilots to be implemented in Small Island Developing States, the least developed countries and African States.[TOR, para. 30]

It’s objective is to allow for an effective operationalization of GI paragraph 47 and, for this purpose, the EDA Pilot will include devolved decision-making to regional, national, and subnational entities … and stronger local multi-stakeholder engagement.[para. 1] The decision-making on the specific projects and programmes to be funded will be made at the national or subnational level, and such direct access is a means to increase the level of country ownership[3] over those projects and programmes. This implies that the screening, assessment and selection of specific pilot activities would be made at the regional, national or subnational level. At the same time, mechanisms will be set up to increase national oversight and multi-stakeholder engagement at the country level.[para. 3]

Countries can nominate an entity for the implementation of the country pilot (National Implementing Entity), such as a public-sector institution (development bank, national fund, etc.), private-sector entity (commercial bank, investment fund, leasing company, etc.), and operating at the regional, national or subnational level.[para. 13]

National Oversight and Steering Function. Country pilots will be overseen and strategically guided at the national level. The oversight and steering function should include the NDA or focal point, and representatives of relevant stakeholders, such as government, private sector, academia, civil society organizations, and women’s organizations.[para. 8]

Engaging local stakeholders through local intermediation. In implementing country pilots, the designated NIEs will work:

  1. with various types of local actors … including public institutions, local bodies, non-governmental organizations, community-based organizations, actors from the informal sector, and private enterprises, particularly small and medium sized enterprises (SMEs).[para. 14] A significant share of small-scale activities should directly support communities or SMEs through, for example, small-scale grants or extended line of credit.[para. 19]
  2. through various types of local actors in the development of potential projects and programmes, particularly local intermediaries and those addressing the needs of vulnerable communities.[para. 20]

These key requirements on country pilots correspond precisely with the conclusions on what the EDA Pilot should focus on, drawn in the most recent OCP/ecbi publications on the matter:

One of the reasons why the EDA Pilot decision is (potentially) momentous is that Board members from both developed and developing countries have started to refer to EDA as the GCF “signature access modality”. It therefore stands to reason that EDA, and more precisely the ideas reflected in the EDA Pilot, should and will have a significant impact on the strategy debate that was also launched at the tenth meeting. But more about that in my next blog.

[1] DECISION B.08/09 (a) Requests the Secretariat, … , to prepare terms of reference for modalities for the operationalization of a pilot phase that further enhances direct access, …, for approval by the Board at its ninth meeting; these terms of reference will launch the pilot phase;[emphasis added]

[2] The passage regarding the “additional modalities that further enhance direct access, including through funding entities” was added to the GI text on 17 October 2011, the penultimate day of the fourth and final meeting of the Transitional Committee.

[3] Müller B, 2014, Enhancing Direct Access and Country Ownership.[Footnote TOR, para. 3]

A lifeline for the Adaptation Fund?

Should the Adaptation Fund seek accreditation with the Green Climate Fund?

by Benito Müller

Background

The Kyoto Protocol Adaptation Fund (AF) was established to finance concrete adaptation projects and programmes in developing countries that are particularly vulnerable to the adverse effects of climate change. Its first projects were approved in September 2010. It has since allocated $265m in 44 countries with project sizes ranging between $0.7m and $10m, i.e. for what the Green Climate Fund (GCF) refers to as ‘Small and Micro Projects’ (less than $10m).

From the very outset, the AF was innovative in a number of ways:

  • It has a majority of Board members from developing countries.
  • It was designed to receive innovative international financing in the form of a 2% adaptation levy on the credits generated by projects under the Kyoto Protocol Clean Development Mechanism (CDM).
  • It pioneered the innovative ‘direct access modality’, under which project proposals could be submitted through National Implementing Entities.
  • It also championed transparency through live webcasting of its Board proceedings.

The AF has evolved to fund smaller-scale innovative adaptation projects and has dedicated processes that can accommodate this scale. The transaction costs for small- and micro-projects can be high, and need dedicated systems and monitoring. The AF has also developed a nurturing environment for direct access and a network of peer-to-peer learning among developing countries. The AF allows for countries to ‘learn by doing’ in a lower-risk environment – pure grants, adaptation only – all within the confines of a performance-based monitoring system.

The main problem facing the AF in the near to medium term is that it has been let down by the inability of developed countries to support the CDM credit price; which at its peak was over €14 per ton, but has since been reduced to currently below 50 cents per ton. Having said this, it is important to emphasize that this issue should not be used as an argument against ‘international innovative funding’, but against putting all one’s eggs into one (carbon-market-based) basket. This is why the provision of predictable GCF ‘core funding’ for the AF is key to a sustainable future for the AF.

