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Securing additional international public finance for climate change: How much is needed and can it be achieved?

Date
Time (GMT +01) 12:00 13:30

Speakers:
Guido Schmidt-Traub – African Progress Panel
Nicola Cantore – Overseas Development Institute
Jessica Brown – Overseas Development Institute

Discussants:
Michael Keating – African Progress Panel
Jamie Drummond – ONE

Chair:
Neil Bird
- Climate Change, Environment and Forests, Acting Programme Leader, ODI

The chair, Neil Bird, welcomed everyone to the meeting with introductory remarks on the speakers and discussants.  Neil introduced the topic of climate finance focussing on the contentious issue of ‘additionality’ over and above traditional official development assistance (ODA). ODI has been reporting on international public finance for climate change since the beginning of 2008 and continues to track climate change funds through the Climate Funds Update website, in partnership with the Heinrich Boell Foundation.

Presentation 1

Guido Schmidt-Traub began by showing developed countries’ responsibility in generating the bulk of historic emissions and making the case for international climate finance.  He followed with a detailed description of adaptation activities in Africa that are needed to respond to a changing climate, where data are most accessible.  Four of the main areas where adaptation will be most needed include:

  • Agriculture and animal husbandry
  • Water and other infrastructure (investments needed to improve water resource management and to avert threats to water supply for household, agricultural, as well as industrial use)
  • Disease management and health systems (vector control, vaccination, treatment of deseases such as malaria)
  • Natural resource management (for example, ecosystems services management)

As the needed activities are not new, adaptation should be approached through the use of proven interventions.

Guido then presented a detailed table with the estimated financing needs for both adaptation and in order to meet the Millennium Development Goals (MDGs).  Annual MDG financing needs between 2010 and 2020 are estimated at $112.7 billion per annum, of which $72.3 are required from ODA.  The external public funding needs for adaptation are estimated between $7 and $13.4 billion per annum. 

Operational implications for adaptation finance were then described. Guido stressed that adaptation requires majority grant financing; reliance on proven activities and interventions; and that adaptation and development should be programmatically joined.  By comparing the status of financing (2007 ODA) and the annual external financing need there appears a clear lack of funding available.

Presentation 2

Nicola Cantore presented findings from the recent ODI report, commissioned for ONE, entitled ‘Climate Finance and Development: Friends or Foes’, which highlights different additionality scenarios. Nicola opened with a brief overview of the different channels of climate finance (namely, international climate finance, private capital flows and domestic climate finance), and then focussed on the differing definitions of ‘additionality’:

  1. Complete separation between ODA and climate change related financing
  2. The amount of climate change related aid that can be reported as ODA should be limited in order to avoid diversion from ‘MDG-related’ ODA
  3. All donor support for climate change should be reported as ODA
  4. All ODA targets and commitments should be adjusted upwards to take account of climate change financing needs.

Four different climate finance scenarios were tested in the ODI report, based on the different definitions of additionality:

  1. Baseline scenario: ODA at 0.7% of GNI by 2030
  2. 0.7% of GNI climate finance additional to traditional ODA + 0.5% of GNI. Funding is counted as ODA and is provided through similar disbursements mechanisms.
  3. 0.7% of GNI climate finance additional to traditional ODA + USD 67 bn. Funding is counted as ODA and is provided by similar disbursements mechanisms.
  4. ODA at 0.7% of GNI by 2030 but some US 67 billion taken out of aid to spend on environmental purposes (and not “traditional” aid).

Each scenario had been projected to see how they will meet climate and development objectives (from 2008 to 2030). 

Nicola focused on two main problems: the geographical and the sectoral diversion of ODA.  If ODA funds are entirely diverted away from the MDG goals and towards climate change activities, there would likely be shifts of ODA funds away from Africa and towards Asia and Latin America.  Sectorally, there would likely be shifts of ODA away from education and health, and towards agriculture, water and ecosystem protection. The consequences of these two problems have been analyzed from both the point of views of the recipients and the donors. 

Presentation 3

Jessica Brown opened by presenting the financial figures which are included in the Copenhagen Accord:

  • Funding should be ‘new and additional’
  • Developed countries commit to provide in the short term (2010-2012) $30 billion, and $100 billion annually by 2020
  • Such funding will be delivered through a multitude of sources, both private and public

The Accord leaves us with a lack of clarity around: how is additionality being defined? How will the money be raised and by whom? What will be the relative roles of both public and private finance? It is therefore difficult to conclude the extent to which the funds are likely to be additional, i.e. over and above current commitments to ODA for development.

