Ten things to know about climate finance in 2012

Smita Nakhooda, Charlene Watson, Alice Caravani, Liane Schalatek, Sam Barnard, Nella Canales Trujillo and Nick Scott
November 2012
This publication is an output of the following project: Climate Funds Update website
Overview

10 interesting things to know about climate finance in 2012

The Conference of the Parties to the UNFCCC is the largest event of the year for those working on climate change. This year attention turns to Qatar, the host of the 18th of these major conferences. Once again, the hot topic will be how to finance developing-country efforts to respond to climate change.  2013 marks the end of the 'Fast-Start Finance (FSF)' period, during which developed countries committed to deliver  $30 billion of ‘new and additional’ finance to help countries take immediate action on mitigation and adaptation. There will be much discussion on how  this finance has been used, and how to mobilize more finance, in Doha.  To inform this debate, we highlight the ten most noteworthy insights from our efforts over the past year to monitor climate finance on Climate Funds Update (CFU).

THE TOP LINES ON CLIMATE FINANCE

1. Countries are committing agreed Fast Start Finance (or at least they say they are)

Governments promised to find $30 billion of Fast Start Finance (FSF). They report providing more than $30 billion between 2010 and 2012. By August, countries self-reported a total of $23.7 billion. In the lead up to COP 18 some observers noted that this sum fell short of the original target. Last week, however, the US reported spending an additional $2.3 billion in 2012. This week, the UK reported $1.2 billion (£700 million) over the past year.  Japan’s most recent presentation on its FSF contribution suggests that it has provided $13.8 billion in public finance. This finance has been channeled through the dedicated climate funds that we monitor on Climate Funds Update, through bilateral aid agencies, and through export credit and development finance agencies. Although reported climate finance has increased significantly since the start of the FSF period, it is not clear that all of this finance is ‘new and additional’.

2. Despite fiscal austerity, countries are delivering on commitments.

More than $2.1 billion was deposited in dedicated climate funds, in support of prior pledges of finance for dedicated multilateral climate funds. However, current economic challenges have a grave impact on the ability of countries to scale up climate finance.

3. In fact, some new pledges have been made this year. But the total amount pledged to major funds is less than 10% of UK spending on the Olympics.

In the past year $1.21 billion has been pledged to dedicated climate funds. This represents an increase of $400 million from last year, when only $800 million in new finance was pledged. About half of this has been pledged to the Climate Investment Funds, which are administered by the World Bank in partnership with regional development banks. These funds are supposed to close operations and ‘sunset’ once the Green Climate Fund becomes operational. Nevertheless, the commitments made are far smaller than any estimates of the costs of climate change and associated finance needs. The total amount of finance pledged last year accounts for less than 10% of the estimated $14.2 billion spent on the London Olympic Games. It remains to be seen whether public and private sources of climate finance can be scaled up to meet the pledge of $100 billion annually by 2020, as committed in the Copenhagen Accord in 2009.

THE DETAIL

4. The five largest contributors of climate finance are the United States, Japan, the United Kingdom, Germany and – more surprisingly (given its relative size) – Norway.

Together, these countries have pledged $8.9 billion in climate finance to multilateral climate funds and initiatives between 2003 and 2012. The US has pledged the most finance, as one might expect from this large economy with high emissions. It has not yet followed through by depositing all of the finance it has pledged, however. Norway punches above its weight: it features in this top five contributor list, even though the absolute size of its economy is relatively small, and its citizens live lifestyles that produce relatively low emissions.

5. While there is an urgent need to increase finance, climate change funds struggle to spend money both quickly and effectively.

Only $1.5 billion was approved or earmarked to new projects or programmes in 2012, even though $ 2 billion was deposited. Spending large amounts of climate finance efficiently and effectively is a difficult balancing act. Designing programmes that deliver real environmental and social benefits is a complex and time consuming process. While it is worth taking the time to get the design of programmes right to ensure that scarce public resources are spent well, there are many opportunities to increase the efficiency and timeliness of climate funding cycles that are often slow and cumbersome.