There appears to be a convergence of opinion among AF Board members that accessing such a core funding stream from the GCF would be desirable, if not essential, for the near- to mid-term survival of the AF, which currently has funding for another 18 months of operations. However, there is still a difference of opinion on how best to access such funding. On 2 March 2015 the AF Board decided to request its Secretariat for a further assessment of the two main options that have been under consideration, namely:

  • [A]: accreditation as a multilateral grant-providing intermediary (‘funding entity’), or
  • [B]: entering an MOU or legal agreement following paragraphs 33-4 of the GCF Governing Instrument.[1]

During the twenty-fifth AF Board meeting, a lively in-depth discussion of these issues began at an informal ecbi Seminar on 8 April (co-hosted by the incoming AF Board Chair) and was taken up in formal plenary on 10 April. In the course of these discussions it became clear that there are two quite distinct issues preoccupying Board members in this context, namely:

  • [a]: urgently securing predictable resources, and
  • [b]: making the best use of complementarities between the GCF and the AF.

So the Board decided (Decision B.25/21) at the end of the formal discussions to request:

  • (a): the Secretariat to prepare a document for consideration by the Board at its 26th meeting [6-9 October 2015] containing further legal, operational, and financial analysis on the implications of various linkages with the GCF, and
  • (b): the Chair and vice Chair to initiate consultations with the Standing Committee on Finance and start a dialogue with the Green Climate Fund (GCF) Board, on potential linkages between the two funds and request the issue of complementarity between the two funds to be considered by the GCF Board at the earliest.

These discussions also highlighted the need for clarification of the nature of the two main options [A] and [B] under consideration. Given the context in which these two options are presented, one might be tempted to interpret them as two independent ways of obtaining GCF funding. This, however, would be to misread the reality of how GCF funding can be accessed.

No [a] without [A]

Option [A] (GCF accreditation), would obviously suffice for accessing GCF funds. However, it would be wrong to think that option [B] (entering some MOU or agreement) on its own i.e. in the absence of accreditation, could achieve the same.

Why? For one, the very first paragraph of Section D on ‘Access modalities and accreditation’ in the GCF Governing Instrument stipulates that ‘[a]ccess to Fund resources will be through … entities accredited by the Board.’[2]

Moreover, as explained in Accreditation to the Green Climate Fund  November 2014

  • Entities seeking accreditation to the Fund in order to access its resources will be assessed against the Fund’s fiduciary principles and standards and environmental and social safeguards (ESS)
  • Through the 3-stage accreditation process [see figure] and the fit-for-purpose approach, entities will be accredited for certain fiduciary functions, size of project/activity within a programme, and environmental risk category.

GCF Accreditation Stages

Figure: The Three Stages of GCF Accreditation (click to enlarge)

Given this, it is difficult to see how the GCF Board would allow an entity to access funding without that entity having undergone these assessments and reviews.

To be quite clear, the accreditation process itself does involve a sort of (legally binding) ‘MOU’ (known as an Accreditation Master Agreement) between the GCF and an accredited entity. It is arranged in Stage III of the accreditation process and fixes issues such as:

  • Project/programme pipeline preparation;
  • Use of accredited entities’ standard forms of loan, grant and other agreements;
  • Project cycle, including internal approval processes;
  • Adherence to guidelines from the Fund, including the fiduciary standards and the environmental and social safeguards.

The point here is simply that on its own an MOU [B] is not a stand-alone option for accessing GCF funds.

No [b] without [B]

As it happens, [B] actually is a viable stand-alone option, but for a different purpose. The fact is: the GI paragraphs referred to in [B] do not relate to accessing funds, but to ‘A. Complementarity and coherence’. Paragraph 34, in particular, states that:

The Board will develop methods to enhance complementarity between the activities of the Fund and the activities of other relevant bilateral, regional and global funding mechanisms and institutions, to better mobilize the full range of financial and technical capacities.

[b] – that is, making the best use of complementarities between the GCF and the AF – is independent of [a] – accessing GCF funds – and requires separate arrangements, presumably under paragraph 34 of the GI, as referred to in Option [B]. Ideally, such arrangements could be made in order to designate the AF as the main multilateral ‘retail agent’ of the GCF for concrete micro adaptation projects. This would relieve the GCF of the need to deal with such projects and enable it to focus on larger-scale activities/programmes instead.

Next Steps

With regard to AF Board Decision B.25/21:

  • The AF Secretariat, following (a), should focus on clarifying, as soon as possible, all the outstanding issues that the AF Board will want to have settled in order to be able to take an informed decision on applying for GCF accreditation.
  • On the basis of the consultation with the Chair and vice Chair of the AF Board, the SCF should include request (b) in the next draft COP guidance to the GCF.

[1] See paragraph 19 (b) in Potential Linkages between the Adaptation Fund and the Green Climate Fund (AFB/B.25/Inf.6, 25 March 2015)

[2] Emphases added.