Chair:
Tom Mitchell - Head of Programme, Overseas Development Institute

Presentation of EDC 2020 project:
Imme Scholtze
Jessica Brown
Merylyn Hedger

Invited commentators:
Khurshid Alam - ThinkAhead Ltd, Dhaka
Etienne Coyette - EC DG EuropeAid Development and Cooperation
Nigel Thornton - Agulhas

This meeting was the second in an ODI event series on climate finance effectiveness.  In particular, the meeting focused on the EDC2020 project.  The meeting described the findings of the project, using Bangladesh and Indonesia as case studies to illustrate the lessons and challenges in creating national frameworks for climate finance effectiveness.  Other experts were invited to present their understanding of climate finance effectiveness at both international and national levels.

Dr. Imme Scholtze stated the EDC2020 project was undertaken during a transition period where relations between OECD, new global powers and ‘developing countries’ was changing and this will impact upon the future economic, poverty and climate policy framework.

Climate change is being framed very much at the economic level to the detriment of the environmental and sustainability agenda, with a greater focus on mitigation and less on adaptation.  The revenue-raising and allocation of climate finance, the alignment of climate policies to development policies, and how donors fit into a national agenda are all key aspects that still need to be worked out.  The critical mass towards effective climate policies is not yet there, though BASIC countries are being more innovative than OECD countries, which could move towards more South-South cooperation. “Donor dominance is not a given for climate change”.

Dr. Scholtz called for:

• a more integrated perspective to strengthen national capacities for effective strategies and coordinated action that is based on real needs and priorities;
• The same mistakes from the development community need to be learnt for climate finance.  This includes more predictable and transparent aid flows with joint standards for MRV. Donors should be transparent on how much they will contribute to ODA and to climate finance. 
• Adaptation and mitigation need to be consistent with poverty reduction, with a move towards poverty-sensitive mitigation and adaptation measures.  
• “The late awakening of the development community to climate issues is a heavy burden on our shoulders and we need to be more frank and honest where we are on the learning curve”, especially on adaptation as disasters intensify.

Dr. Merylyn Hedger presented a case study on climate finance effectiveness in Bangladesh. Key points included: 

1. Bangladesh has established new financial mechanisms;
2. there have been efforts to align funds but it is still unclear whether funds will be consolidated or whether there will be a further differentiation of roles within these funds;
3. Aid is at risk from climate change (OECD, 2003 estimates this to be up to 50%); 
4. capacity building remains a key challenge, and there is a tendency for business-as-usual when there is a need for improved coordination and improved project management and planning processes;
5. donors have different motivations and respond to different pressures: some respond to the Bangladesh Country Action Plan, others to domestic concerns and it is hard to measure donor input.  This has in part contributed to the proliferation of financial mechanisms; the two national trust funds arose out of conflicting agendas between the governments of Bangladesh, the UK and Denmark;
6. no models exist for climate finance, which is cross-sectoral funding.

Jessica Brown gave a presentation on Indonesia’s experience in the delivery of climate finance, which has to-date focused mainly on mitigation as opposed to adaptation, and the institutional structures to handle climate finance at the national level.   The research focused on three key areas:

1. to determine the current role and status of climate finance in Indonesia;
2. the types of emerging institutions;
3. how far climate finance is being coordinated and aligned with national systems.

Indonesia has announced a voluntary 26% reduction in emissions and a further 15% by 2020 if additional finance can be raised.  Currently USD 4.4 billion has been pledged to address mitigation with USD 2.9 billion in concessional loans and USD 1.4 billion in grants and technical assistance, leading to a proliferation of different funding instruments, mostly for mitigation under REDD+.

The main instruments and institutional structures are:

1. The climate change policy loan (World Bank and JICA);  
2. The Indonesia Climate Change Trust Fund (DFID and AusAid);
3. the Norway and Indonesia letter of intent;
4. The Indonesia Green Investment Fund, which sits within the Ministry of Finance’s government investment fund, with some private finance support; and
5. bilateral and multi-lateral project support at national ministries and subnational levels, particularly for REDD+.

The Indonesia case study illustrates there has been a proliferation of instruments and corresponding fragmented policies and competition between government agencies, some of which run parallel to the systems already in place by the government. This is indicative of a poor understanding of the activities that need to be financed and priorities are ill-defined. Whilst there is a good understanding at a high-level of financing needs ‘the actual activities and implementation routes of that need is unclear’.

Jessica Brown concluded that there is a need to build modalities to meet national financing needs rather than meeting the needs of donors.  Moreover, there is a need to go beyond the amount of financing as an indicator of effectiveness towards indicators that can measure levels of capacity, perverse incentives, sustainability of political support and donor coordination to support harmonisation within government systems.

Khurshid Alam gave a political economy perspective on Bangladesh’s experience on climate finance effectiveness, based on an IDS study that looked at how and who resolves problems on climate change within societies, which will be published in May 2011.  Mr. Alam summarised the political economy context as:

• There has been a shift in political circles to taking climate change seriously in Bangladesh, particularly after the large-scale disasters in 2007.  This has caused interest to develop effective institutions to tackle climate change. 
• This shift has still not translated into effective policies on climate change policies since most discussion is happening in expert and developmental circles.
• Climate justice is being heavily influenced by international NGOs, not domestically.

