TWN Info Service on Finance and Development (Sep08/03)
8 September 2008
Third World Network

G77-CHINA PROPOSE “ENHANCED FINANCIAL MECHANISM” FOR UNFCCC

A major highlight of the Accra climate talks that concluded on 27 August was the tabling of a paper by the G77 and China proposing an “enhanced financial mechanism” to ensure the effective implementation of the Climate Change Convention. he proposal calls for enhanced financial resources and investment to support action on mitigation and adaptation as well as the development and transfer of technology, as required by the Bali Action Plan.

The proposal was put forward at the contact group on “delivering on technology and financing, including consideration of institutional arrangements”, one of three contact groups in Accra under the Ad-hoc Working Group on Long-term Cooperative Action (AWG-LCA) of the UN Framework Convention on Climate Change (UNFCCC).

An important aspect of the proposal is that any funding pledged outside of the Convention shall not be regarded as fulfilment by developed countries of commitments under Article 4.3 of the Convention, or commitments to provide measurable, reportable and verifiable finance, technology and capacity-building as required by the Bali Action Plan.

Below is a report on the G77-China proposal. It was published in SUNS #6542, Thursday, 4 September 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

G77-China Propose “Enhanced Financial Mechanism” For UNFCCC
By Matthew Stilwell, Accra, 29 August 2008

A major highlight of the Accra climate talks that concluded on 27 August was the tabling of a paper by the G77 and China proposing an “enhanced financial mechanism” to ensure the effective implementation of the Climate Change Convention.

The proposal calls for enhanced financial resources and investment to support action on mitigation and adaptation as well as the development and transfer of technology, as required by the Bali Action Plan.

The proposal was put forward at the contact group on “delivering on technology and financing, including consideration of institutional arrangements”. It was one of three contact groups in Accra under the Ad-hoc Working Group on Long-term Cooperative Action (AWG-LCA) of the UN Framework Convention on Climate Change (UNFCCC).

The proposal builds on the experience of other relevant funds such as the Multilateral Fund established under the Montreal Protocol, which deals with the phase-out of ozone depleting substances. Other proposals on finance were also presented in Accra by Mexico, Norway, South Korea and Switzerland.

Introducing the proposal, Bernarditas Muller of the Philippines, on behalf of the G77 and China, stated that it would operationalise an effective financial mechanism under the Conference of Parties with the goal of ensuring the full, effective and sustained implementation of the Convention’s obligations relating to financial resources. The proposal aims to bring about coherence in the global financial architecture for financing under the authority and governance of the Conference of Parties.

The proposal identifies five principles to guide an enhanced financial mechanism under the Convention. It must: (1) be underpinned by the principle of equity and common but differentiated responsibilities; (2) operate under the authority and guidance of, and be fully accountable to, the Conference of Parties; (3) have an equitable and geographically-balanced representation of all Parties within a transparent and efficient system of governance; (4) enable direct access to funding by recipients countries; and (5) ensure recipient country involvement during all stages of identification, definition and implementation, rendering it truly demand driven.

The main aims of an enhanced financial mechanism would include recognizing, promoting and strengthening engagement at the country level, to ensure a country-driven approach and direct access to funding. It would enable a shift from a project-based approach to a programmatic approach to help optimize and scale up implementation. It would facilitate linkages between various funding sources and funds to promote access to a variety of available sources and reduce fragmentation. It would ensure that activities relevant to climate change undertaken outside the framework of the financial mechanism (including those related to funding) are consistent with the Convention and relevant Conference of Parties decisions.

The main source of funding will be the public sector through implementation by developed countries of their commitments under Article 4.3 of the Convention. Funding will be “new and additional” and over and above overseas development assistance. According to the proposal, any funding pledged outside of the Convention shall not be regarded as fulfilment by developed countries of commitments under Article 4.3 of the Convention, or commitments to provide measurable, reportable and verifiable finance, technology and capacity-building as required by the Bali Action Plan.

The proposal calls for predictability, stability and timeliness of funding. Resources shall be essentially grant-based (particularly for adaptation), without prejudice to concessional loan arrangements. The level of the new funding is proposed at 0.5% to 1% of the gross national product (GNP) of Annex I Parties. The mechanism would address quantified commitments by developed countries to adequate and predictable funding for mitigation and adaptation. According to the proposal, a Board will decide and periodically review funding allocated to adaptation or mitigation, taking into account historical imbalances and the urgency of funding for adaptation.

The proposal sets out a range of activities to be funded. It would fund the agreed full incremental costs for the implementation of developing countries’ commitments under Article 4.1 of the Convention, including: (1) mitigation; (2) deployment and diffusion of low-carbon technologies; (3) research and development for technologies; (4) capacity-building; (5) preparations of national action plans and their implementation; (6) patents; and (7) adaptation in accordance with Articles 4.4 and 4.9. The mechanism will also fund the agreed full costs for the preparations of national communications.

The proposal states that in accordance with Article 4.3, developing countries would receive new and additional financial resources, including for the transfer of technology. Funding can be used for: (1) adaptation and its means of implementation; and (2) mitigation and its means of implementation. Meeting these two objectives may include technology development, deployment and transfer, capacity building and risk management, including insurance, and so on. The mechanism will also finance action programmes developed under the Convention, such as the national adaptation plans of action (NAPA) and technology needs assessments (TNA).

