10 April 2011

European Commission “Scaling up climate finance”: what does it actually mean?

The European Commission says $100 billion a year by 2020 for “climate funding” in developing countries is “challenging but feasible.” But read behind the press release, and what is actually being proposed shifts even further away from the idea that climate finance should form part of an obligation (or “debt”) incurred, alongside other industrialised nations, for playing a disproportionate role in causing climate change in the first place.

What follows are some notes on a new European Commission document prepared as a follow up on the UN High Level Panel on Climate Change Financing (AGF). The report was commissioned by ECOFIN (the Economic and Financial Affairs Council, which is the meeting of EU finance ministers) in December 2010.

Like most Staff Working Documents, its 46 pages are a dry and technical affair, but unlike most such documents it contains some interesting clues as to the direction of the Commission's thinking.

Carbon markets are central to the EU's approach, as are a broad range of other “private financial flows”. Public climate finance is defined in increasingly blurry ways, including promoting the EIB's role, double-counting aid flows, and blurring the boundary between public and private financing (eg. suggesting that more public sector equity be provided for private projects – in essence, because the banks aren't lending so much as a result of the economic crisis).

What are “private financial flows”?

* The general orientation of the document is that “Private financial flows will depend largely on developing countries' capability to create a general business environment which is attractive for domestic and international investment. ” (p.10) However, it is noted that the economic crisis has “severely limited access to private financing worldwide.” (p.45). It suggests, in this context, that MDBs and other IFIs act as “market maker” (p.45), in which the EU could be a partner through ”measures such as co-investments, risk sharing mechanisms, fee incentives, sanction mechanisms, etc. ”

* The boundary between public and private finance is becoming very blurred. For example, the document notes “The blending of grants and loans as well as equity and quasi-equity constitute innovative mechanisms to enhance support to EU external priorities and to multiply the impact of EU external assistance (p.43)

* A number of “innovative” instruments are proposed to enhance private financial flows. These include : “Instruments to improve the risk-return profile include the provision of guarantees, technical assistance or interest rate subsidies to support the issuance of debt for climate projects. Public-Private Partnerships (PPPs) can spread the costs and risks of financing of public goods over the lifetime of the asset which can considerably alleviate the short to medium-term pressure on public budgets. Using public funds to inject equity capital into companies or projects can be another mechanism to mobilise private investment. Public support for the use of market-based insurance schemes covering natural disasters can leverage sizeable amounts of private finance for adaptation. Other examples of innovative mechanisms that could raise private finance for climate actions are Advance Market Commitments (AMCs), tax discounts, access to finance, or standards of corporate social responsibility. ” (p.12) (see also p.39)

Public finance

* The document offers an “indicative table of financial contributions from Annex I states” (p.19) and suggests a central role (esp. in adaptation) could be played by the Green Climate Fund, which it sees as “likely to become bigger than the existing funds under the Financial Mechanism of the Convention ” (p.19)

* On adaptation, it is noted that“donor support for microfinance institutions (MFIs) could also be regarded as climate finance to some extent, ” (p.39)

Carbon markets

* The documents recommendations include the (predictable) suggestion that that the EU “work with other developed countries interested in setting up cap-and-trade systems, ... make progress on the reform of the Clean Development Mechanism, and ... promote a sectoral crediting mechanism; ”

* More interestingly, “Commission analysis shows that with current pledges, allowing the full banking of the Assigned Amount Unit surplus and choosing the Kyoto Protocol target as a starting level for the emission reduction paths for the period 2013-2020 would result in no demand for international credits additional to what has already been enabled.” (p.34) This begs a significant question as to what the use of the EU's proposed market mechanisms would be? In fact, it seems to signal a potential lack of demand that would undermine prices. As such, figures for the proposed “financial flows” that the EU attaches to such mechanisms should be treated with extreme caution, and may leave a large climate financing hole.

* For those with an interest in carbon markets, these projections are also useful to bear in mind (and offer one of the clearer projections relating to demand for sectors outside the EU ETS, ie. those covered by “effort sharing” Directive: “Current EU ETS legislation allows for carbon offsets of about 1.6- 1.7 Gt of CO2 in the period 2008-2020 (i.e. about 130 Mt of CO2 per year). Additional demand for credits will come from the sectors outside the EU ETS amounting up to approximately 700 Mt over the period of 2013-2020, i.e. roughly 88 Mt of CO2 per year until 2020. At the current price for CDM credits of some EUR 13 per tonne of CO2, the demand by the EU could generate roughly EUR 3 billion of financial flows to developing countries per year, not taking into account additional flows triggered by investments underlying CDM projects.” (p.35). Here as elsewhere (p.10 of the report), figures on CDM “investment” treat investment as the same thing as the cost of carbon credits sold (ie. these figures don't try to account for the large sums skimmed off by project developers, etc. ... and other financial transfers – eg. returns on equity borrowed to finance projects; intra-company financial flows from South to North).

MRV (measuring emissions)

* On MRV, it notes that “A new major challenge in the context of long-term climate finance will be the monitoring and accounting of private flows.” (p.20)

Double-counting aid flows

* Double-counting aid flows now seems to be normal Commission practice. Figures on existing climate finance are said to include allocations from the European Development Fund (EDF) (p.20), as well as a proportion of the EU's existing 2007-2013 budget that was allocated to the Instrument for Development Cooperation (DCI). (p.21), including subsidiary thematic programmes such as "Environment and sustainable management of natural resources including energy" (ENRTP) with a total amount of approximately EUR 1.1 billion.” The document notes that “The ENRTP covers the additional budget allocation granted for fast-start climate change funding and the allocation for the Global Climate Change Alliance (GCCA). ” The EU's climate finance figures also seem to include money from “the Neighbourhood Investment Facility (NIF) [which] has approved more than EUR 100 million of grants for climate related projects” since 2008. (p.43)

New EU carbon tax

* The EU is seriously considering new carbon taxes. “The Commission intends to come forward, during the second quarter of 2011, with a proposal for a revision of the Energy Taxation Directive (ETD) to bring it more closely in line with the EU's energy and climate change objectives. The proposal will aim at, on the one hand, integrating an explicitly CO2-related element into the energy taxation system which would be applicable outside the EU ETS and, on the other hand, putting the remaining part of energy taxation on a neutral basis by linking it to the energy content of the products subject to taxation. In doing so, it will ensure consistent treatment of energy sources within the ETD in order to provide a genuine level playing field between energy consumers independent of the energy source used. Moreover, it will provide an adapted framework for the taxation of renewable energies and provide a framework for the use of CO2 taxation to complement the carbon price signal established by the ETS while avoiding overlaps between the two instruments. ” (p.31) More on this is also reported here.

Privatising the commons

The document suggests that “ETS auctions of allowances for greenhouse gas emission sources in energy and industry could deliver revenues of more than EUR 20 billion per year by 2020. According to the ETS Directive, Member States should spend at least half of these amounts on activities related to climate change, energy and low-emission transport, including in developing countries ” (p.8). It should be noted that(1) these funds are not actually earmarked, and many EU Member States would resist such a move; (2) in putting a value on auctioned permits, the EU is creating property rights from pollution which are drawn from a global carbon space (that the EU has already over-used its share of).

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