Brief on Climate Change Finance

Introduction

Climate change is a complex policy issue with major implications in terms of finance.
All actions to address climate change ultimately involve costs. Funding is vital for
developing countries to design and implement adaptation and mitigation plans and
projects. The problem is more severe for developing countries like India, which would
be one of the hardest hit by climate change, given its need to finance developmental
issues like poverty eradication, food security, providing clean drinking water and
sanitation etc.. Most countries do indeed treat climate change as a real threat and are
striving to address it in a more comprehensive and integrated manner with limited
resources at their disposal. But financial ways and means must be found to enable
developing countries to enhance their efforts in this direction, especially enhancing
their adaptive capacity. Thus, climate change is an environmental issue, an economic
cost, and a development issue.

Lack of funding is a large impediment to implementing adaptation plans. The scale

and magnitude of the financial support required by developing countries to enhance
their domestic mitigation and adaptation actions are a matter of intense debate in the
multilateral negotiations under the UNFCCC. The Convention squarely puts the
responsibility for the provision of financial support on the developed countries taking
into account their contribution to the stock of GHGs in the atmosphere.

Climate Change Finance

Internationally Climate change finance forms one of the core issues of climate change
negotiations. As per the agreed Convention under the framework of the UNFCCC,
provision of adequate climate change finance by the developed (Annex II) countries to
developing (non Annex I) countries is a commitment/obligation of developed
countries (responsible for historic emissions and causing climate change). Developed
country parties have to mobilize and provide funds for addressing adaptation and
mitigation at the required scale through the Financial Mechanism of the Convention.
One of the mandates of the Convention is that the finance provided by developed
countries will be new and additional i.e. over and above the development assistance
in form the of ODA (Official Development Assistance). (Box1)
Box1: Various Articles Relating to Finance Obligations in the Convention
Article 4.3: The developed country Parties and other developed Parties included in
Annex II shall provide new and additional financial resources to meet the agreed full
costs incurred by developing country Parties in complying with their obligations under
Article 12, paragraph 1. They shall also provide such financial resources, including for
the transfer of technology, needed by the developing country Parties to meet the
agreed full incremental costs of implementing measures that are covered by paragraph
1 of this Article and that are agreed between a developing country Party and the
international entity or entities referred to in Article 11, in accordance with that
Article.

Article 4.5: The developed country Parties and other developed Parties included in
Annex II shall take all practicable steps to promote, facilitate and finance, as
appropriate, the transfer of, or access to, environmentally sound technologies and
know-how to other Parties, particularly developing country Parties, to enable them to
implement the provisions of the Convention. In this process, the developed country
Parties shall support the development and enhancement of endogenous capacities and
technologies of developing country Parties.

Article 4.7: The extent to which developing country Parties will effectively
implement their commitments under the Convention will depend on the effective
implementation by developed country Parties of their commitments under the
Convention related to financial resources and transfer of technology and will take
fully into account that economic and social development and poverty eradication are
the first and overriding priorities of the developing country Parties.

Article 11.1: A mechanism for the provision of financial resources on a grant or

concessional basis, including for the transfer of technology, is hereby defined. It shall
function under the guidance of and be accountable to the Conference of the Parties,
which shall decide on its policies, programme priorities and eligibility criteria related
to this Convention. Its operation shall be entrusted to one or more existing

Even though the Convention has squarely put the responsibility for the provision of
financial support on to the developed countries, the pledges and commitments taken
by them to provide financial resources under the head of fast start finance and long
term finance, only collectively amounts to USD $30 billion for the period 2010-12 and
USD $100 billion annually by 2020 respectively. It has been estimated by many
studies that the funds currently available under the Convention are small compared to
the magnitude of the needs assessed. The UNFCCC in 2007 estimated a requirement
of USD $200-210 billion in additional annual investment in 2030 to return GHG
emissions to current levels. Further, additional investment needed worldwide for
adaptation was estimated by the UNFCCC to be annually USD$ 60-182 billion in
2030, inclusive of an expenditure of USD$ 28-67 billion in developing countries.
Most recent estimates at the UNFCCCs three day workshop on Long term Finance
(July 2012)point out to an even more enormous scale of funds in the range of USD
$600-$1500 billion a year that would be needed by developing countries alone for
mitigation and adaptation. This amount is at least 5-10 times the prospective financing
flows when referring to the USD $100 billion per year goal by 2020 agreed under the
Cancun Agreements. Therefore, the current provision of funds clearly does not justify
the requirement estimated globally for climate change finance.

