How are we going to deliver climate finance at a sufficient scale to help developing countries mitigate and adapt to climate change? Parties to the UNFCCC–including those at this month’s intersessional in Bonn–are struggling to agree on the answer to this question. The UNFCCC established a Standing Committee on Climate Finance to take stock of global progress towards this goal, while a work program on Long-Term Finance will continue this year.
As these various groups debate the future of climate finance, it’s important to look back at progress and trends thus far. The fast-start finance (FSF) period offers important insights into how different developed countries are approaching the challenge of delivering international climate finance. These lessons can inform future efforts.
Major Insights from the Fast-Start Finance Period
Developed countries report that they delivered more than $33 billion in FSF between 2010 and 2012, exceeding the pledges they made at COP 15 inCopenhagen in 2009. But how much of this finance is new and additional? How has it been allocated, and what is it supporting?
1) Developed Countries Delivered Much More Finance for Climate Activities During the FSF Period than Before
The FSF period has been a difficult one: Developed countries pledged their climate finance support at the advent of unprecedented economic difficulty brought on by the 2008 financial crisis. Yet these countries have sustained support for climate change adaptation and mitigation in developing countries. Indeed, all of the countries we reviewed appear to have significantly increased their international climate spending since 2010 (see Figure 1).
In many cases, data limitations impede a direct and precise comparison of fast-start spending to related expenditures before 2010. But the UK appears to have increased its climate finance four-fold relative to environment-related spending before the FSF period. Germany’s annual climate finance has nearly doubled, and Norway’s has increased an estimated 30 percent. Japan previously mobilized $2 billion per year in climate finance through the Cool Earth Partnership; under FSF, it reports average spending of more than $5 billion per year. Finally, through its Global Climate Change Initiative, the United States has increased core climate funding from $316 million in FY09 to an average of $886 million per year in FY10 to FY12.
2) But Countries Are Counting Different Kinds of Finance
The contributions we examined differ by an order of magnitude, from Germany’s $1.6 billion to Japan’s $17.4 billion. These figures, however, are not comparable, as there is major divergence in what forms of finance countries have “counted” (see Table 1). A large share of Germany’s FSF is directed through its International Climate Initiative, which is indirectly financed through revenues from its emission-trading mechanism. With the exception of its $615 million loan contribution to the Climate Investment Funds, Germany counts only grants towards its FSF. By contrast, Japan and the United States include as FSF a large share of export credit and development finance for low-carbon infrastructure. In Japan’s case, some efficient fossil fuel options are also counted. Although Germany, Norway, and the UK also have active development finance and export credit programs (which have sought to promote low-carbon technologies), they have not counted finance delivered through these channels as climate finance. Finally, Japan has counted leveraged private finance in its total; the other countries have also leveraged private finance with their FSF contributions, but they have not counted this finance toward their totals.
3) Adaptation Finance Has Increased, but Still Only Accounts for 12 Percent of Top Contributors’ FSF
While support for adaptation activities has increased significantly over the FSF period, the majority of climate finance is directed to support mitigation. In the five countries we examined, the share of FSF for adaptation ranged from about 7 percent in Norway (which has prioritized REDD+) to about 35 percent in the UK and Germany. (In practice, of course, adaptation and mitigation activities may be quite interlinked.) A substantial factor in mitigation’s dominant share of the portfolio has been contributor countries’ focus on instruments and channels that draw in private sector co-finance. Directing and identifying private finance has been much more straightforward for mitigation than for adaptation.
Adaptation FSF was also intended to focus on the developing countries that are most vulnerable to climate change, including Least Developed Countries (LDCs), Small Island Developing States (SIDS), and African countries. Forty percent of the UK’s total contribution and 27 percent of Norway’s is directed to Africa. Of the U.S. contribution, 20 percent supports projects that occur at least in part in LDCs, SIDS, or both. About 6 percent of Japan’s FSF is directed to LDCs and SIDS.
4) The Extent to Which Finance Is “New and Additional” Is Unclear
While funding has increased, many countries seek FSF “credit” for projects and programs that they were already supporting prior to the FSF period. While sustained funding for these programs is important, FSF is supposed to be “new and additional.”
For instance, the United States counts its contribution to the Montreal Protocol Fund—which it has been supporting since the early 1990s—as FSF. A significant share of Japanese FSF was pledged prior to 2010 through initiatives such as the Cool Earth Partnership. All five countries count contributions to the Climate Investment Funds (CIFs) since 2010, although countries pledged to fund the CIFs in 2008. And finally, while some argue that only finance beyond the commitment to provide 0.7 per cent of GNI should be considered additional, only Norway actually met this commitment during the fast-start period.
5) Strengthening Transparency and Predictability of Long-Term Finance
Better information on how climate finance has been spent is essential for understanding and increasing the effectiveness of scarce public finance. Detailed and disaggregated information on the projects and programs counted as international climate finance is essential to understanding its impact and effectiveness.
Countries have taken substantially different approaches to reporting their financial contributions. We observed an improvement in some countries’ reporting practices over the course of the FSF period to include more complete information.
For example, Japan just published a complete list of the projects it supported during the FSF period, joining other countries that had previously provided this information. At Doha, countries adopted a common tabular format for biennial reporting on climate action, including the delivery of climate finance. If countries use this format to provide project-level detail on their contributions, it would go a long way toward increasing the transparency of climate finance. Given that climate finance is intended to support ambitious action on the part of recipient countries, there is a strong argument for ensuring that developed countries meet robust standards for reporting on climate finance delivered in a spirit of mutual accountability.
All the transparency in the world, however, is not a substitute for scaling up finance in order to meet increasingly urgent climate mitigation and adaptation challenges. The FSF period was a good start, but now it’s time to develop long-term climate finance plans. Economic circumstances in developed countries are difficult, so it’s more important than ever to find new sources of finance and ensure that they are deployed as effectively as possible. This will require political commitment and leadership at the national level, as well as enhanced cooperation globally.
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