The 21st Conference of the Parties or COP21 to the UN Framework Convention on Climate Change (UNFCCC) is convened this week in Paris, France. Besides concluding a new greenhouse gas emission-reduction agreement and designing a post-2020 international mechanism to deal with climate change, an important task of the meeting is to boost global climate change financing, which is essential to enhance mutual trust and re-establish confidence in global climate cooperation.
Climate financing holds a critical position in the global action to combat climate change. Its progress up to now has lagged far behind what is actually needed. The mismatch between emission-reduction commitments and available finance has become a major obstacle for the global agenda on climate change.
The game between the South and the North focuses on emission-reduction commitments. However, developing countries face financial and technical constraints in their low-carbon transformation, and hence their emission reductions must be based on the provision of financial and technical assistance by developed countries. Upon repeated appeals, the 2007 Bali Conference (COP13) for the first time made finance an important agenda item. Two years later, the Copenhagen Conference (COP15) introduced a historic proposal to create the Green Climate Fund, for which developed countries undertook to have a Fast Start Fund of $30 billion between 2010 and 2012 and to provide developing countries with at least $100 per year from 2013 to 2020.
Developed countries have failed their commitment. For example, even with a strong push from the UN and G20, it is now already two years beyond the schedule and the Fast Start Fund has accrued only one-third of the target amount. According to the latest OECD statistics, from 2013 to 2014, the $100 billion per year target was only about 60% achieved, leaving a financing gap of over $70 billion. On the other hand, the actual financing demand is also expanding. The UNEP estimated that the adaptation cost for developing countries will far exceed the previous estimate of $70 billion to $100 per year and that the cost by 2050 could be two or three times of the previous estimate. As such, funds already mobilized are far from being sufficient for the needs of developing countries.
The financial crisis, absence of appropriate mechanism and insufficient political will are the three main reasons behind the slow progress in climate financing. First, the relevant commitments of developed countries need to be financed in their public budgets. After the outbreak of the financial crisis, however, developed countries in Europe and North American exercised fiscal austerity and found it difficult to increase their public budgets, directly leading to failure to fully materializing the financing plan. Second, although the 2009 Copenhagen Conference agreed on the targets of financing, it did not make any arrangement for its implementation. In particular there has been no cost-allocation plan, and developed countries are supposed to provide funds on a voluntary basis. Meanwhile, there are various overlapping funds mechanisms, with unspecified financing channels and uneven allocation and use of funds. Finally, developed countries have complaints about the “common but differentiated responsibilities”. As emerging economies as a whole have gained strength, developed countries are increasingly reluctant to compromise. This leads to differences on the definition of climate financing. Developed countries have stressed the equality aspect of responsibility and argued that financing should not only be a South-North cooperation.
Historically, international development cooperation without any financing arrangement often had no future. Although the Paris Conference is opening soon, there has been no systemic progress on climate financing. If developed countries fail to make a clear arrangement on how to finance the $100 billion, developing countries may well refuse to sign on the final agreement. It is therefore essential for the parties to reach a realistic and politically acceptable financing scheme for the $100 billion target, which will be key to the success of the Paris Conference. In this connection, it seems necessary for the meeting to prioritize climate financing on its agenda.
First, efforts should be made to sort out such basic issues as definition and mechanism of climate financing. At present, developed countries, developing countries, the UN and the World Bank all have their own definitions and statistical methods. The key lies with investment responsibility and funds determination. The Paris Conference should give a uniform definition on the basis of consultation and should clarify how funds will be calculated. Parties should stop wasting time on funds’ determination and take measures to avoid double-counting by developed countries. The Conference should also try to address the problem of overlapping mechanisms to at the least sort out leading mechanisms at the global, regional, sub-regional, bilateral, multilateral, North-South, South-South, official and unofficial levels.
Second, efforts should be made to facilitate diversification of financing channels. Agencies such as the World Bank should redouble their financing effort and increase the share of climate financing in total investment, thus narrowing the gap. Where feasible, developing countries may be pushed to try green bond and other innovative ways of financing so as to attract with lower investment risks more private capital into the climate-financing market. Developed countries should be encouraged to provide public funds for climate financing by levying carbon taxes, which will not only generate income but also promote emission reduction.
Third, efforts should also be made to optimize the structure of climate financing. The money will be used for two purposes: adaptation and mitigation. In the future, more money should be channeled to climate change adaptation and liked to the post-2015 sustainable development agenda of the UN, thus helping improve people’s survival environment in developing countries while they transform towards low-carbon economies. Furthermore, interests rates are now low throughout the world and there is no big cost difference between long-term, mid-term and short-term loans or between local or foreign currency loans. But the era of low interest rates will come to an end someday. Interest increase in developed countries will result in extra pressure on developing countries. Preparations have to be made for that situation. Besides, the timeliness of climate financing also matters. The uses of payable-at-sight or forward investment commitment or one without a specified time arrangement are significantly different for developing countries. Therefore, it is necessary to facilitate the development of contribution schedules.