Article based on secondary research on climate finance pre-Durban talk.

1. (Article published in www.sustainabilityoutlook.in on December 1, 2011
http://www.sustainabilityoutlook.in/content/climate-financing%E2%80%93thoughts-durban)
Climate financing–Thoughts for Durban
This article discusses the emerging status of climate finance ahead of the negotiations on the mechanics
of the proposed Green Climate Fund at the forthcoming Durban climate conference. It introduces the
nature of climate finance and their streamlining measure in the short and longer term as per the Cancun
Agreement. It then discusses the nature and status of climate finance before concluding with remarks
on challenges for the Durban conference.
Cancun Agreement and Climate Finance commitments
One of the most significant outcomes of the Cancun Climate Conference was the consensus on
establishment of a Green Climate Fund. The fund isaimed at addressing ‘climate impacts, support clean
energy and reduce deforestation in developing countries’(the Conference of Parties (COP), 2010) and is
to be designed by a Transitional Committee ahead of the Durban session of the COP in November 2011.
While majority of the Committee members belong to developing countries, the trusteeship of the
fundwill remainwith the World Bank (for an interim 3 years period) where developed countries are
deemed to have more influence.
The climate finance committed under the Cancun Agreement will be streamlined through two measures,
as described below –
1. ‘Fast-start finance up to 2012’, wherein funding up to US$30billion will be made available to
developing countries for allocation to both their adaptation and mitigation strategies and will
include forestry as well as investments on technologies and capacity building.
‘Long term funding arrangement’, wherein the aforementioned Green Climate Fund will be established
for the developingcountries to access as a part of ‘scale-up provisions’ for mitigation and adaptation
strategies. Developed countries collectively will commit to raise the long term finance up to US$100
billion per year by 2020. Finance may come from variety of sources - public and private, bilateral and
multilateral, including alternative sources.After enacting the process of streamlining, the obvious
question that arises is – how will these finances be mobilized? The entire framework for this
mobilization process can be discussed under three key components:
1. Sourcing the funds: Inter-government, inter-governmental and private cooperation, capital
markets, national budgets and innovative means of creating revenue sources are seen as
primary means of generating fund.
2. Mobilizing agents: Various national implementation entities, multilateral, bilateral and other
public institutions as well as independent private entities can act as the agents who would
source the funds and channel them through appropriate means while assuming the
responsibility of accountability.

2. 3. Channels: Once raised, channeling the funds can happen through three particular means:
a) Existing overseas development assistance by the developed countries
b) Creating similar assistance focused only on climate change but independent of the first one
c) Through carbon market investment
Figure 2 provides a summarized insight into the sources, agents and channels of climate finance
mobilization in the light of above discussion.
Figure 1 Climate finance: Sources, themes and channels (Adapted from UNDP 2011)
For any of the sources, agent or channels presented above, capital flows would have two important
facets to be eligible and reported as climate finance. One is the eligibility screening and other one is
“net” flow accounting of fund flow.
All finances, public or private, need to go meet the following eligibility criteria for monitoring and
verification purpose (Moncel et al. 2009):

3. 1. Additional to Official Development Assistance (ODA): climate financing is not diverted from
development resources and does not undermine development objectives.
2. Predictable and sustainable: the financial flows are lasting and consistent over the long term.
3. Recipient-country control: recipient countries exercise a degree of control over the resources
provided.
4. Avoiding double-counting: financial resources may not be counted by several actors and should
not undermine mitigation objectives.
Besides, for transparent accounting purpose, climate finance flows are recommended to be reported on
a “net” basisand not on a gross flow basis. In economics terms, this net flow is given by the difference
between marginal costs of mitigation as revealed by the market (and found in terms of the carbon price)
and the lower cost of a specific mitigation action.The question of net flow arises from the concern that
net benefit accrued to the developing country needs to be understood rather than simply accounting
the gross flow of capital from developed countries. Public finance channeled in form of loan bears
interest while private capital is expected to generate returns. Such forms of finance can sometimes
offset the flow meant for development. Therefore, net flow of climate finance is argued to be a more
appropriate measure of the benefit accrued by the recipient developing countries.
Once the framework is set up, focus would be on determining feasible ways and sources for generating
US$100billion per annum target. A High Level Advisory Group on Climate Financing within UNFCCC,
formed in February 2010, looked into potential sources of funds and came up with a number of
approaches, including existing and new public funding and increased private flows, in order to achieve
the target. An overview of the “net” flows from these sources, as a share of the overall pie of
US$100billion, is illustrated in Figure 2.
Figure2: Breakdown of potential sources of yearly climate finance commitment of US$100billion by 2020 (Data source:
UNFCCC 2010)
Carbon pricing revenue (levy, ETS) for
International transport
10%
Redeployment of fossil fuel subsidy or
10% financial transaction tax
39%
Net transfer associated transfer of
US$100b private capital flows
Net transfer from carbon offset
20%
market
Net flow from multilateral
development bank
11% 10%
National budgets