Possible solutions to operationalise climate finance additionality have been provided. Most importantly, additionality can be secured at ‘source’ through the use of new and innovative revenue generation mechanisms (raising money through carbon markets various forms of taxation and levies, bonds, the Currency Transaction Tax, etc).

Assuming however that a substantial amount of traditional ODA flows will be directed towards climate change objectives, there are ways to improve the tracking of climate finance within ODA as well. This can be achieved through introducing new forms of tracking (i.e. separating ‘ODA classic’ from ‘ODA climate’), establishing a new public finance target for climate change similar to the 0.7% of GNI established to meet MDG goals, or strengthening current monitoring of climate finance. Such ideas are currently being discussed within the World Bank and the OECD DAC.

There are however significant political barriers to these solutions. Some donor countries (US and UK) are resistant to accepting common rules for measuring climate aid.  This is largely because donors are using different definitions of additionality. For example:

  • Sweden and Denmark are using the 0.7% GNI baseline, above which is finance for climate change would be additional.
  • Norway is using their 2008 ODA figures as a reference point.
  • The UK is claiming that no more than 10% of aid budget will be spent on climate.

Discussion

Michael Keating started the discussion by pointing to the possible implications on development as a result of increased climate finance.  He raised the possibility of relaxation in the momentum of MDG achievement; the likelihood of the proliferation of climate funds scarcely coordinated; the danger of donor-driven strategies and the risk of competition between MDG objectives and climate change objectives. 

Michael suggested the worth of an international political consensus secured through strong leadership instead of adopting a bottom-up approach, which was apparent in Copenhagen.  He noticed that the business sector is losing trust in green opportunities because of the lack of predictability of climate funds. He concluded by suggesting that climate change should reinforce development - therefore shared responses from development and climate change sectors are required.

Jamie Drummond gave general feedback to the presenters and offered some political observations. He noticed how some of the MDGs have been neglected recently, especially the agricultural and the water and sanitation sectors.  Jamie also suspected that additionality is unrealistic for the so-called ‘fast-start’ finance, as such money would have to be already committed in national budgets.  He also raised the need for attention to be given to the interim target for climate finance (i.e. for 2015).  The 2020 target has much less value as current policy makers cannot be held accountable.  He invited civil society to ask for more transparency from governments in order to demonstrate if international public finance follows the right principles.

Jamie also commented how Africa is the ‘hub’ of renewable energies, and the potential of renewable energy sources in different African countries.  For example, the new wind farm initiative in Kenya which could generate 25% of national electricity.

Questions/comments

Several questions and comments were raised related to the need for more clarity on defining additionality; how better to distinguish climate finance when tracking flows (in particular the role of carbon markets – is finance considered additional if the emissions reductions are serving as offsets for developed country emissions?); how to prioritise the immediate need for finance versus longer term needs for finance; and how most funding targets are going towards mitigation rather than the need for adaptation for the most vulnerable countries.

Description

There is a growing awareness and evidence-base that climate change will have considerable effects on development and in particular in Sub-Saharan Africa. A key challenge is to ensure sufficient finance is available to address climate change in developing countries, in addition to the ongoing need for development assistance.

The Copenhagen Accord calls for the provision of “scaled up, new and additional, predictable and adequate funding” to developing countries for climate change. It pledges US$10 billion per year from 2010-2012 with the promise to increase to US$100 billion per year starting in 2020. But how can ‘new and additional’ funds be secured? While a variety of possible mechanisms for generating additional revenue are being discussed, there are still major concerns that international public finance will be diverted from existing international development assistance commitments in order to address climate change.

This ODI public meeting explored this debate around securing financial resources to help Africa adapt to climate change that are over and above (‘additional’) to what is needed to help reach the Millennium Development Goals. Specifically, the meeting aimed to address the following questions:

-         How do the MDG baseline and implementation strategies for Africa need to be revised once we account for climate change?

-         What additional funds are needed to address climate change, and what has been promised so far?

-         What are the possible mechanisms to ensure that finance is additional?

-         What are the possible implications for development if finance is diverted away from the MDGs towards adaptation priorities?

The panel will present recent research related to the issue of additionality of climate finance. The meeting aims to explore and add greater clarity to the debate, feed into post-Copenhagen climate finance negotiations, and help influence UK policymakers.