Climate Finance: Regulatory and Funding Strategies for Climate Change and Global Development

Chapter 17 Developing Countries and a Proposal for Architecture and Governance of a Reformed UNFCCC Financial Mechanism

Climate Finance 165 Chapter 17 Developing Countries and a Proposal for Architecture and Governance of a Reformed UNFCCC Financial Mechanism Luis Gomez-Echeverri International Institute for Applied Systems Analysis Key Points • There is a pressing need for wholesale reform of the financing arrangements under the UNFCCC at Copenhagen, in terms of scale of funding as well as scope and method of governance structures, with ties to compliance. • The current situation of financial support for emissions reduction and adaptation support is characterized by a great number of funds with complex administrative processes, minimal transparency or accountability, and conflicting mandates that do not necessarily address or respond to developing country concerns. These funds collectively do not have the capacity to change the course of global development towards a lower-carbon path. • New efforts to address these issues need to deal with the historical baggage of distrust between rich and poor countries; frame the negotiations within the principle of the legal obligation and compliance to replace the present de facto voluntary system; significantly increase the ability of the UNFCCC to carry out its objectives; bring some measure of harmony and good governance to the multiplicity of funds; and draw significant interest from the private and public sectors, bearing in mind the historical sources of finance for the Convention’s purposes. 166 Luis Gomez-Echeverri Introduction As has been highlighted in a number of chapters in this book, the engagement of developing countries is fundamental to the success of any post-2012 climate regime. Developing country engagement is inextricably linked to issues of governance and institutions. This link is an issue both legal as well as practical. It is a legal issue, because developing country engagement is based on the principle of common but differentiated responsibilities , as well as on the obligations and commitments spelled out in Article 4 of the United Nations Framework Convention on Climate Change (UNFCCC). This Article spells out the commitment of developed countries to support developing country efforts. And it is a practical issue, because without well-designed, well-functioning, and responsive governance institutions—including a financial mechanism that can facilitate and implement mitigation and adaptation funding—the chances of significant developing country engagement are remote. Without this engagement , it will be practically impossible to successfully mitigate climate change. Flaws in Governance = Flaws in Implementation Many years ago, developed countries agreed to support the climate change mitigation efforts of developing countries. However, they argued that there was no need for a new financial mechanism, as they believed the Global Environment Facility (GEF), established in 1991, would be adequate . However, it is now obvious to developed and developing countries alike that the scale of funding and the current operational arrangements for implementation are inadequate. The Financial Mechanism—which is meant to play a central role in supporting the implementation of the Convention—is in need of major reform. The reform is required because (a) the severity of the climate change challenge requires a much greater scale of action and response than at present, (b) the need and urgency to act now rather than later to avoid even higher costs and hardship, and (c) the mandates of the Convention. The inadequacy of the current arrangements of the financial mechanism of the UNFCCC has given rise to a fragmented, complex, and inefficient system of finance for climate change and implementation of the Convention that is characterized as follows: Developing Countries and a Reformed UNFCCC Financial Mechanism 167 • A large number of funds and financing instruments have been created to address specific climate-related objectives. Most of these are outside of the Convention, and many of them fund pilot projects rather than large-scale operations. • Generally, each fund has its own rules of procedure and its own governance structure. Many of them lack transparency and accountability . • Because of the operational complexity of many of the funds, dedicated experts are required at the national level in order to access and benefit from them. This has major consequences and adds pressure to already weak national monitoring and reporting capacities of developing countries. • These funds and financing instruments have immense direct and indirect transaction costs. • The objectives of many of these financing instruments and funds are often formulated neither to respond to the demand or needs of developing countries nor with their participation. • A majority of these funds and financing instruments prefer to fund projects rather than programs or sector plans of action. This...