TWN
Info Service on Finance and Development (Jun08/01)
12 June 2008
Third World Network
DEVELOPING
COUNTRIES ASK FOR NEW UNFCCC FINANCIAL ARCHITECTURE
Developing
countries have put forward concrete proposals for establishing a new
financial mechanism and “architecture” under the UN Framework Convention
on Climate Change (UNFCCC) to take charge of the transfer of financial
resources to assist the developing countries to address the climate
change challenge. It was the first time in recent years that so many
developing countries and their groupings had put forward such concrete
and systemic proposals on the Convention’s financial mechanism, said
a long-time participant of the UNFCCC process.
Several
developing countries referred to the large amounts of funds which are
being planned for organisations outside the UNFCCC, particularly the
World Bank, and said that these funds should instead by placed under
the Convention, which is the body in charge of cleat change negotiations
and the implementation of the outcomes.
Below
is a report on developing countries’ proposals. It was published in
SUNS # 6491, Monday, 9 June 2008. This article is reproduced
here with the permission of the SUNS. Reproduction or recirculation
requires permission of SUNS (sunstwn@bluewin.ch).
With
best wishes
Martin Khor
TWN
Developing
Countries Ask For New UNFCCC Financial Architecture
By Martin Khor,
Bonn,
6 June 2008
Developing
countries have put forward concrete proposals for establishing a new
financial mechanism and “architecture” under the UN Framework Convention
on Climate Change (UNFCCC) to take charge of the transfer of financial
resources to assist the developing countries to address the climate
change challenge.
Many
countries, including Bangladesh (for the LDCs), China, India, Barbados
(for small island developing states), Argentina, the Philippines, Malaysia
and Saudi Arabia, called for a new financial mechanism and new funds
relating to various areas (adaptation, technology, mitigation, etc),
which would be under the authority and guidance of the UNFCCC’s Conference
of Parties (COP).
It
was the first time in recent years that so many developing countries
and their groupings had put forward such concrete and systemic proposals
on the Convention’s financial mechanism, said a long-time participant
of the UNFCCC process.
Several
of the countries referred to the large amounts of funds which are being
planned for organisations outside the UNFCCC, particularly the World
Bank, and said that these funds should instead by placed under the Convention,
which is the body in charge of cleat change negotiations and the implementation
of the outcomes.
China notably
stated that funds provided to organizations outside the Convention would
not be counted as being in fulfilment of the developed countries’ commitments
under the UNFCCC to provide financial resources to developing countries
to help them take action on climate issues. India
concurred with this view.
The
Philippines said climate-related funds
should be placed in the Convention and not other institutions, and if
we are not serious (in making outside funds comply with the Convention’s
principles and priorities) it did not see what future there would be
for the Bali Action Plan.
The
proposals of developing countries were made on 5 June at a workshop
on investment and financial flows, which is an official part of the
meeting of the ad hoc working group on long-term cooperative action
(AWG-LCA) under the Convention. The group is tasked with implementing
the Bali Action Plan and coming up with a decision by the end of 2009.
Besides
the members of the G77 and China, other countries providing proposals included
Mexico, South Korea and Switzerland,
while Japan,
the EU and US also spoke.
The
first workshop presentation was by Bernaditas Muller of the Philippines, on behalf of the G77 and China. She said
the G77 and China
had identified basic principles under which they would like to work
in the context of enhancing financial resources (a major element of
the Bali Action Plan).
Muller
(who is coordinator of the G77 and China
in the AWG-LCA) said that at the first AWG-LCA meeting in Bangkok, members of the group had spoken about
establishing various funds, such as an adaptation fund, a technology
fund and a risk insurance fund. The G77 and China believed that this enhanced
action should be guided by the following principles:
*
Operate under the authority and guidance of and by fully accountable
to the Conference of Parties of the UNFCCC.
*
Have an equitable and balanced representation of all Parties within
a transparent system of governance.
*
Enable direct access to funding by the recipients.
*
Ensure recipient countries’ involvement during the definition, identification
and implication of the actions.
