Commentary

A climate finance road map from Lima to Paris

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When COP 21 takes place in Paris next year, it will need to send a signal to business, investors, governments and the public that the transition to a low carbon, resilient world is inevitable. A key part of the agreement will include climate finance; key to gluing trust among parties and to allow for implementation of the agreement.

Current Investment insufficient to meet the 2c target

Analysis, such as the New Climate Economy report, shows that the total domestic and international investment required to avoid dangerous climate change, falls far from the reach of current levels of both public and private international climate finance. Thus international climate finance must catalyse broader shifts in financial flows to align them with sustainable development objectives. This will require particular efforts to scale up finance to reach those more vulnerable and less capable, including a specific adaptation public finance component; but as the scale of the challenge is huge, it must set clear rules to switch investments at a scale and pace necessary for a global low carbon transition that avoids an above 2 degree temperature rise.

Predictability and transparency

A meaningful agreement in 2015 will need to deliver an effective and coherent international climate finance ecosystem building on current institutions, such as the Green Climate Fund (GCF) and the Standing Committee on Finance (SCF), to catalyse the action required both pre- and post-2020. This should include a mechanism to ensure predictability of international climate finance, thus allowing for effective planning, required by governments as well as private investors. Transparency of climate finance flows, the criteria by which it is available as well as Measuring, Reporting and Verification (MRV) requirements are equally important. Together predictability and transparency can provide the certainty of climate finance that governments and the private sector need for shifting their flows of finance, particularly long-term finance.

Country ownership

An agreement in 2015 will also need to address country ownership, a key element to ensure that financial investments are aligned with the domestic context and structure of a country’s economy and sustainable development objectives, for example through National Financing Strategies. Finally, as it’s clear that the scale of the challenge falls outside the UNFCCC’s own reach, it will be critical for all parties to agree to align cross-country public investment flows in line with a long term goal of carbon neutrality by 2050 to increase the probability of a 2 degrees world, as required by the Fifth IPCC report.

$100Bn/year by 2020?

Lima follows a successful pledging meeting for the GCF that took place on 20th November and which saw funds pledged to increase from $2.3Bn to $9.3Bn in a week. The fund is close to fulfilling the initial unofficial target of $10Bn and expectations are that more pledges in Lima will reach this target. The success of pledges to the GCF is welcome and will create positive pressure for the full operationalisation of the GCF in early 2015. However, the $100Bn/year by 2020 remains the big elephant in the room.

A road map to scale up climate finance to $100Bn by 2020 is deemed critical to built trust for the post- 2020 period. Whilst Lima might not be the place to define this roadmap, it must agree on a work plan that results in a clearly defined roadmap that is anchored in the Paris 2015 agreement.

A placeholder for finance

This underscores another critical issue; Lima will also need to shed light on where and how finance will be dealt with during 2015. A placeholder for finance should be put in the draft paper of the agreement, including how key elements of predictability and transparency will be clearly defined. While defining predictability of climate finance beyond 2020 is challenging, there are many proposals on the table as captured in the Co-chairs Non-paper. Indicative levels of climate finance will be critical to send the right signal to the wider economy of the type of investment we want to see to keep the world under 2 degrees. This Non-paper is an excellent starting point for discussion, which includes critical elements on finance and which should result in a draft agreement following discussions in Lima.

A mandate for the SCF

Parties have recognised the key role that the SCF will have to play in coordinating, governing and delivering international climate finance. The work carried out by the SCF to deliver the 2014 biennial assessment and overview of climate finance flows, captured in the summary and recommendations document, is an excellent baseline to build on the SCF’s role. In Lima the COP will need to strengthen this body and produce clear mandates for a 2015 work plan on issues such as MRV, coordination and transparency. Without this parties won’t be ready to make critical decisions in Paris.

An agreement on the INDCs

Finally, Lima also needs to define the information, scope and cycles for the intended nationally determined contributions (INDCs) in 2015. Views on the INDCs were very polarised at the recent ADP session in Bonn. Currently there is no clarity on whether the INDCs are to include Adaptation and Means of Implementation (MoI) – including finance- beyond the Mitigation commitments. While valid points were put across by different parties, finance contributions by all parties in the INDCs will help to recognize ongoing national efforts in adaptation and mitigation as well as spur country ownership, this domestic effort can be further catalysed by international supply of climate finance. The detailed AILAC proposal on INDCs has caught attention and might help dealing with some of the polarizing issues in this discussion. Reaching an agreement on the INDCs is urgently required for meeting the deadline set for submissions in March 2015 and securing an evaluation of the adequacy of the commitments.

In summary Lima will need to deliver on five main areas:

Pre-2020:

  1. Agreeing on a detailed and time bound process for defining the pathway to $100Bn by 2020 and anchoring this within the Paris agreement;
  2. Reaching the $10Bn goal for the GCF IRM.

Post-2020:

  1. Identifying how climate finance will be anchored within the Paris agreement;
  2. Mandating the SCF to advance agreement on measures to ensure predictability and transparency of climate finance;
  3. Resolving how finance is linked to information, scope and cycles that are included within the INDCs, allowing for an adequate ex-ante evaluation of this.

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