Gearing up for the COP20 in Lima - Progress in Climate Finance

By Luis Fierro Carrión, Climate Finance Advisor for AILAC (*)

In recent months, there has been ​​significant progress on the issue of funding for mitigation and adaptation to climate change; but much remains to be done to cover the financing needs of developing countries, which exceed $ 500 billion per year.

Green Climate Fund

After Germany pledged to provide 750 million euro to the Green Climate Fund (GCF) during the Petersberg Dialogue in July 2014, during the Climate Summit of the United Nations held in September in New York, France announced a commitment of US$ 1 billion, and other countries also announced their pledges: South Korea ($ 100 million), Switzerland (at least $ 100 million), Sweden ($ 45 million), Denmark($ 70 million), Norway (at least $ 33 million in the first year), Mexico ($ 10 million), Luxembourg ($ 6.8 million), and the Czech Republic ($ 5.5 million).

In October, Sweden announced an increase in its pledge to the equivalent of US$560 million, which is thus far the most generous in terms of per capita contribution.

Of these announcements, we can highlight the cases of South Korea and Mexico, which although part of the OECD, are not part of "Annex 1" of the UN Framework Convention on Climate Change (UNFCCC) of "developed countries". Previously, Indonesia had also announcing a contribution of $ 250,000, and some other members of AILAC and the Pacific Alliance have also reported that they are considering making a contribution.

For his part, the Secretary of State of the United States, John Kerry, said that his country will announce its contribution during the Pledging Session for GCF Resource Mobilization, to be held on 19 and 20 November in Berlin. It is also expected that the United Kingdom, Japan, and other developed countries will announce their contributions in Berlin. The BRICS countries, although they announced that they will capitalize their "New Development Bank" at $ 50 billion, have not yet announced any contributions to GCF (see position of the BASIC group).

Meanwhile, the Board of the GCF has complied with the pre-requirements for the operation of the Fund, and held its 8th meeting in Barbados from 14 to 17 October, where, among other issues, governance, contribution policy, and operational programming issues were discussed (Decisions were reached on accreditation and other policies required for contributions to come in).  See a summary here.  Furthermore, the Directors for Norway and Peru were elected Co-Chairs of the Board.

Other announcements and commitments at the Climate Summit in New York

Apart from the GCF contribution announcements, during the Climate Summit held on September 23, 2014 in New York, other initiatives and commitments in the field of climate finance were presented:

• Peru announced a partnership with Norway and Germany to improve national forest management (with a contribution of $ 300 million from Norway)

• Chile announced a new carbon tax of $ US5 / tCO2, and that the country will generate 45% of its energy from renewable sources by 2025

•  The Multilateral Development Banks (which include 6 institutions, among them the World Bank and the IDB) announced that they awarded $ 23.8 billion in climate finance in 2013.

• The International Development Finance Club (IDFC), which brings together 20 regional and national development banks, including the CAF and KfW of Germany, announced that it provided $ 99 billion in "green finance" in 2013 This includes flows of $ 15 billion from institutions in OECD countries to developing countries.

• According to the Climate Bonds Initiative (Climate Bond Initiative) in 2014 it is expected that $ 45 billion in "green bonds" will be issued globally. With emissions of the European Investment Bank (EIB) for $ 1 billion and the German Development Bank (KfW) for $ 1.5 billion in October, the total has reached $ 32 billion to date. At the summit, it was announced that private banks expect to issue $ 30 billion this year.

• This is part of a broader "Climate Related Bonds", which includes some bonds that are not rated as 'green', but they are intended, for example, to finance renewable energy, public transportation and energy efficiency. These were estimated at $ 502 billion. A significant portion corresponds to national bonds issued to finance railways in China, so it is not clear if they would have been classified as "green bonds" (given that much of the power generation in China uses fossil fuels).

• The commitment of institutional investors to reduce their carbon investments by $ 100 billion by the end of 2015 and to measure and report the carbon footprint of at least $ 500 billion in investments.

