World Bank Climate Funds May Undermine Climate Talks

The initiative, led by a handful of G8 countries, will undermine existing multilateral negotiations on climate change and create conflicting parallel mechanisms for delivering climate-related financing.

In a letter sent to UK Secretary of State for International Development, Douglas Alexander, on Tuesday 11 March 2008, representatives from more than 20 UK-based and international non-government organisations (NGOs) said that the current rush to finalise the proposals for the funds could lead to the establishment of “top-down funds, without adequate participation of developing countries, without much needed accountability mechanisms, and without promoting the wider environmental and development benefits and sustainable transformations”.

The NGOs include the Bretton Woods Project, Christian Aid, Friends of the Earth, Greenpeace, Jubilee Debt Campaign, Oxfam GB, Practical Action, Third World Network and WWF-UK and the letter was copied to Hilary Benn, Secretary of State for Environment, Food and Rural Affairs, UK.

The World Bank expects to conclude discussions on arrangements for its climate investment funds, including securing financial pledges from donors, at the G8 environmental ministers’ meeting in Tokyo in late May this year and seek final approval for the funds from its Executive Board in early June.

The World Bank has proposed the creation of three specific climate investment funds - the Clean Technology Fund, the Forest Investment Fund and the Adaptation/ Climate Resilience Pilot Fund - along with a Strategic Climate Fund to deliver donor financing for climate change mitigation and adaptation projects.

According to a leaked draft of the Bank’s proposal dated 22 January 2008, the funds will be aimed at providing “concessional finance for policy reforms and investments that achieve development goals through a transition to a low carbon development path and climate-resilient economy for developing countries”.

The combined target size of the funds is between US$7-12 billion and stems from the institutions’ dialogues with a tripartite of countries, the UK, the US and Japan, building upon the UK’s earlier initiative for an Environmental Transformation Fund (ETF), the US’s proposed Clean Technology Fund and Japan’s Cool Earth 50 initiative.

Financing will take the form of credit enhancement and risk management tools, such as loans, grants, equity stakes, guarantees and other support mobilised through donor contributions to the respective trust funds and implemented in collaboration with the regional development banks.

NGOs are concerned that the proposed Bank funds, established as trust funds under the Bank’s Concessional Finance and Global Partnerships Vice-Presidency, will lead to parallel structures for the mobilisation and disbursement of climate-related financing and bypass existing multilateral negotiations.

For example, they are worried that the inclusion of the US-led Clean Technology Fund into the Bank’s portfolio “could imply support for the US Major Emitters Meeting process, which lies outside the UN track of negotiations on a post-2012 framework”.

This is compounded by the fact that the Bank will host a secretariat for the climate investment funds and, in collaboration with regional development banks, will be responsible for selecting staff for the secretariat and managing the secretariat.

The governance structure of the climate investment funds will also be donor-dominated, governed by trust committees made up of the contributors to the respective funds. The trust fund committees would be responsible for reviewing and approving country applications for financing and determining the terms of access to the funds.

The Bank itself has an asymmetrical governance structure where voting power is allocated according to capital invested in the Bank, giving five developed countries almost 60 percent of the votes in the institutions.

NGOs are concerned about the potential conflict between the Bank proposed Adaptation/ Climate Resilience Pilot Fund and the United Nations Framework Convention on Climate Change (UNFCCC) Adaptation Fund agreed at the climate change talks in Bali, Indonesia in December last year. The NGOs said: “While this latter fund faces some challenges going forward, it importantly has a far greater degree of developing country ownership.”

The NGOs added: “We appreciate that difficulties may exist as to whether the UNFCCC fund can accept certain types of funding, but we believe that all options need to be fully considered and the option of [the UK’s Department for International Development] channelling significant funds via this route should not be discounted at this stage”.

The Adaptation Fund which finances climate change mitigation and adaptation activities in developing countries is funded by proceeds from the 2 percent levy on transactions under the Kyoto Protocol’s Clean Development Mechanism (CDM).

At Bali, it was decided that the Adaptation Fund is to be supervised and managed by an Adaptation Fund Board represented by developed and developing countries. Although the secretariat for the fund will be held by the Bank-based trust fund, the Global Environmental Facility (GEF), this is meant to be temporary and the secretariat would have to report to the aforementioned board and the GEF’s status as secretariat will be reviewed after three years.

The NGOs are against the proposal that the Bank’s Adaptation/Climate Resilience Pilot Fund is to offer concessional loans for adaptation, saying that “it is inappropriate to use loans given that the problems that developing countries must tackle were largely created by rich countries in the first place”.

Furthermore, substantial parts of the climate investment funds will be counted as official development assistance (ODA) by donor countries, including the UK, which means that it will compromise additional overall development financing to developing countries. This goes against existing multilateral commitments under the UNFCCC, which states that developed countries should provide new and additional financial resources to meet the agreed full costs incurred by developing countries in meeting their climate change commitments.

“We believe, however, that funding to help developing countries respond to the challenges of climate change should be additional to the long-standing ODA commitment of 0.7 percent GDP,” said the NGOs in their letter to Alexander.

The NGOs also have reservations about the role of the World Bank in climate change activities, given its negative track record on social and environmental issues. They point out that the Bank’s “energy portfolio continues to be skewed towards fossil fuels over decentralised renewable energy” and that in order for the Bank and other regional development banks to be “credible” partners in the fight against climate change, they must make sure that they have adequate social and environmental safeguards in place.

The NGOs called for governments to ensure that the proposals for climate change financing are appropriate at this crucial juncture, when “it is vital that these proposals are opened up to wider ownership and engagement from civil society and developing countries”.