Climate Finance, Climate Talks, COP23 - Fiji & Bonn

Climate finance negotiations and game theory: how a green equilibrium could not be achieved (Part 3)

This article is divided in 3 parts. Read the 1st part here and the 2nd part here.
This article is written by Solène Dengler.

Public and private sector finance is needed to achieve the Paris Agreement objectives

The Paris Agreement sets out two different objectives as regards climate finance: on the one hand developed countries need to invest $100bn dollars per year for mitigation and adaptation projects in developing countries and on the other hand, all finance flows need to progressively be consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.

Opposite views between public and private sector

The buzzword of climate finance at COP23 seems to be blended finance and public-private partnerships. There was a contradictory view between the private and public sector about sequencing, balancing efficiency and equity perspectives and whether sound climate investments, institutions and growth perspectives should be a prerequisite for climate finance or should be furthered simultaneously.

The public sector and multilateral banks seemed to say that financial instruments and systems should be adapted and the private sector should move forward.The role of central bank governors was highlighted to drive this. There are over 300 trillion dollars in global financial assets under management but only 1-2% are flowing into the green area. The Climate Policy Initiative estimated total climate finance to be 641$ billion in 2016, of which 501$ billion was private finance.

There was never any commitment that the 100 billion should be exclusively public money but public-private leverage can be used. It was particularly encouraged for the Green Climate Fund that always had a co-financing approach and that needs to release investment faster (even though only around 2% of the 100 $ billion will be channelled through the GCF directly).

Stakeholders asked for an increase in bilateral funding and national investment as Development Finance Institutions are currently financing around 90% of total public finance. Green bonds were welcomed as game-changers but actors noted that they would have to be regulated and their release encouraged through new coalitions (but not necessarily through incentives which were seen as not sustainable). Fidji was the first emerging country to release a green bond in October 2017, raising 50$ million with a focus on adaptation.

The private sector, however, asked for enhanced predictability through clear and stable policies (in particular at the EU level) to be able to channel green investment. The steady upward trend of domestically raised investment indicates the persistent importance of strong national policy and regulatory frameworks for climate-related projects.

Still no agreement on the definition

That is why favoured approaches were that public sector involvement should mainly be about de-risking or lowering costs of capital, providing infrastructure and gather confidence for local governments and investors. Companies stated that the role of governments is essential to enable private sector to be channelled effectively (i.e. public guarantees for low carbon projects).

But beyond all those instruments, there is still no agreement about the definition of climate finance, which complicates reporting and accounting, even if the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) established by the Financial Stability Board (FSB) or working papers from the OECD are progressively trying to move in one direction to achieve a common definition. But negotiations on this issue are very touchy as it is directly linked to transparency and clarity and impedes into national sovereignty.

Similarly, the lack of concrete guidelines on how the 100 billion should be channelled to developing countries leaves the door open to interpretation. Of course it should be used to support countries to achieve their NDCs but should it do so by providing climate finance for local adaptation projects more effective for community resilience or to provide infrastructure funding that provides the basis for private sector investment in climate change resilience? This has to be assessed on a case-by-case basis but the current orientation seems to favour latter and there seems to be an inherent clash between developing and developed countries on this. It also influences decisions on the governance of funds and accreditation of entities.

Developing countries particularly felt that the time was not for finance to enhance data and to define the national adaptation funds (and bankable projects) but to look at existing programmes that have been “recycled” over years and resubmitted to different funds. Developed countries think otherwise, stating that generally governments that were successful in raising finances had a clear understanding of the private sector or multilateral funds and how to present plans in a targeted way and mitigation plans in NDCs were generally well costed. This seemed to be an inherent divergence of views during the negotiations.

There are several ways to achieve a green equilibrium: likeminded groups driving a positive change are important, repetition of interactions with the same players is essential and highlighting the win-win situations particularly for the most powerful actors (least vulnerable, richest and drivers of climate change). Clearly stated, one needs to establish increased climate finance, particularly in adaptation, to be a norm (including for financial sector actors that generally neglected social impact), continuously emphasize the common benefits to act, communicate transparently the success stories at all levels of action for peers to follow and build trust among actors with transparency playing a key role. This positive approach was most visible during the side events but was unfortunately mostly lacking in the negotiations. The hope is that advances on article 6 and transparency can build trust towards COP24 so that political discussions then can follow more the Talanoa spirit.

About the author: Solène Dengler is CliMates’ Empowerment Team co-director. She was previously involved in research projects such as financing small-scale energy projects, climate migration in Alaska, or the Youth on the Move project. She now works as a consultant for the World Bank in Vienna, on a program on sustainable urban development and governance in South-East Europe.

References:
http://www.climatefinancelandscape.org/
http://www.climatefundsupdate.org/listing/adaptation-fund
http://www.wri.org/events/2017/05/report-launch-future-funds
http://www.oecd.org/env/cc/financing.htm
http://unfccc.int/meetings/bonn_nov_2017/in-session/items/10494.php
www.businessinsider.com/global-financial-assets-2015-2
https://www.carbonbrief.org/cop23-key-outcomes-agreed-un-climate-talks-bonn
https://www.carbonbrief.org/mapped-where-multilateral-climate-funds-spend-their-money
https://cop23.unfccc.int/news/insuresilience-to-provide-the-poor-with-more-financial-protection-against-climate-risks
https://www.theguardian.com/science/blog/2016/apr/13/can-game-theory-help-solve-the-problem-of-climate-change
http://carbon-price.com/climate/game-theory
  1. Mielke and G. A. Steudle (2017), “Green investment and coordination failure: An investors’ perspective”. GCF Working Paper No. 1/2017.
https://simpolproject.eu/2017/06/15/green-investment-a-game-theoretic-view/
Climate Finance: Theory And Practice, Markandya Anil,Galarraga Ibon,Rubbelke Dirk T G 2017

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