Muller
said Group is developing a proposal based on the above principles, which
take into account various provisions of the Convention, including Articles
4.3, 4.4., 4.7, 4.9 and in accordance with article 11.
Bangladesh on
behalf of the LDCs, said the investments of today determine the extent
of climate change tomorrow. It put forward “principles and an architecture
of a future funding mechanism.” These included: (1) Adequacy of funds,
to meet the needs of adaptation, mitigation, and technology transfer;
(2) The equity principle; (3) Likely sources of funding should be from
developed countries in implementing their commitment under Article 4.3,
and other possible sources include a levy on airline travel, an international
fuel levy, an extension of the Adaptation Fund’s levy to other mechanisms,
venture capital and the carbon market.
Barbados, on behalf
of the small island developing states (SIDS), represented by Selwin
Hart, said the funds for adaptation were inadequate. Any resources must
be additional to traditional ODA. Referring to financing that is market-based,
it said that markets don’t work well in small economies. Financing
for mitigation is more readily available and easier to access than for
adaptation (for example the private sector is not interested to build
a seawall or restore coral reefs).
Barbados
put forward a shared vision on adaptation financing in the UNFCCC: (1)
New and additional funds above the current commitments on ODA and 0.7%
target; (2) Predictability: and stability in funding, which should be
sourced from assessed contributions from developed countries and levies
of carbon markets; (3) The funds should be in the form of grants rather
than loans (as SIDS have to adapt to climate problems caused by emissions
and lifestyles of other countries). This should also be consistent with
the polluter pays principle; (4) Priority access should be given to
the most vulnerable countries; (5) The governance should be under the
UNFCCC.
The
SIDS also advanced these specific proposals: (1) Establish a Convention
adaptation fund. The aim is to implement Convention articles including
4.3 and 4.4, in line with the polluter pays principle. Access to recipients
should be direct. Governance should be under the authority of the COP;
(2) Establish an insurance mechanism; (3) Set up a Technology Fund;
(4) We also support a Mitigation Fund.
The
SIDS also stated that there are many bilateral and other instruments,
but they
are
not under UNFCCC. These should be channelled through Convention process.
China made a formal
presentation, putting forward a proposal on the elements and
structure
of multilateral funds operating under the Convention.
Represented
by Ms. Huang Wenhang of the Finance Ministry, China said the Convention and the
Bali Action plan require developed countries to commit to give financial
resources that are new and include grants. Existing funding is very
limited, with $3.3 billion by the GEF in 1991-2010, $90 million in the
Convention’s special climate change fund, $180 million in the Convention’s
LDC fund including new pledges and an estimated $37 million in the Kyoto
Protocol Adaptation Fund.
These
compare with the estimates of finance needs, including $65 billion in
2030 for mitigation estimated by the UNFCCC secretariat, and an Oxfam
estimate of $50 billion per year for adaptation. There is a huge gap
between needs and available resources, said China.
China added that
scaling up of funding is needed. If it remains at the same level, it
will not meet the future requirements for adaptation and mitigation.
China then proposed
the establishment of a set of new funds under the UNFCCC. The new financing
would have the following elements: (1) The source of funding is the
implementation of developed countries’ commitments under UNFCCC; (2)
The scale of funding should be a certain percentage of the GDP of developed
countries, for example 0.5% of GDP, in addition to existing ODA; (3)
The funds would be used to enhance mitigation, adaptation, R&D in
technology, and technology transfer; (4) Any funding pledged outside
the UNFCCC shall not be regarded as being in fulfilment of commitments
by developed countries under article 4.3 of the Convention.
China
also proposed the following coordinated funding arrangements: (1) In
the design, there would be the establishment of a number of specialized
funds, including an Adaptation Fund and a Multilateral Technology Acquisition
Fund; (2) On Governance, (a) The Fund would be established under the
authority and guidance of and fully accountable to the COP, (b) There
would be equitable and balanced representation of all parties in the
governance, (c) There would be easy access and low management costs.