Recent Developments
Given the magnitude of the task and the requirement of funds, global funding through
the multilateral mechanism of the Convention will be essential to enhance domestic
capacity to finance climate-related efforts. To facilitate financial support, the
Convention established a financial mechanism to provide funds to developing country
Parties. GEF (Global Environment Facility) which is one of the operating entities of
the financial mechanism of the Convention provides grants and loans to developing
countries for projects that benefit the global environment, linking local, national, and
global environmental challenges and promoting sustainable livelihoods. With the
growing realization about the large amount of resources that would be required for
climate change mitigation and adaptation especially in the developing countries it
became evident that the funding and operational arrangements under GEF were
inadequate and there was a need for major and urgent reforms in the financial
mechanism. Hence, the developing countries initiated talks on the need of a new fund
to carry out the full mandate for the provision of financial resources to developing
countries exclusively dedicated to climate change, unlike GEF which serves broader
areas of global environment. Moreover, GEF was established at that time without any
legal capacity and there were also other concerns like lack of financing for adaptation.
All of the above, led to the demand to set up the Green Climate Fund (GCF), and by
Cancun 2010 decision to set up the GCF was taken by Parties. A significant part of
the US $100 billion pledged under long term finance by developed countries, would
now flow through the Green Climate Fund. The COP (Conference of Parties) finalized
the design of the GCF (Green Climate Fund) at COP 17 in Durban after protracted
negotiations. COP 18 in December 2012 in Doha endorsed the selection process of the
Board of the GCF AND Republic of Korea has been selected for hosting the
headquarters of GCF. It is expected that the GCF will be the main channel of finance
to address climate change in future. Apart from GEF and GCF, there are specific
funds established under the UNFCCC like the Adaptation fund, Least Developed
Country Fund. There are also funds administered by the World Bank, Asian
Development Bank, African Development Bank, etc. with clear climate change
components.

The decision to set up the Green Climate fund (GCF) was taken at COP 16 in Cancun
in December 2010 and the GCF was operationalized in COP 17 in Durban in 2011.
One of the most significant achievements of the Durban meeting was the agreement
on the Green Climate Fund (GCF) i.e. agreement by the Parties on the design for
operationalizing the GCF. The just concluded COP 18 in Doha on 8th December this
year further operationalized the GCF which is expected to take off fully by next year
Also, the 24 member Board of the GCF (India is one of the 24 members of the Board)
has been set up and has already had three meetings, the Board also selected the host
country for the GCF, which is South Korea. With these developments, very soon, we
can expect the GCF to get fully operationalized. So far Countries have also pledged
some funds for the initial capitalization of the GCF and some developed countries
announced pledges for climate finance in the CoP 18 as well. The GCF will function
under the guidance of and be accountable to the Conference of Parties. The GCF is to
conferred international legal status, and the role of national authorities has been
recognised in the Durban decision in relation to the GCF.

Recently at Doha in COP 18, in December 2012, two of the Ad Hoc Bodies under
UNFCCC, i.e Ad Hoc Working Group on Long Term Cooperative Action (AWG-
LCA) and Ad hoc working group on Kyoto Protocol terminated its work. There were
no particular elements of finance negotiations under AWG-KP. The AWG-LCA
concluded its work on all streams: mitigation, adaptation, finance and technology. The
text on finance under LCA calls for developed country parties to channel public funds
for adaptation and that a significant share of such funds should flow through the GCF.
It also reiterates the commitment of developed country Parties to jointly mobilize
USD 100 billion by 2020,and invites them to submit plans by CoP 19 on how they
plan to do this.

Next Steps: Drafting Arrangements between the GCF and the COP, and setting
up the Business model for the GCF.

A Standing Finance Committee (SCF) was formed at CoP 17 in Durban to cohere the
work on issues of finance under the financial mechanism of the Convention and work
under the advice and direction of the Conference of Parties in the interest of achieving
the objectives of the financial mechanism of the Convention. The Standing Finance
Committee has now come up with its work plan and agreement on areas of work,
under which some of the important work to be taken up by the Standing Finance
Committee is to draft arrangements between the GCF Board and the COP. The SFC
would draft these arrangements in consultation with the Board by COP 19. Also the
committee would consider ways of strengthening methodologies for reporting climate
finance and appropriate methodologies and systems used to measure and track climate
finance. The GCF is expected to be instrumental in channeling significant funds that
will help developing nations adapt to and mitigate climate change. Determining how
the GCF shall conduct its work - including how it will interact with the private sector
and how countries will access funds will be key to moving forward with
operationalizing the Fund. As a member of the Board as well as a developing nation
,India is making all efforts to ensure that an effective and efficient business model is
achieved, which caters to the climate financing needs of the developing countries and
simultaneously gives effect to the ultimate objective of the Convention.