The study found it is not unique that the planning process is heavily influenced by domestic and international political economy concerns. The Bangladesh Climate Change Policy demonstrates conflicting ideologies, whereby two versions were developed with one having a plural and open mechanism for both loans and grants whereas the approved version only had a grant component. It is not the poor or vulnerable who are defining the climate strategy agenda but experts aligned to more traditional discourse.  In addition, there is conflict between the climate justice and market-driven ideologies.  Finally, there is an inherent tension between impact and accountability in the aid effectiveness agenda and short-sighted planning processes, which can lead to a proliferation of funding mechanisms.

Mr. Alam offered the following recommendations to improve the aid effectiveness agenda:

• Pluralistic approaches may not work in developed and poorer countries in the same ways.  Donors need to think about who they engage with and help to shift the debate away from the cities to local government levels.
• Climate finance must ensure it is not a top-down initiative and there is a need to learn from past mistakes.
• Poverty alleviation is the best way to help people adapt to climate change and it is not possible to separate poverty alleviation from DRR: an integrated approach is necessary.
• There is a need to be aware of the international political economy of the business of clean development and mitigation and the interests of some donors towards mitigation rather than adaptation.

Discussion:
Etienne Coyette offered an EU perspective on climate finance effectiveness.  The EU currently spends 300 million Euros a year on average on development cooperation.  This is set to increase dramatically with the USD 100 billion global annual target for climate finance, in effect bringing the EU contribution to USD 2 billion a year, on average.  The EU is starting to take a more integrated approach within thematic programmes; programmes prior to 2002-3 were not screened for climate change. New programmes offer an opportunity to mainstream climate change into programming.  There is, however, conflict between climate finance and other development sectors competing for ODA funding.  Currently, the EU is in a phase of structural reorganisation to become more harmonised in its approach to climate change and climate finance. 

The EU has the largest carbon market, with 90% of carbon rights traded through ETS.  The EU is trying to link the ETS with other markets.  However, addressing capacity in LDCs and SIDS needs to be done much more systematically than previously to ensure climate finance effectiveness and systematically address adaptation, technologies and mitigation.  Many climate contacts in developing countries are heavily overworked and have to play multiple roles at multiple scales and this remains ‘a very concrete challenge in the need to move towards harmonised programming processes at all levels’.  Moreover, there is a need to utilise existing and develop new tools to promote private investment in renewable and other sectors. Accountability of climate finance flows and an EU common position remain challenges to be addressed.  Donors also need to move towards an integrated strategy in all their aid programmes.   

Nigel Thornton presented his experience of research into how climate finance is linked to aid effectiveness through the prism of the Paris Declaration.  The study included Bangladesh, Cambodia, Indonesia, the Philippines and Vietnam, Ghana, Kenya, Tanzania, Cameroon, Morocco and South Africa.  

Asian Environment and Finance ministries met in Bangkok in October 2010 to discuss climate change.  Mr. Thornton commented that there is a disconnect between what is happening in theory and practice. The development discourse only recently grasped climate change and lessons on effective external finance have been slow to be taken up by the climate finance discourse. There is no reason why the Paris Declaration should not apply to climate finance – domestically owned, supporting domestic systems and local planning processes, alignment, coordination, measurable results and accountability.

However, the case studies found that:

• In none of the countries is climate finance a domestically owned process, except Vietnam where the government are not directly accountable.
• Climate change is often viewed through very personalised and localised understanding by populations; this will only change if local governments can introduce policies that broaden understanding of the issues.
• National policies are weak on climate change, and most policies are externally driven.
• Ministries have little capacity to hold each other to account on climate change and most climate change activities have been channelled through weak Environment Ministries.  It needs the attention of the ministry of finance to enable a domestically-driven climate agenda.

Questions raised:

• If it is possible at community level to converge climate change and development, why is it so hard to do so at international levels?  Programmes were designed before the issue of convergence became paramount.  As programmes enter into new planning processes, this can be rectified.  Projects and programmes should be screened for climate change and modified accordingly.
• Why is climate change not a domestic issue in these countries? This depends on each country, but immediate concerns over food security take priority and it is difficult to make the link to anthropogenic climate change.  This will only happen when the politicians play a leadership role.   This will intensify as the number of disasters increases.  Regrettably, the framing of climate change has often bypassed the national accountability process.
• Are we approaching climate change the wrong way round and should we look at specific issues rather than at global levels? There is a need to bring international and national level discussions to local governments.  By working at national levels up to the international levels, this will increase the likelihood of vulnerable people are supported through climate finance.
• How is the private sector being factored into climate finance? The private sector approach has been piecemeal, as the financial flows have not been systematic and are happening on a project-by-project basis.  The private sector needs clarity on regulation, predictability, security and the transition to a low-carbon economy.  In the EU, ‘climate windows’ within existing investment facilities are working to promote investment in climate change-related issues and better monitor what is climate-relevant for existing investments.