6. The distribution of climate finance spending does not mirror the distribution of development finance (traditional ‘aid’)

Climate finance has tended to be concentrated in a small number of large countries. Around 92% of approved climate finance has, to date, been directed to middle income countries, and has primarily supported mitigation action to reduce greenhouse gas emissions. Urgent mitigation action in these rapidly growing economies is imperative if we are to have any hope of avoiding the most dangerous impacts of climate change. Nevertheless, there is a real need to ensure that more finance supports climate compatible development in poor countries that are highly vulnerable to the impacts of climate change. Small island developing states, whose very existence is threatened by climate change, have received very little finance so far. For example, Fiji, Kiribati, Marshall Islands, Samoa, Tonga, Tuvalu and Vanuatu have, to date, received just 2% of the total amount directed to Asia and the Pacific.

7. Finance to stop or reverse climate change has, for the most part, supported energy efficiency and renewable energy programmes.

A closer look at the portfolios of the two largest funds to combat climate change, the World Bank administered Clean Technology Fund (CTF) and the Global Environment Facility (GEF), finds that energy efficiency projects have received the most finance. Energy efficiency can be difficult to implement, but it is often cost effective in the longer term and support low-carbon development.. These two funds have also financed low carbon transport solutions such as bus rapid transit and rail systems. Finally, substantial finance has been invested in renewable solutions to energy needs, particularly solar and wind power. The volume of climate finance for hydropower (a widely deployed and commercial technology that can pose significant environmental and social risks) increased significantly this year. This results from a CTF financed development policy loan to the Indian state of Himachal Pradesh to develop its hydropower resources.

9. Finance to respond to the impact of climate change is used for more than just building walls to protect us from rising sea levels.Pilot Programme on Climate Resilience and the Adaptation Fund invest primarily in activities that help make agriculture more resilient to climate change, and strengthen food security.  The volume of finance for adaptation projects increased nearly 70% over the past year to $143 million in 2012, while climate finance for disaster risk reduction rose six-fold to $89 million. These developments reflect a growing commitment to funding adaptation in developing countries, prompted by the increasingly severe manifestations of climate change exemplified by extreme weather events such as hurricanes and floods. Infrastructure, of course, still has a central role in adapting to the impacts of climate change, with $63 million directed to roads, irrigation, and of course, sea walls. 

8. Brazil leads the way on efforts to reduce emissions caused by deforestation and forest degradation

Tropical forest loss may account for as much as 20% of global greenhouse gas emissions. Brazil is home to the largest remaining area of tropical forest in the world. In 2012 the Amazon Fund approved $82.4 million for 14 new projects to strengthen forest management practices in Brazil with finance from Norway and Germany. The total capitalisation of the Amazon Fund is more than $1 billion, to be delivered when Brazil demonstrates that it has made progress in saving its forests and combatting climate change.

10. Finally, work began to progress the Green Climate Fund, which is supposed to become the channel for a majority of public climate finance over time.

But the GCF is presently the smallest multilateral climate fund with just $7.5 million pledged (and less than $3 million received). The city of Songdo in South Korea won the bid to host the Green Climate Fund (GCF), with the Korean Government pulling out all the stops to beat its competitors (Geneva, Bonn, Windhoek, Warsaw, and Mexico City), even calling in its newly famous pop star Psy to write a song to champion its bid. Its victory marks the first time that a major climate change institution will be based in an Asian country, and one with a strong expressed commitment to ‘green growth’.  Expectations of the fund are high. Rapid progress needs to be made in agreeing its work programme and priorities, so that it can realise its aspirations to support ambitious and innovative finance for climate change mitigation and adaptation.

Climate Funds Update

CFU is a joint initiative of the Overseas Development Institute (ODI) and Heinrich Böll Stiftung (HBF). Since 2009, we have monitored dedicated public climate funds from the point when donors pledge support, through to the actual disbursement of finance for projects in developing countries.

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10 interesting things to know about climate change - full infographic

10 interesting things to know about climate change - full infographic
10 interesting things to know about climate change - full infographic