Issues

The Cancun Agreements recognized the commitment of developed country parties to

the goal of jointly mobilizing USD $100 billion per year by 2020 to address the needs
of developing countries from a wide variety of sources, public and private, bilateral
and multilateral, including alternative sources. At Durban, a work programme on
long-term finance was launched, with the aim of contributing to the ongoing efforts to
scale up mobilization of climate change finance after 2012 and analyse options for the
mobilization of resources from a wide variety of sources, public and private, bilateral
and multilateral, including alternative sources.

Long term finance is the most important of all finance issues. It was an unfinished
business under AWG-LCA in Doha. Under COP, it was discussed with regard to the
report of the work programme on long term finance. Various innovative sources and
issues and ways to raising the USD $100 billion goal annually by 2020 have been
pointed out in two reports namely the Report of High-level Advisory Group on
Climate Financing and also the report of the Co-Chairs on the work programme under
long term finance. Like all other countries, India supports some of the
recommendations of this report (need assessment, work on scaling and mobilizing
finance, building a political process) and India was not in favour of some (border
taxes, aviation taxes etc.) Another point of concern is that various innovative sources
of finance, for example aviation tax, being deliberated upon may have an incidence on
developing countries. Hence the multilateral negotiations must ensure that incidence
(of innovative sources of financing) should not fall on developing countries, which is
a violation of the principle of CBDR (Common But Differentiated Responsibilities).
According to the decision adopted at Doha, Governments will continue the work
programme on long term finance through 2013 to contribute to the ongoing efforts to
scale up mobilization of climate finance and report to the next COP in November
2013 on pathways to reach the USD $100 billion target. Also there would be an in-
session high-level ministerial dialogue under the COP, on efforts being undertaken by
developed country Parties to scale up the mobilization of climate finance after 2012 at
COP 19, as informed by inputs from Parties, technical bodies and processes under
the Convention, as well as the outcomes of the extended work programme on long-
term finance

There are still some areas of concern in which further work will be needed to
safeguard the interests of developing countries in future climate change deliberations.
First, the sources and channels of providing long-term finance by developed countries
have not been clearly identified. It is necessary to expeditiously identify the sources of
finance and provide initial capital to the GCF for its operations. Secondly, it is
necessary to include the obligations of developed country parties under the
Convention to provide finance, technology, and capacity building as part of the new
arrangements to be developed under the Durban Platform. Finally, the issues of
mobilization and provision of necessary resources on a predictable basis and
relationship of these mechanisms with the financial mechanism of the Convention
remains to be addressed.

Indias Actions

On its part, India is strongly committed to engage constructively and productively with
the international community in the global efforts to preserve and protect the environment
and collectively deal with our common global challenge of climate change. India is also
committed to spend large resources through its planning process on meeting the
domestic mitigation goal of reducing the emissions intensity of its GDP by 20-25% by
2020 in comparison with 2005 levels.

India recognizes that a strategy for addressing climate change has to be based on the
strategy of sustainable development. This is reflected in many of the major programmes
addressing climate variability concerns. Current Government expenditure in India on
adaptation to climate variability exceeds 2.6 per cent of the GDP, with agriculture, water
resources, health and sanitation, forests, coastal zone infrastructure and extreme events,
being specific areas of concern.

India has prepared a comprehensive National Action Plan on Climate Change (NAPCC)
with a view to achieve sustainable development with co benefit in terms of climate
change. Eight focused national missions in the area of solar energy, enhanced energy
efficiency, sustainable agriculture, sustainable habitat, water, Himalayan eco-system,
increasing the forest cover and strategic knowledge for climate change form the core of
NAPCC. Besides, there are several initiatives envisaged in the sectors pertaining to
energy generation, transport, renewable, disaster management and capacity building that
are to be integrated with the development plans of the Ministries. The Prime Ministers
Council on Climate Change, set up in June, 2007 monitors the implementation of the
National Missions and related actions in India.

Primarily out of its own concerns, India has chalked out ambitious plans and policies to
tackle climate change and environmental issues that reflect Indias strong will to address
this global public bad. However, given the scarcity of resources and other competing
demands, finding the matching resources is a challenge. The Expert Group on Low
Carbon Strategies has also stated in its Interim Report that aggressive mitigation cannot
be achieved without substantial international financial support, both in terms of financial
resources and technology transfer. The Prime Minister also echoed similar sentiment in
his Rio+20 Summit speech: Many countries could do more if additional finance and
technology were available. Unfortunately, there is not enough evidence of support from
the industrialised countries in these areas. Therefore, domestic momentum for
addressing climate change also critically depends on multilateral negotiations and actual
disbursement of long term finance promised at Cancun.

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