4. Pledges under the fast start finance
Table 1 highlights the approximate finances committed by the developed country Parties under the fast
start finance measure till 2012. Most finances are channeled in form of development assistance, through
either bilateral or multilateral agents.
It is observed the fast start finance, aimed at kick-starting the fund flow, is primarily channeled through
development assistance in form of grants. This calls for closer monitoring of such flow in order to ensure
that they fulfill the ‘additionality’ requirement to Official Development Assistance (ODA) by the
developed country Parties.

5. Table 1 Status of fast start funding - major commitment by the developed countries (data source: Fast Start Finance website)
Approx. committed
Donor countries Agents Type Beneficiaries amount (converted to
US$) in 2010-11
Bilateral (71%), multilateral 611m
Australia Grant (94%) Global*
(29%)
Bilateral (9%), multilateral Small island states, Indonesia, Kenya, 31m
Belgium Grant (100%)
(91%) Maldives, global
Grant, loan 374m
Canada Bilteral (4%), Multilateral (96%) investment Haiti, Vietnam, Ethiopia, Africa, global
(75%)
Bilateral (48%), multilateral Small island states, Indonesia, Kenya, 72m
Denmark Grant (100%)
(52%) Maldives, global
Ethiopia, Small Island States, Nepal, Africa, 82m
European Union Bilateral (100%) Grant (100%)
global
Bilateral (23%), multilateral Indonesia, Ghana, Kenya, Mozambique, 49m
Finland Grant (100%)
(77%) Nepal, global
Grant (9%), Indonesia, Nigeria, Kenya, China, Ghana, 596m
Bilateral (82%), multilateral
France loan/investment Morocco, Niger, Africa, Amapa, Albania,
(18%)
(91%) China, Guyana, global
Grant (12%), 7200m
Japan Multilateral (100%) loan/investment Small Island States, Africa, global
(88%)
Morocco, Peru, South-east Asia, Small island 510m
states, India, Fiji, PNG, Solomon Islands,
Grant (65%),
Bilateral (42%), multilateral Mexico, Brazil, China, Bangladesh, Turkey,
Germany loan/investment
(58%) Kenya, Indonesia, Benin, Mozambique,
(35%)
Uganda, Colombia, El Salvador, China,
Honduras, Thailand, global
Bangladesh, Benin, Bolivia, Ethiopia, 434m
Bilateral (17%), multilateral Honduras, Kenya, Burundi, Congo, Rwanda,
Netherlands Grant (87%)
(83%) Indonesia, Senegal, Tanzania, Uganda,
Colombia

6. Bilateral (33%), multilateral Brazil, Congo, Guyana, Indonesia, Tanzania, 474m
Norway Grant (100%)
(67%) Mexico, global
Grant (48%), 181m
Spain Multilateral (100%) loan/investment Africa, global
(39%)
Bilateral (45%), multilateral Bangladesh, Bolivia, Mali, Burkina Faso, 61m
Sweden Grant (100%)
(55%) South Africa, global
Grant (31%), 1,122m
Bilateral (22%), multilateral
United Kingdom loan/investment Congo, global
(78%)
(69%)
Uganda, Indonesia, Maldives, Georgia, 575m
Grant (8%),
United States of Bilateral (11%), multilateral Guatemala, Andean nations, Africa, Kenya,
loan/investment
America (89%) India, Algeria, Jordan, Morocco, Egypt,
(92%)
Tunisia, global
*Allocated globally through either a fund or a program

