Financing the transition to a green economy: Where’s the money?

 Credit: Agni Klintuni Boedhihartono

According to the United Nations Intergovernmental Panel on Climate Change, the Earth is set to warm by 4 to 5 degrees compared with pre-industrial levels, warming that will wreak devastating effects on the planet and lead to massive destruction, loss of life and loss of subsistence for millions. In order to avoid this outcome, the International Energy Agency says we need US$1trn a year until 2050 to finance a transition to green growth and green lifestyles.

Where is this US$1trn going to come from?
First, based on research by the Climate Policy Initiative, three-quarters of all climate financing already comes from the country it is spent in. We will need (and will have to get) funding from most countries, even very poor ones, though that’s not the same thing as saying we need it from their public purse: climate change is a global “commons” and requires every individual, company, and country to participate in its solution.

Countries with little capacity to reduce emissions and adapt to climate impacts will nonetheless have a deep-pocketed private sector which can contribute. What matters is how the private sector can be made a full partner in the fight against climate change. The private sector already accounts for more than 60% of global climate finance and if we are to get to US$1trn in annual climate finance flows, it will have to account for the majority of funding.

Second, we also know that out of this US$1trn, US$100bn or 10% is intended to come via the Green Climate Fund, a UN institution which joins an alphabet soup of international climate support vehicles, including the GEF or Global Environment Facility, the CIFs or Climate Investment Funds, the UN climate talks’ “Adaptation Fund” and another thirty-five organizations listed as “UN partners on climate change”. The Green Climate Fund is supposed to facilitate the mobilization of the US$1trn annual flow of capital needed for climate action.

So how do we make the private sector a full partner, while getting the Green Climate Fund off the ground?
Private sector mobilization is straightforward: we must continue our efforts to introduce a carbon price across, at a minimum, all G20 economies. Carbon markets represent up to 50% of the solution in the fight against global warming and a carbon price is critical to mobilize the private sector (which accounts for 70% of global GDP and 70% of employment). Domestic carbon markets are spreading and linking up around the world, and by 2015 are likely to cover some four billion people. Yet fossil fuel industry lobbying continues to deliver watered-down versions of this effective instrument. Green bonds, for example, won’t get off the ground at the scale we need without a carbon price (and a rising curve for carbon prices) to help price future cash flows correctly.

Getting the Green Climate Fund off the ground with US$100bn in annual spending power is just as challenging. For now, the US$100bn is nowhere to be seen, a symptom of a larger malaise. There are several factors behind a social movement’s likelihood to succeed, and, to date, the climate movement has spectacularly bungled all of these factors, but none more so than the need to give rise to stabilizing institutions to give it permanence and efficacy. 

The track record of climate funding from UN-related institutions leads one to despair: between them, these vehicles disbursed a total of US$15bn over the past 20 years, an average of US$750m per year, a far, far cry from US$100bn.

Contrast the current state of international climate funding, in particular the Green Climate Fund, with the Global Fund to Fight AIDS, Tuberculosis and Malaria. The Global Fund is an international financing institution set up in a partnership between governments, civil society, the private sector and affected communities, by combining resources towards fighting HIV and AIDS, tuberculosis and malaria through grant programmes. 

Founded in January 2002 in Geneva, just three months later it approved its first round of grants for 36 countries. Twelve years later, the Global Fund has disbursed more than US$23bn, saving 8.7 million lives: emphatic proof that global co-operation can work and that when it does, it solves global problems.

Why has the climate movement been unable to give rise to effective institutions of a size commensurate with the problem we are trying to tackle?

The Green Climate Fund has been a very long five years in the making and is acting as if it were deserted of common sense: while it has received a paltry US$40m in pledges so far, it spent all of it on its administration and on board meetings around the world, without a thought to approving even symbolic grants to needy communities and deserving projects. 

In typical fashion, in May 2014, it declared that it finally agreed on a set of design rules, paving the way for its initial capital to be raised, and accompanied this “success” by announcing a French contribution of US$1m (that’s 10% of 1% of 1% of US$100bn) to fund its own expenses! There are a couple of conclusions we can already draw from the history of climate funding mechanisms.

First, we need to stop reinventing the wheel with new aid mechanisms. Greater fragmentation is undermining the few public dollars that are put toward mitigation and adaptation annually. As the Global Fund has shown, it is easy to raise massive amounts of funding once the political will is there. In the case of the climate funding mechanisms, whether it’s the Adaptation Fund, the GEF, the CIFs or the Green Climate Fund, we know that that financial transaction taxes for example (well-tested, tiny taxes on certain financial transactions, also known as Robin Hood taxes) could raise US$300bn a year globally. It’s time for the G20 or the G7 to implement these Robin Hood taxes and, following the lead of the Global Fund, voluntary taxes on aviation as well.

Second, it’s time for the UNFCCC to be vastly scaled down to an institution providing technical input on monitoring, reporting and verification, and accounting of greenhouse gas emissions. After 20 years of arguing that a tonne of CO2 is a tonne of CO2, it’s now clear that’s not the case. The “tonne is a tonne” mantra is a key reason behind the failure of international negotiations, because the effort to reduce emissions in one country is not the same as that required in another. As we are witnessing, governments are quite happy developing emission-reduction policies and measures on their own terms.

Recognizing this fact leads to the conclusion that the UNFCCC’s function should now be greatly reduced, with much less effort devoted to trying to get countries to agree on comparable targets and much more effort devoted to ensuring the integrity of underlying climate actions. With sound monitoring, reporting and verification principles accepted among all governments, there is much greater scope for markets to work to create long-term, rising forward price curves against which the private sector can invest.

by ASSAAD W. RAZZOUK