Japan asked China to explain its statement that
any funds outside the UNFCCC cannot be counted as part of developed
countries’ implementation of their Article 4.3 commitment. Would this
mean China wants to
make UNFCCC an aid agency?
China responded
that the UNFCCC is not an aid agency, but it is the most appropriate
forum to discuss climate change. The developed countries have an obligation
to developing countries in the Convention. If Japan
wants to pledge its money outside the Convention, that should not be
counted as fulfilling part of its commitment under the UNFCCC.”
India, represented
by Mr.Surya Sethi, presented a comprehensive analysis of the status
of climate financing, which he showed fell far short of financing needs,
such as the Stern estimate of 1% of world GDP which in 2007 translates
to $540 billion.
He
said the World Bank group is not in a position to handle the funds required.
Any funding structure of the international financial institutions will
remain outside of the UNFCCC. The funding mandate of the IFIs is economic
development and the capacity of these should not divert to climate change.
The IBRD disbursement in 2007 is minus $6.2 billion, which means they
receive more than they disburse. No wonder the World Bank wants to expand
to climate change, he said.
India said that
alternative means for predictable resource flows is needed. We need
a new global fund, capitalised by developed countries at a level of
0.3% to 1% of GDP, said India.
India proposed
the establishment of a new financial architecture in the UNFCCC. It
should have the following elements:
*
It must operate under the guidance and must be accountable to the COP.
*
There would be balanced representation in the governance.
*
Direct access by parties to the funds.
*
It should be demand driven, with recipients involved in definition of
needs.
*
It should be funded by developed countries and may accept other resources
from the market and other sources.
*
It should be organized in functional windows for technology, venture
capital for emerging technologies, and a fund for research and development.
*
Other funds should be integrated under the Convention.
*
A Board would govern, and there should be a professional secretariat,
aided by technical committees. This design was achieved under the Montreal
Protocol, and under the Kyoto Protocol’s adaptation fund.
*
The unifying force of the various funds to be set up is a common governing
architecture which is under the control of COP. Each window will grow
under this architecture.
Argentina proposed
the establishment of a multilateral fund, as a framework and an umbrella
system. It can cover various areas including adaptation and technology.
It will develop financial resources of existing funds that exist and
that may come up in future. It can include elements mentioned by China
and other countries.
Malaysia welcomed
the idea of establishing a new funding mechanism. It should be under
COP. It should also enable direct access by recipients. This mechanism
will be assisted by expert or technical panels. Funding will be by Annex
I parties to fulfil their commitment in accordance with Article 4.3,
and additional sources can be determined. The fund should complement
the existing funds. Competing mechanisms outside the UNFCCC poses a
serious challenge to the Convention and this is cause for concern.
Philippines said
the finance commitment was not being implemented, there has been inadequate
funding and the agreed full incremental cost has not been given to developing
countries. The Convention’s parties had also decided that consistency
must be ensured between the principles and priorities of the COP with
bilateral and other funds on climate operating outside the Convention
and that they must not impose new conditionalities.
Referring
to recent initiatives outside the Convention to set up new climate funds,
she remarked that if we are not serious about this issue, she did not
see what future there would be for the Bali Action Plan. There are funds
out there. They should not be put in bodies that impose conditionality
on developing countries. They should be put in the hands of the parties
of the Convention.
South Africa, on behalf of the Africa Group, emphasized
the group’s support for the G77 and China’s
principles presented by Philippines.
The scale of funding for adaptation must be scaled up 2 or 3 times.
There is need for assessing costs, planning, NAPAs, implementation for
adaptation, mitigation technologies, wider deployment of existing technologies
and R and D for new technologies.
Brazil said there
was a need for funds to be in compliance with UNFCCC. It stressed the
need for a fund with a governance structure that is fair and transparent
and reinforces the COP’s capacity to guide climate change.
Saudi Arabia said
there was a need to bring all the ideas of the funds together. There
is need for a solid structure in UNFCCC where all the initiatives can
be put together in a structure, as laid out by the G77/China principles.
