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Update of Investment and Financial Flows to Address Climate Change
 

An update on Investment and Financial Flows to Address Climate Change has just been published by the secretariat. The update has moved forward the discussion on financing from broad investment and financial needs to options, tools and mechanisms to enhance financing for mitigation, adaptation and technology cooperation for an effective response to climate change. Significantly, Parties have tabled proposals which have the potential to generate multiple billions of dollars per year of predictable and sustainable funding.

The 2007 report estimated that an additional 200–210 billion US dollars would be necessary globally in 2030 to reduce CO2 emissions 25 per cent below 2000 levels by 2030. The 2007 report also estimated that the additional investment needed for adaptation in 2030 amounts to several tens of billions, possibly hundreds of billions of US dollars.

The estimates of investment required for mitigation have increased significantly, whereas no new information is available on adaptation needs. A significant share of this additional investment is estimated to be needed in developing countries.
The update presents the tools and mechanisms for the three broad strategies identified in the 2007 report for meeting the additional investment and financial flows needed to address climate change:

  • Shift investments and financial flows to more climate-friendly alternatives
  • Scale-up international private and public investments and financial flows
  • Optimize the allocation of the funds available

To support developing countries in shifting, scaling-up and optimizing investment and financial flows, four broad means can be considered and influenced by the Parties to the Convention:

  • Public finance
  • Private finance
  • National policies
  • The Convention itself

Adaptation

The need for scaled-up resources for adaptation has been widely acknowledged. While the current and pledged levels of resources dedicated to adaptation are well below what is projected to be needed in the future, proposed options have the potential to generate the resources needed within an adequate time frame.

Adaptation actions are grouped into three broad categories:

  • Actions that climate-proof development activities by integrating climate risk into socio-economic activities (i.e. “climate-proofing”)
  • Actions that expand adaptive capacity to deal with future and not only current climate risks
  • Actions that are  aimed purely at adapting to impacts of climate change and would have otherwise not been initiated

Public funding - both domestic and international - is expected to play a larger role in financing adaptation actions than in financing mitigation measures. This is because the benefits generated by adaptation actions often have the characteristics of public goods; for example, the benefits of coastal protection will typically be enjoyed by all the residents of the community at risk. Also, ensuring that private sector investments help reduce vulnerability and exposure and contribute to effective adaptation can steer a large source of funding towards appropriate outcomes.

Regardless of how resources are generated, designing an appropriate delivery mechanism with the right institutional and operational arrangements is paramount. This includes facilitation of access and effective disbursement through the possible provision of programmatic, or even budget support, rather than project-based support in order to enhance action on adaptation. 

Mitigation

While developed countries need to take the lead in addressing climate change, determining how best to support mitigation efforts in developing countries to realize their  mitigation potential is important for a comprehensive response. Mitigating climate change will require technological and behavioural change on multiple fronts. Any future agreement to enhance mitigation action needs to encompass a variety of funding sources and delivery mechanisms that address greenhouse gas emissions from all sectors in all countries, and that foster the development and transfer of mitigation technology. An assessment of maturity of mitigation technology, in terms of technology development stage, is key to arrive at the optimal mix of financial resources and mechanisms needed in order to realize the mitigation potential.

Private sector resources suitably guided by  public sector finance, international and national, could play an important role in mitigating climate change in developing countries. Depending on commitments taken, the demand for emission reduction credits could be significantly higher in 2020, but still not be sufficient to realize the full mitigation potential in developing countries. Furthermore, limitations of crediting mechanisms to address all ranges of mitigation opportunities and to realize mitigation potential in countries with difficult investment conditions, would require measures beyond an expansion of  crediting mechanisms. Such measures could include direct financial support for certain mitigation measures, such as renewable energy generation in least developed countries, as well as financial support for national policies, such as implementation of efficiency standards.

International public finance can play an important role in realizing the above, and also in leveraging private finance. Public finance may also play a role in funding research, development and early deployment of technologies that will open up new and potentially cheaper mitigation opportunities in the future. Measurable, reportable and verifiable (MRV) support to MRV actions will be key to an international mechanism to support mitigation actions.

Technology innovation will increase the potential for, and reduce the cost of mitigation over time, but international financial support for technology transfer is needed. Presently, essentially all technology transfer for mitigation technologies occurs as a result of the application of those technologies in developing countries. International mechanisms and funding for capacity building and creation of enabling environments is needed to accelerate the  adoption of near commercial mitigation technologies in developing countries.

Proposals to Scale Up Funding

At present, adaptation, mitigation and technology cooperation activities under the Convention are funded by the Global Environment Facility (GEF) Trust Fund, the Special Climate Change Fund (SCCF), Least Developed Countries Fund (LDCF) and the Adaptation Fund. The first three are managed by the GEF and rely on voluntary contributions by developed countries.  The Adaptation Fund is managed by its own Board and is funded by a 2 percent levy on the CDM.

Parties have tabled many proposals to increase the financial resources available for adaptation, mitigation and technology cooperation. Some proposals would be under the Convention, while others would be outside the Convention. Some proposals would generate funds internationally, while for others the funds would flow through government budgets. The proposed options could generate significant resources . 

A key issue is efficient and effective delivery of financial resources and investment, which includes aspects of allocation, access and  modes of disbursement, as well as  measuring, reporting on and verifying the delivery of financial support.
Institutional arrangements to mobilize, manage and deliver the funds on the scale needed will be a challenge. Parties have submitted many proposals for management of the funds. These range from a single umbrella body that coordinates the activities of three (or more) specialist bodies to a number of specialist bodies all reporting directly to the COP. The proposals also differ in terms of how rigidly the proposed allocation of funds is specified.

Putting the climate change challenge into perspective

Responses to the current financial and economic crises can help address climate change. Government measures to stimulate economic recovery could be used to shift investment and financial flows into more efficient technologies and infrastructure.

The analysis in the update presents a diverse set of elements, including different private and public funding sources and delivery mechanisms, as well as national policies, that constitute the required toolbox to address climate change. Importantly, most of these elements have been proposed by Parties and thus can be negotiated at COP14 in Poznań.

The update of Investment and Financial Flows to Address Climate Change will be available shortly on the UNFCCC website: http.unfccc.int