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

Chapter 22 Making Climate Financing Work: What Might Climate Change Experts Learn from the Experience of Development Assistance

206 Climate Finance Chapter 22 Making Climate Financing Work What Might Climate Change Experts Learn from the Experience of Development Assistance? Ngaire Woods Professor of International Political Economy; Director of the Global Economic Governance Programme, University of Oxford Key Points • Financing for climate change mitigation will likely involve some form of conditionality, although conditionality alone is a poor guarantor of project or policy success. • The most important factors in determining project or policy success is the alignment of a project with the priorities of the community and local ownership, local implementation, and the timing, certainty , and reoccurrence of funding. At the heart of any global deal on climate change lies a compact between wealthy and less wealthy countries. The vast majority of industrialized countries have already accepted binding commitments to reduce their greenhouse gas (GHG) emissions (although few have made any progress to reducing emissions in practice). Future progress in limiting emissions relies upon wealthy countries meeting their commitments and—equally importantly—upon major emerging economies agreeing to accept limits on their future emissions. No such deal has yet been forged. At the same time industrialized countries and emerging economies have agreed that support must be offered to poorer developing countries that will be Making Climate Financing Work 207 severely affected by the failure (to date) to mitigate emissions. Most proposals envisage that wealthy countries will persuade developing countries by putting financing on the table. But how, and with what strings or performance criteria attached? Climate change experts have framed the problem as one of how to best use finance to incentivize developing countries to undertake significant near-term mitigation measures and eventually transition to emissions caps. The assumption is that by setting up incentives for developing countries to deliver, the industrialized countries will be able to transform policies and practices in developing countries. Wealthy countries will set goals and disburse financing only upon proven performance of actions taken towards the goals. A long history of donor efforts to incentivize policymakers in developing countries could usefully inform climate change proposals. Donors often believe that the use of structured incentives and conditionality are sufficient to ensure that countries will adopt particular policies or meet certain objectives. Although this is intuitively appealing, the history of attempts to do this suggests that this is a fundamentally mistaken view. In fact, the main impact of such structured incentives or conditionality may well lie in the effect on the behavior of those providing the financing. Reliance on incentives and performance-based conditions offers a tempting shortcut, which often leads donors away from examining other elements that are significantly more likely to shape whether or not a government or local authority will achieve particular goals. Let me outline some of these elements. 1. Alignment and Ownership (and How to Test for It) A core lesson from development assistance is the importance of aligning any foreign-supported proposed policy or project with a country or a community’s own priorities and objectives. This lesson has been accepted by major industrialized country donors in the 2005 Paris Declaration on Aid Effectiveness and the subsequent 2008 Accra Agenda for Action. The lesson is also often expressed in terms of ownership: the more a policy or project is owned by those who implement it, and the more closely a project or policy reflects local priorities, the more likely it is to succeed. This goal is easy to state but difficult to translate into operational guidelines. How does one test whether or not a project or policy is locally owned or 208 Ngaire Woods sufficiently aligned and what does that mean? Important indicators of local ownership could include • the origination of the project or policy (who had the idea?); • the design of the project or policy; and • the financing and resourcing of the project or policy (have locals contributed resources?). The latter is perhaps the clearest indicator of how much priority a community gives to the idea proposed. All that said, any tests of ownership require an initial answer to the question “owned by whom?” Is it ownership by a government that matters , or by an individual Minister within the government, or by a disenfranchised minority? Here providers of external financing have to make explicitly political choices about whose visions and aspirations they are supporting within a society. No policy will succeed without local champions —no matter how much this fact might be obscured by the design of performance...