It has been a busy few weeks for United States (US) action on climate change. In the wake of a groundbreaking deal in which the US and China both agreed to limit future greenhouse gas emissions, the US also announced that it will pledge US$3bn to the Green Climate Fund (GCF). This has the potential to be a game-changer in terms of unlocking progress in the ongoing negotiations.
Pledges to the Green Climate Fund
On the morning of the first formal GCF pledging conference in Berlin, the $10bn goal for contributions certainly seems within reach. The US and Japan’s ($1.5bn) total pledge of $4.5bn comes on top of $3bn previously announced. It’s likely that the UK will match the $1bn that Germany and France have each committed, alongside Sweden’s $0.5bn which is significant in being over and above its aid commitments. Also politically significant is that non-traditional donors such as Mexico, Korea and Indonesia will be contributing to the Fund. With a UK $1bn pledge on the cards, Italy, Spain and Canada yet to specify, and others such as Norway able to commit more, today could be an historical moment in international climate finance.
Creating an Effective Ecosystem for Climate Finance
The GCF has the potential to dramatically change the landscape of international climate finance. The Climate Investment Funds (CIFs) and the Global Environment Facility (GEF) are the two primary vehicles for delivering climate finance. Both of these, particularly the CIFs, have made important progress in catalyzing resources – both financial as well as human capacity – from the multilateral development banks.
At a Committee meeting this week, a decision on options for sun-setting and/or integrating the CIFs into the GCF was postponed for another 2 years. Whilst the Committee deliberated over the need for reducing fragmentation of the international climate finance architecture versus ensuring diversity of financing sources, the fact that countries are now coming forward with financeable project pipelines no doubt influenced this decision. Importantly, any new programmes under the CIF could now be designed to access other sources including the GCF.
Mobilising Private Sector Flows
Success in mobilizing the private sector at scale remains a bigger challenge. The World Resources Institute estimates that the private sector accounts for roughly one third of co-financing under the GEF and only one quarter under the CIFs. This is disappointing as experience shows that when used effectively public finance can mobilize much greater levels of private investment. The World Bank for example suggests a 1:3 leverage ratio of public-to-private investment.
The GCF’s Private Sector Facility (PSF) has the potential to go well beyond what is currently available within the existing ecosystem for climate finance. It could incentivize innovative ways for leveraging institutional investors and ensure these resources are matched to country pipelines of transformational investments. The PSF could also help ensure the participation of local private sector actors and the growth of domestic green markets in developing countries. However, progress with the design of the PSF currently lags behind other aspects of the GCF’s business model. Addressing this at the next Board meeting will quash doubts that the GCF can a transform private sector flows of finance and the PSF’s potential to harness the private sector resources announced at the UN Secretary General’s Summit in September so that these align with developing countries national strategies and plans.
US Objectives for the GCF
All eyes have been on the US, so the $3bn commitment is highly significant. Securing Congressional approval of the funds has become more challenging now that Republicans control both the House of Representatives and the Senate. However, several objectives have been attached to the US pledge in an effort to help ensure the funds survive the appropriations process. As with other multilateral funds, the US contribution should not exceed 30 percent of total confirmed pledges. The meeting in Berlin today is set to confirm that is the case. The US also wants to ensure a significant portion of its pledge goes to the PSF as would be consistent with the GCF’s allocation criteria. However the US also wants to retain the right to allocate resources to other multilateral funds if the GCF fails to make sufficient progress next year.
There are several reasons why Americans, conservatives included, should want the US to pay its fair share and allow the GCF to play a highly catalytic role in mobilizing private sector investment. For starters, a US contribution to the GCF represents an investment in global stability. Money that is dispersed from the GCF will help ensure developing countries are adequately prepared for the worst impacts of climate change which in turn will mean less US intervention will be required in the future, including expensive deployment of US military and other personnel in disaster relief efforts.
A credible US contribution is also needed to leverage greater action from China. While developed countries must lead, the scale of the challenge faced by the most vulnerable countries means there is also a need and opportunity for the major emerging economies to play a greater role. That the GCF is able to attract non-traditional donors is a welcome development within the international climate agenda.
Aligning All Flows of International Public Finance
Efforts led by the major emerging economies are already underway. Brazil and China are emphasizing the importance of South-South cooperation on climate. This past summer saw the establishment of the BRICS bank which was created to fund sustainable infrastructure in low and middle income countries, and the launch of the Asian Infrastructure Investment Bank was announced in October. Both of these new institutions will be capitalized by as much as $100bn with around 50% of this coming from China. In what appears to be a direct response, at the recent annual meeting of the World Bank a new $1bn Global Infrastructure Facility was also launched. With all this new public finance becoming available for infrastructure investments, the key issue becomes to what extent these resources are consistent with global efforts to stay below the 2 degrees temperature increase necessary to avoid dangerous levels of climate change.
More proactive efforts from the US has already yielded dividends – notably China’s commitment for emissions to peak in 2030, as well as the recent agreement of the EU’s climate and energy package. Indonesia, Mexico and South Korea have already pledged money to the GCF with Peru and Colombia signaling an interest in contributing. In 2015 continued US leadership to align multilateral development banks resources and other international flows of public finance, including making actionable the G20’s commitment to reform fossil fuel subsidies, is necessary. It is critical that the US doesn’t come up short just when they are starting to see a return on investment from other stakeholders.