• Insurance associations pledged to increase their green investments to $ 84 billion by December 2015 and reach $ 420 billion in climate investments by 2020;

• Three large pension funds in Europe and North America indicated that they will accelerate low-carbon investment to more than $ 31 billion by 2020.

• The German government said it would stop providing concessional financing for new power plants based on coal. Other countries (including the United States) had already announced that they will no longer provide concessional financing for high emission technologies, and have pressured the MDBs to also cease such financing.

• The European Union reiterated its intention to donate three billion euros to help developing countries reduce their emissions over the next seven years (2014-2020).

• Similarly, the United States government offered to provide to the World Bank $15 million to help fund a new pilot program to reduce methane emissions.

• The World Bank coordinated an initiative of 74 countries and over 1,000 companies in favor of "putting a price on carbon", i.e. establishing a tax or a market system for exchange of emission rights.

Some summaries of the results of the Summit can be viewed at the following links: http://goo.gl/ejuviH, http://goo.gl/WsxluV, http://goo.gl/CmPVH7, and http://goo.gl/zHxVBR.

Standing Committee on Finance of the UNFCCC

From 1 to 3 October in Bonn, the Eighth Session of the Standing Committee on Finance (SCF) met, to review a number of documents to be presented to COP20 in Lima (more info here). These included the first report of "Biennial Assessment and Review of Climate Finance Flows" (BA), in which the total climate finance flows derived from various sources are estimated.

According to preliminary figures published in the draft Summary and Recommendations on the UNFCCC website , these flows are estimated as follows:

• Annual flows from developed countries to developing countries through public institutions (bilateral, multilateral funds, multilateral, regional and national development banks) are estimated between $ 35 and $ 50 billion. This includes amounts previously mentioned for the multilateral, regional and national development banks.

• Additionally, it is estimated that private flows from developed countries to developing countries reach between $ 25 and $ 125 billion per year (the uncertainty in the range is due to different sources and methodologies used). The "green bonds" used to finance projects in developing countries would be included here.

Progress was made ​​toward identifying elements for a definition of climate finance, with this base definition:

"Climate finance is finance that aims to reduce emissions and enhance sinks of greenhouse gases, and that aims to reduce vulnerability of, and to [maintain/] enhance the resilience of human and ecological systems to, climate change impacts."

Progress was also made ​​in defining the work program for "measurement, reporting and verification" (MRV) of the financial support provided by developed countries to developing countries. This will be critically important to determine whether the goal of "mobilizing $ 100 billion a year" by 2020 of climate finance will be achieved; and, within this total, what amount of private resources were directly mobilized or leveraged by public resources.

According to the GCF, it is estimated that to achieve the goal of keeping global warming to below two degrees C above the pre-industrial level, this will require that developing countries receive annual funding for mitigation of at least $ 350 billion; while that for adaptation, the World Bank has identified requirements of at least $ 70-100 billion a year. Given the magnitude of resources required, a greater commitment by developed countries (and others in the ability to do so) to provide public resources is necessary; but it is also necessary to boost the channeling of private resources. 

Large institutional investors (pension funds, insurance companies, sovereign wealth funds, etc.) manage resources for $ 83 trillion. Therefore, if they devoted at least 1% of those resources to climate finance, this would come close to the required number (considering that this is a stock, not an annual flow).

Lima Climate Finance Week (LCFW)

From August 26 to 28, the Lima Climate Finance Week took place, as well as the Informal Dialogue on Finance (some presentations are available here ). The Presidency of COP20, the Government of Peru, identified as key issues for the Ministerial High Level Dialogue of Lima (to take place during the second week of COP20) the transparency and enabling environment of climate finance. These issues, among others, were discussed during the week and the Informal Dialogue.

