Red herrings in debates over climate finance

One gets a new perspective on climate negotiations when your toes are about to fall off! It took me 8.5 hours of standing in sub-zero temperatures to get registered at the Bella Centre (and this is after I was only about fiftieth in line, showing up at 6.45am). There were thousands of people behind me when I last looked back. Not one official came out to explain what was happening or whether people should simply go home. If this level of mismanagement had occurred in a developing country, at best we would have called for ‘capacity building’; worse, we would have been reading about ‘poor governance’, ‘lack of foresight’, or even ‘disregard for basic human rights’. Seeing this, a potential recipient of climate finance in a developing country might wonder: why should a rich country taxpayer worry about mismanagement in poor countries when their own record does not seem to be much better? But an opponent of public finance for climate change might also ask: why should we believe that the UN or any other international body can handle $100 billion when it can’t manage a conference? Both sides would be right but their questions come from completely different perspectives. This is the fundamental divide in climate negotiations – there seems to be no reason to trust each other.

Much is written these days about the need for building trust. Political scientists and international lawyers offer many solutions: credible commitments to resolve time inconsistencies, contingent and conditionality-based support, procedures for monitoring and verification, reciprocity in actions, and compliance-oriented sanctions. But international negotiations, in general, and climate negotiations, in particular, have shown how difficult it is to either agree on such arrangements or to put them into practice. For instance, the Kyoto Protocol already suffered from an institutional design that postponed fines for non-compliance to future commitment periods. Worse still, if a completely new protocol is negotiated at Copenhagen or afterwards (as is the demand of developed countries), then the credibility of future compliance procedures will also be called into question.

The trust deficit is particularly deep on the question of climate finance. Current negotiations are unlikely to result in a substantive deal, notwithstanding a new Mexican-Norwegian joint proposal. Word in the corridors point more in the direction of a fudge, whereby short-term funding proposals will be made (like the recent EU announcement or the declaration at the Commonwealth summit); long-term institutional and financing questions will remain open for further discussions. But discussions on emissions reductions or low energy intensity targets without thinking about where the money will come from suggest a strategy of putting the cart before the horse. Remember that the Montreal Protocol needed the London Amendments of 1990, which included a financing mechanism, to gain acceptance from developing countries and facilitate effective implementation.

If Copenhagen does not deliver substantive outcomes on climate finance, in the minimum we could start building trust by exposing some of the red herrings that distract attention from in depth discussions.

Public versus private

A common demand from developing countries is for public finance support from rich countries for their mitigation and adaptation projects. A common refrain in developed nations is that big transfers of taxpayer money to poor countries is political infeasible. This is an unhelpful way to frame the climate finance debate. It is now well established that a funding mix is essential. As currently configured, carbon markets will not generate funding to match the actions required. The incremental costs of moving up the technology ladder – R&D, capital costs, intellectual property – imply public financing support. At the same time, public financing that does not facilitate sustainable business models to induce greater flows of private capital would result in cherry-picking technologies and entrenched vested interests in some sectors over others. Political leaders need to be more honest to taxpayers about the purpose of public funds to combat climate change. Treating it as merely development assistance is unhelpful, dishonest and undermines negotiations.

Us versus them

A second worry about any international arrangement on climate finance is the fear that this is a recipe to strengthen one’s competitors. This was implicit in Todd Stern’s comment during the negotiations that he did ‘not envision public funds, certainly not from the US, going to China.’ Yet, climate finance is needed to facilitate cooperation on research, development and deployment of clean energy technologies. In fact, in November China and the United States announced several joint initiatives, on energy efficiency, research on cleaner coal plants, electric vehicles, carbon capture and storage, and renewable energy, among others. Other bilateral and regional initiatives have included Australia, the EU, India and Japan in addition to China and the US. The main problem is that the sums involved are too small compared to the scale of investments needed.

Conditionality versus commitment

A related problem is that, on one hand, rich countries argue that they would not transfer funds unless recipients undertake to fulfil conditions, including clear programmes of action that are monitored and verified. In turn, poor nations want a credible commitment on financing before they promise to undertake actions. This chicken-and-egg debate stems from a long history of unmet funding commitments on the donor side (the record of the G8 on its Gleneagles promises being only the most recent example). Once again, as long as we think about climate finance as purely wealth transfers from rich to poor, the donor-recipient, conditionality-commitment, you-first-me-later morass will only become deeper.

A way forward

In a recent paper, Kevin Watkins and I propose a multilateral Low Carbon Technology and Finance Facility. It would use public funds to cover incremental costs for more efficient technologies. The facility would also adopt flexible modalities to leverage private investment, through concessional finance, loan guarantees, risk insurance, advance payment guarantees, and payment of intellectual property fees. Further, it would give rich and poor countries balanced representation in decision-making and in monitoring and reviewing both project performance and financial flows. It is unlikely that Copenhagen will be the venue for movement along these lines. But a constructive dialogue on governance questions will not begin unless we recognise how current narratives define and distract discussions on climate finance.