The goal is to bring under one umbrella a solid new architecture. It
would operate under the authority and guidance of the Convention and
be fully accountable to the COP.
Mexico pointed
to the unpredictability of current funding and the need to overcome
the atomization of current financing in many funds. The current financial
system is totally insufficient to sustain the scale of actions needed.
It
proposed a World Climate Change Fund covering mitigation, adaptation,
and technology. All countries would contribute to it, with contributions
to be agreed multilaterally and could be determined by criteria like
Greenhouse gas emissions, population and GDP size, as well as the polluter
pay principle, equity and efficiency and each country’s capacity. The
Fund should mobilize no less than $10 billion a year, with $200 billion
by 2030.
Mitigation
activities to be supported should yield measurable, reportable and verifiable
mitigation results. Activities to be funded include forest, agricultural
soils, biofuels, energy, green buildings, lower-emission vehicles.
Korea, represented
by Raekwon Chung, advanced a proposal on carbon credit for NAMA (nationally
appropriate mitigation actions) by developing countries, supported by
finance that is measurable, reportable and verifiable. In this scheme,
mitigation can be initiated by developing countries even without finance
and technology, similar to a unilateral CDM.
He
suggested that Annex I countries undertake a deeper emission reduction
target to facilitate more funds. Instead of developed countries offering
to contribute to funds, they could instead buy credits for NAMA.
Switzerland presented
a proposal on a “funding scheme for Bali Action Plan”. It proposed a
global carbon dioxide levy of $2 per ton of carbon dioxide, in accordance
with common but differentiated responsibilities. There would be three
pillars in the scheme. Overall revenues would be $48.5 billion, with
$18.4 billion to a multilateral adaptation fund or MAF (with a $9.2
billion prevention pillar and a $9.2 billion insurance pillar), and
$30.1 billion going to national climate change funds.
High
income countries will transfer 60% of their levy to the MAF, medium
income countries 35% and low income countries 15%. Countries with below
1.5 ton of carbon dioxide emission are exempted from payment; Switzerland
said these would mainly be LDCs.
Brazil commented
that the Swiss proposal had taken current emission rather than historical
responsibility on board when choosing who to tax. Switzerland
replied historical responsibility was counted if the future emissions
is counted but not so in relation to past emissions.
Germany, for the
European Union, said the challenge is to stabilize greenhouse gases
at 450 ppm, restrict temperature rise to 2 degrees and to reduce emissions.
Finance is required for a transition to a low carbon economy. Most funds
for mitigation will be from the private sector and this won’t change
in future, but pubic funds are still needed to catalyze and leverage
private investments.
In
mobilizing financial flows, the main tool is the price of carbon as
the carbon market is delivering a significant part of the flows. On
innovative financing, the EU can discuss auctioning of carbon allowances
and a levy on bunker fuel.
Norway proposed
a scheme for “financing adaptation by auctioning” in which a small percentage
of asset value can be auctioned or sold to finance adaptation. The task
can be given to an international bank.
The
United States, commenting on other
countries’ remarks on the World Bank climate funds, said that the clean
technology fund under this is not meant for unmet contributions under
the Convention. It will be supportive of the objectives of the Convention.
It is hosted at the World Bank as it will provide rapid disbursement
of funds and leverage other funds.
As
the private sector gives most investments, the issue is how governments
can encourage private sector flows to clean technologies. Countries
with an enabling environment, open markets and respect for IPRs will
attract more clean technologies.
Surya
Sethi of India, responding
to Japan and US relating
to the World Bank climate funds, said that the funds to developing countries
for climate must come in the form of resource transfer or grant. “If
I borrow money I have to return it and it is not funding my full additional
cost,” said India.
“Any mechanism must ensure the full incremental cost must be met and
it won’t be met by loans even if these are concessional.”
The
Chair of the AWG-LCA, Luiz Machado of Brazil, said the discussion had been
rich, there were some areas of convergence and some new and innovative
ideas. This was a very valuable brainstorming, which could be used for
discussing future work. A contact group of the AWG LCA will further
take up the finance issue.
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