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Climate finance in LDCs

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Published: Tuesday, Aug 09, 2016

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Climate finance in LDCs

The World Economic Forum has projected that, by 2020, about US$5.7 trillion will be needed annually for green infrastructure investments.

Mehrin Karim

Background

“Let us not take this planet for grant- ed. Climate change is real.” These were the words that echoed at this year’s Oscars from the famous actor, Leonardo DiCaprio.

Stabilising the global climate is going to be one of the most urgent challenges in the coming decades. In order to tackle this problem, develop- ing countries would require funds to mitigate, or adapt to, the problems. And, this is where climate finance plays its part.

In developing countries, climate change investment needs are signif- icant, but direct government fund- ing is scarce. The World Economic Forum has projected that, by 2020, about US$5.7 trillion will be needed annually for green infrastructure investments, much of which will be in today’s developing world. A recent research by the International Institute for Environment and Development (IIED) estimates that the cost for 48 least developed countries (LDCs) to implement their post-2020 climate action plans would be around US$93 billion per year.

Climate finance

Climate finance refers to financing channelled by national, regional  and international entities for climate

change mitigation and adaptation pro- jects and programmes. They include climate specific support mechanisms and financial aid for mitigation and adaptation.

The necessary finance is sourced from public, private and public-pri-

vate sectors. It is channelled through various intermediaries, notably banks and financial institutions, micro-fi- nance institutions, development coop- eration agencies, the United Nations Framework Convention on Climate Change (UNFCCC) and its various funds, including those managed by the Global Environment Facility,

non-governmental organisations and the private sector. The finance can come from developed to devel- oping countries (North-South), from developing to developing countries (South-South), from developed to

developed countries (North-North) or it could just come from domestic cli- mate finance sources in developed or developing countries. At the moment, climate funds are almost all counted as the Official Development Assistance (ODA) under Development Assistance Committee (DAC) rules.

For climate change mitigation, a case can always be made for funding to be directed to relatively big emitters (large middle-income countries) where the biggest reductions in greenhouse gas emissions can be achieved. But meeting the scale of climate finance needed to support the LDCs to im- plement their climate action plans, submitted to the Paris conference on climate change, is a compelling priori- ty. The IIED analysis suggests that this can be estimated at $93.7 billion per year between 2020 and 2030.

Status of climate finance According to IIED, out of the US$40 billion of climate finance provided to developing countries each year, only a

third has made it to the LDCs, where- as 70 per cent went to middle income countries.

The European Union (EU) is the largest contributor of climate finance to developing countries. It is also the world’s biggest aid donor, collectively providing more than half of global ODA. Climate change is being increas- ingly integrated into the EU’s broader development strategy.

While continuing to invest in domestic climate action, the EU cli- mate action plan is scaling up climate finance to help the poorest and most vulnerable countries mitigate, and adapt to, climate change. At least

20 per cent of the EU budget will be spent on climate action by 2020. Also, at least €14 billion, an average of €2 billion per year, of public grants will support activities in developing coun- tries between 2014 and 2020.

The director of the European Capacity Building Initiative, Benito Müller, wants to enhance direct access to the Green Climate Fund’s (GCF) resources through devolution of decision-making to the local level. De- veloping countries are advised to test their existing financial transfer mecha- nisms, such as development banks, to choose the most effective way to reach local communities.

The GCF is a new fund set up un- der the UNFCCC to channel US$100 billion a year from the developed countries to the developing coun- tries to help tackle climate change.

Bangladesh was among the first eight countries to be allocated funding by the GCF. Countries can get funding

from the GCF by demonstrating good practice in transparency and account- ability of climate funding. Policymak- ers in developing countries are also unlocking public-private flows for inclusive investment in low-carbon development.

Opportunities and challenges for LDCs

Government ministries in developing countries typically work with a very short time horizon. Finance and plan- ning departments are often thinking about the next annual budget or are working to formulate it. At most, they may be working out a five-year plan. They are thus trapped into just ex- trapolating the present ways of doing things far into the future as well.

The LDCs and developing coun- tries should devise ways to tackle climate change with international financial support. For example, climate finance can be used to reduce greenhouse gas emissions and sell the surplus carbon credits to other coun- tries that need them to reduce their own carbon footprints. However, the low return in the international carbon market is a hindrance for reaping the benefits of carbon trading.

It is worth noting that the allo- cation of short-term and mid-term financial support for developing countries has not been specified in the Paris Agreement. And, any absence of predictability and reliability of climate finance, in terms of resource alloca- tion, would pose a serious challenge for developing countries to implement the Agreement.

Cases from Nepal and Bangladesh

Nepal has developed a policy framework to help integrate climate resilience into national and local de- velopment planning. The framework includes the National Climate Change Policy (2011), the National Framework on Local Adaptation Plans for Action (LAPA) (2011) and the Low Carbon Climate Resilient Development Strate- gy. The latter is under development.

Nepal is also making progress

in integrating climate resilience into economic, social and environmental objectives at the sector level. For exam- ple, in the energy sector, the National Rural and Renewable Energy Pro- gramme that was launched in 2011 is bringing together a number of existing initiatives and is providing a national platform for future work. Climate finance coming from the Scaling-Up Renewable Energy Programme (SREP) of the World Bank’s Climate Invest- ment Funds is contributing to this.

Accountability, transparency and integrity in climate finance are areas that are difficult for Nepal to maintain, but the country has made significant progress in establishing an institu- tional mechanism for climate finance delivery.

The climate change policy of the Government of Nepal predicts that 80 per cent of the climate investment

will reach those communities where it is needed the most. At the local level, climate and environmental problems are so intertwined that differentiating between the two, is problematic. It is made even more so by the fact that the budgetary system does not indicate actual climate expenditure either. In order to track the budget allocation for climate, the National Planning Com- mission (NPC) conducted the Climate Public Expenditure and Institution Review in 2011 and subsequently developed a tracking system founded on the use of climate budget codes for

all climate activities under all public sectors.

The Bangladesh Climate Resil- ience Fund (BCRF) was set up with international funds from the United Kingdom, the European Commission, Denmark and others. Its governance includes representation from the donors and is managed by the World Bank.

BCRF also allocates funds to pro- jects which are larger than the Bangla- desh Climate Change Trust (BCCT)—a statutory body formed under Climate Change Trust Act, 2010 to administer Climate Change Trust Fund (CCTF)– and has a robust evaluation system.

It manages several hundred million dollars for fewer, but bigger, projects than the BCCTF. Since, it was slow  in disbursing funds it is now being wound up with money left unspent.

Conclusion

Many LDCs are investing in address- ing climate change which could have been used to address their other development needs. This is due to lack of resources to fight climate change.

Therefore, knowledge of how to access available finance, is a crucial chal- lenge for the LDCs. Governments and project developers should understand the requirements of the various inter- national and multilateral sources of finance. •

The author is a Senior Research Associate, Policy Research Institute of Bangladesh, Dhaka.

http://www.sawtee.org/publications/Trade-Insight34.pdf

 

 

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