The week opened with high-level speeches by ex-President of Mexico, Felipe Calderón, and the Ministers of Economy and Finance (Luis Miguel Castilla), and Environment (Manuel Pulgar-Vidal) of Peru. Minister Castilla said that the countries of the Pacific Alliance (Colombia, Chile, Mexico, and Peru) are exploring making a contribution to the GCF. Calderon said that the economy cannot develop without protecting the environment. He said there are rising costs of natural disasters associated with climate change. He called for the removal of subsidies to fossil fuels and to establish a carbon price. He stressed that in the coming decades, the world must invest $ 90 trillion in infrastructure, so it is preferable to develop new low carbon technologies.

Abyd Karmali, Director of Climate Finance for Bank of America & Merrill Lynch, said there is the capital required to finance mitigation and adaptation, mobilizing additional $ 120 billion per year. However, this requires dealing with the risks and other impediments:improving policies and regulations, reducing costs, and aggregating projects to achieve liquidity. He cited as examples the Green Bonds, structured finance to reduce risk, insurance mechanisms, and aggregation structures for small-scale opportunities.

David Wilk, from the IDB, said that currently 25% of IDB operations are related to climate change (CC), renewable energy and the environment, with a volume of approvals between USD $ 1,200 and USD $ 2,100 million a year. The Bank manages two grant funds for Sustainable Energy and Climate Change (SECCI). Loans have been approved to support the reform of environmental policies in several countries, including Colombia, Guatemala and Peru.

Several speakers highlighted the importance of creating an atmosphere or environment conducive to receiving resources (investment, concessional loans, grants). This includes:

• development of climate change strategies and  policies;
• clear and stable regulatory policies;
• incentives and risk reduction for a proper relationship between risk and return;
• development of institutions capable of handling resources (e,g, through accreditation of national implementing entities for multilateral funds);
• development of a list of "bankable" programs and projects, i.e. able to receive external funding.
• establish policies and procedures in domestic financial institutions (policies for environmental and social safeguards, audit, risk management, transparency, monitoring and evaluation of operations, etc.).

Mohamed Nasr, from Egypt, said that finance is a key to advance to the 2015 Climate Agreement.  He said that clarity is needed about the scaling-up and the trajectory required to reach $ 100 billion in annual climate finance agreed for 2020 -as well as with respect to the initial capitalization of the GCF. He said there has been a long process of negotiation in terms of "Long-Term Financing" (LTF), and what is required is to have predictable, adequate and accessible financial resources. He added that Finance must be one of the elements anchored in the 2015 Agreement, which is required to advance in the transformation of production and energy.

In the closing session, the Vice-Minister of Environment of Peru, Gabriel Quijandría stressed that public resources are required to create the enabling environment for private investment. He noted that the Summit of the Secretary General of the United Nations and the COP20 will be opportunities to signal that climate finance will increase. He said GCF capitalization should continue. He stated that developing countries have to deal with many challenges, to which climate change is added. Adjustments are needed to ensure economic, environmental sustainability, and to deliver social benefits.The long-term horizon requires funding, and efforts to generate bankable projects. He concluded that a transition is needed towards a low carbon and resilient economy.

Summaries of the Week have been prepared by IISD and Thomas Kerr from IFC.

Conclusion

There has been progress in the provision of financial resources to developing countries, to carry out activities to mitigate and adapt to climate change. About $ 50 billion a year are being mobilized through public, bilateral, multilateral and development banks sources. A similar figure is being provided through private resources, which could increase if several of the initiatives announced at the summit come to fruition. However, there is still a gap to achieve the financing required by developing countries to achieve the objectives of mitigation and adaptation, which goes far beyond the $ 100 billion per year committed in Copenhagen and Cancun, and exceeds $ 500 billion per year. 

(*) The views expressed in this article are the author's and do not compromise the AILAC Group or any of the countries that are part of the group. Originally published in Spanish at: http://climatefinance.info/profiles/blogs/avances-en-el-financiamiento-climatico-2014