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Negotiating around Trade-offs

Alternative Institutional Designs for Climate Finance

Arunabha Ghosh
December 2010 | Low-Carbon Pathways

Suggested Citation: Ghosh, Arunabha. 2010 "Negotiating Around Tradeoffs: Alternative Institutional Designs for Climate Finance.” CEPS ECP Report No. 10, December: 22.

Overview

This paper examines how different governance priorities would affect the institutional arrangements for a credible financing mechanism in the climate regime. It highlights that trade-offs are inevitable in climate finance negotiation. Hence, it is important to recognise them upfront and organise negotiations around the priorities that different sets of countries identify. Such a process would generate alternative institutional designs, each offering a different balance of voice in governance, scale and funding and timely action. The focus of this brief is institutional design. It emphasises that while climate finance will come in different phases, many governance-related questions remain unanswered.

Key Highlights

  • The scale of funding required is vastly greater than what the existing climate regime or other international environmental agreements have been able to generate so far.
  • Funding is needed for both mitigation and adaptation. The lesser the effort taken to mitigate the greenhouse gas (GHG) emissions, the more will have to be spent on adaptation activities due to climate change.
  • Developing countries are legitimately concerned that funds intended for development assistance would be reclassified as adaptation expenditure.
  • Funds for mitigation activities are needed for deploying existing technologies as well as for developing new ones. In the absence of funding for technology transfer, there is the risk that poor countries would end up at the wrong end of a new technological divide.
  • China and India have the highest and fifth-highest installed renewable energy capacity respectively. During 2004–08, Brazil, China, and India experienced compound annual growth rates in renewable energy investments of 171 per cent, 104 per cent, and 52 per cent respectively.

Funding sources are many but their governance is often interlinked

Source: Adapted from ClimateFundsUpdate.org; added to, modified and updated by the author

  • The different carbon markets have their own governance arrangements, but they do interact when credits are purchased in one market towards fulfilling obligations under other schemes.
  • Rich countries are keen to use existing channels of funding rather than create new institutions. Contributing countries argue that creating new institutions would only add to the bureaucracy and transaction costs in disbursing money when the landscape is already populated with so many funds.
  • Poor countries fear that financing for adaptation would be treated as an afterthought or a ‘poor cousin of mitigation’ in climate negotiations.
  • The gap between commitments and disbursements has been a source of mistrust between contributing and beneficiary countries. The issue is not restricted only to the number of funds provided but also to the manner in which the resources flow and the prevailing conditions.

Key Recommendations

Different options for institutional design

  • Consolidate and specialise: This option prioritises two governance concerns: more voice or decision-making power for beneficiary countries and coordination among existing institutions.
  • Aim for Budget support: To reduce transaction costs for contributing countries and increase voice for beneficiaries, attempts will be made to provide more programmatic and budget support rather than focusing only on projects.
  • Create and legitimise: This option relies largely on public funding but aims to create a wholly new global fund that would increase the legitimacy of any deal on climate finance in the international negotiations.
  • Innovate and de-bureaucratise: The priority in this option is to significantly increase the scale of funding to ensure that climate financing is adequate for the purpose. Conversely, the other priority is to reduce administrative barriers to increasing the flow of resources.
  • Separate and indigenise: Its focus is on prioritising actions now rather than later by leveraging what leading economies are already doing. The preference here would be to coordinate better the work of existing funds.

As power shifts in climate negotiations, it is important to find ways to ensure that leading countries do not exit the playing field entirely, leaving the smaller players with neither money nor technology.

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