The proposal sets out the design and structure of the enhanced financial mechanism’s institutional arrangements. The mechanism will operate under the authority and guidance of the Conference of Parties, which will decide on policies, programme priorities and eligibility criteria for funding. The Conference of Parties will appoint a Board, which shall reflect an equitable and balanced representation of all Parties within a transparent and efficient system of governance. The Board, in turn, shall be assisted by a Secretariat of professional staff contracted by the Board.

The Conference of Parties and Board shall establish specialized funds and funding windows as well as a mechanism to link various funds. The funds would be administered by a Trustee or Trustees selected through a process of open bidding. Each of the separate funds may be advised by an expert group or committee, which could also be supported by a technical panel or panels addressing specific issues addressed by the fund.

To ensure transparent and efficient governance, other possible components of the structure include a consultative/advisory group of all relevant stakeholders, and an independent assessment panel. Modalities for determining the role of existing funds and entity or entities for the operation of the financial mechanism will have to be worked out.

At the contact group, a number of other delegations also put forward proposals designed to deliver on technology and financing. Norway suggested that financing for adaptation is primarily an issue of funding and that financing for mitigation is primarily an issue of incentives, such as carbon trading, other market approaches and direct regulations.

As a means to raise funds, Norway proposed auctioning a share of assigned amounts. Its approach would be reliable and sustainable, as income would be sourced from the international (not national) level. Funding would draw on a large base including the amounts assigned to all countries participating in emissions reductions as agreed in Copenhagen.

Mexico proposed a new fund to which all countries contribute in accordance with the common but differentiated responsibilities principle. The contribution would be based on indicators such as greenhouse gas emissions, population and gross domestic product (GDP). According to the proposal, “developing countries that choose not to join the Fund would be excluded from its benefits, without any penalty”.

Mexico suggested that all countries including developed and developing countries could benefit from the fund. It said that developing countries would have extra access to resources of financial instrument, and that the instrument could have an important link with other financial instruments.

Australia, in response to the G77 and China, agreed on the need for direct access to funding, on adopting a demand driven, on the need for coherence in any financial architecture, on funding to be new and additional (provided it is considered as ODA), on a transparent governance, and on independent assessment. It said, however, that the proposal should recognize that Article 11.5 of the Convention provides for implementation through bilateral, regional and multilateral channels.

Switzerland spoke on its proposal, which is based on the “polluter pays principle” which is underpinned by a global CO2 tax designed to raise revenues. A “global solidarity principle”, based on common but differentiated responsibility, would ensure that funding derives mainly from developed countries and mainly goes to developing countries.

It said that revenues from the global CO2 tax would go mainly to adaptation in two main areas: to fund a pillar relating to prevention of disasters; and to fund a pillar relating to insurance and responses to adverse events. In response to the proposal by the G77 and China, Switzerland agreed that we should do everything possible to reduce the fragmentation of resources, and should try to work with existing institutions.

Japan said that adaptation and mitigation requires significant financial resources. Unfortunately, the financial sources available are not sufficient to respond to the needs that have been expressed by Parties. It noted that the Japanese funding scheme, known as the “Cool Earth Partnership”, had pledged $10 billion for the next 5 years (most of which will be in loans rather than grants).

The European Union welcomed proposals by others and regretted that it could not offer its own concrete proposal at this stage. It said it was committed to scale up finance and investment flows and optimize the existing ones as part of a comprehensive Copenhagen agreement. The EU proposed that the AWG-LCA develop a toolbox of measures to finance mitigation and adaptation. In this session and the next one, we could concentrate on the “how” of financing, it said.

On adaptation, the EU said that public resources remain important but it is clear that this is not enough and we will need to identify how to generate private resources as well. Funding should be reserved for the poorest countries and those with the least resources. On mitigation, the EU said that the carbon market has potential and should become a key vehicle. Innovate financing mechanisms are equally important. The EU is considering allocating 15% of the EU aviation allowances to be auctioned to provide financing for climate efforts.

In response to the G77 and China, the EU asked how the mechanism would catalyze private investment and link to other instruments including the carbon market, national policies, and innovative financing instruments? How does the G77 and China envisage the linkages to the existing mechanism such as those currently administered by the Global Environment Facility? How would finance be scaled up when overseas development assistance amounts to a fragment of overall financial flows? What would the funds concretely deliver?

South Korea spoke on its proposal which calls for carbon credit to be provided for mitigation undertaken through nationally appropriate actions by developing countries under the Bali Action Plan. It said if we offer credits for national actions, then technology and finance will flow to developing countries through the carbon market and we can enhance the engagement of the private sector.

India, associating itself with the proposal by the G77 and China, said that financial contributions should be new and additional and not detractions from development finance and overseas development assistance. Nor should they result in conditionalities. It said that investments made so far by multilateral financial institutions - such as those to improve access to electricity which have helped to address poverty and achieve the Millennium Development Goals - could themselves become vulnerable to the effects of climate change.

India said that the UNFCCC must provide oversight in management of additional flows and all funds under the Convention. Proactive oversight by the Conference of Parties should be transparent and unambiguous. India called for an emphasis on technology research and development, and on collaboration between institutions in developed and developing countries supported by the sharing of intellectual property rights.

The transfer of intellectual property rights should set a more appropriate balance between holders and the public good, it said. It added that a number of references had been made to the carbon market, and suggested that a key driver of the market is the commitment of developed countries to fulfill their own commitments. It is their enhanced commitments that will create demand and spur the market.