7. Long term finance
Climate finance is relatively a new area of finance. Source and strategies to raise such finance in the
longer term for each developed country party will evolve as discussion and negotiation progresses on
the establishment of the Green Climate Fund.
A good example is the case for Australia, as discussed in a recently published working paper by the
Centre for Climate Economics & Policy at the Australian National University. The paper explores the
potential finance sources to meet Australia’s commitment under the long term finance for the Green
Climate Fund. Four broad categories of finances, namely private finance, public finance, new innovation
and allocation from national budget, along with potential sources are analyzed for their suitability (in
terms of the eligibility, monitoring and accounting requirements as discussed in previous section) and
amount where estimation is possible. These are illustrated in Table 2. 60% - 87% of the long term
climate finance commitment is found potentially feasibleby re-allocating the current domestic budget
on fossil fuel subsidies whereas 2% - 3% are possible through revenue raised through carbon levy on
international transport.Potential to re-allocate the share of existing aid funds is also discussed. If
Australia raises the share of climate assistance to 5% of the current aid funding budget, that would
potentially make up for 1% - 5% of the long term finance commitment by 2020.
Table 2 Potential long term climate finance sources for Australia (data source: Jotzo et al. 2011)
Finance Sources Estimated per Comments
categories annum amount (in
AU$, assuming parity
with US$) by 2020
1) Private A. Carbon market 1-3.9billion Double counting of any offset in the
finance carbon market is to be avoided.
2) Public A. Private capital No figure There is a possibility of using
finance leveraging in Australia’s public finance to leverage
developing private capital in developing
countries countries.
3) New A. Carbon levy on 0.2 - 0.5 billion This is primarily from a levy on jet
innovative international fuels and after setting aside 25% of
sources of transport the levy revenue for domestic
finance industry support
B. Financial No figure It is argued that such instrument can
transaction tax distort financial market and so far,
there is no clear emergence for
using such instruments for climate
financing.
C. Share of revenue 0.1 - 0.8 billion Revenue from domestic carbon
from domestic prices are currently earmarked to
carbon prices household and local industry
assistance. The estimated amount
can be available if the Govt.
relocates 1-7% of this revenue.

8. 4) National A. Reducing tax 3 billion The estimate is from the current
budget re- exemption on budgetary support on such activities
allocation industrial 6 billion The estimate is from current
activities that use budgetary support for off-road and
fossil fuel on road fuel use by heavy vehicles
B. Resource tax No figure It is estimated that current mineral
exemption rent tax cover the entire climate
finance budget for Australia
C. Aid funds 0.1 – 0.8 billion This would represent 5% of
Australia’s aid budget by 2020.
Challenges for Durban
Agreement on the process of the Green Climate Fund is a key deliverable of the Durban conference.
While developed countries expect to identify the governing structure of the fund, developing countries
would want to have the confidence in the financing commitments of their counterparties – both in fast
track and long term by 2020.
Status of fast track funding shows less than 40% of the US$30 billion amount has been raised till date
and hence means for getting together the balance before the 2012 deadline will form a key part of the
deliberations. Besides, developed countries are required to present their roadmap for their respective
shares of the long term finance arrangement (as discussed in an earlier section). The issues around
diversion of existing aid funds and additionality criteria for climate finance have been contested for a
while now. These will continue to find relevance in Durban too.
Regardless of such debates, the challenges for Durban also provide an exciting opportunity to think
about innovative means of raising and mobilizing climate finance. As discussed earlier, carbon levy on
international transport, particularly for shipping, is receiving serious attention as a new source of funds
for the developed countries. Similarly there is an onus on the recipient developing countries to come up
with strategies for utilizing the climate assistance funds in the most effective manner. A key role that
such international assistance can play is to provide a platform for leveraging private capital for
mitigation and adaptation activities and reduce investment risks in developing countries.
All this is achievable – Durban is the key !
References
Fast Start Finance website, http://www.faststartfinance.org/home, accessed on 15th November 2011
Jotzo F, Pickering J, Wood P J (2011) “Fulfilling Australia’s International Climate Finance Commitments:
Which Sources of Financing are Promising and How Much Could They Raise?” Working paper, Centre
Climate Economics and Policy, Australian National University
Moncel R., Mcmahon H. &Stasio K. (2009) “Counting the Cash: Elements of a Framework for the
Measurement, Reporting and Verification of Climate Finance” Working paper, World Resource Institute

9. UNDP (2011) “Guidebook for the Design and Establishment of National Funds to Achieve Climate Change
Priorities” published by the United Nations Development Program in September 2011
UNFCC (2010) “Report of the Secretary-General’s High-level Advisory Group on Climate Change
Financing”
The Conference of the Parties (2010) “Draft decision -/CP.16 - Outcome of the work of the Ad Hoc
Working Group on long-term Cooperative Action under the Convention” Cancun