How to Spend Climate Finance (If We Had It)

This is a joint post with Jens Engelmann.

Imagine for a moment a world in which rich countries followed through on their rather vague promise at the 2009 climate conference in Copenhagen to mobilize $100 billion per year by 2020 to help developing countries reduce their emissions and cope with climate change. How should that money be spent?

Since that pledge was made most of the efforts have focused, understandably, on how to raise the money. After all, if you can’t raise it you can’t spend it. But a major obstacle in raising the money has been lack of agreement on how it would be spent.  In recognition of that problem, CGD hosted a conference last week, How to Spend It (If We Had It): Priorities for Allocating International Climate Change Finance. While there was no consensus there were plenty of good ideas.

How much and where?

CGD President Nancy Birdsall kicked off the day-long event by asking participants, many of whom are experts in development finance, how much they believed could be raised. Many thought that public finance would be quite modest, much less than the $100 billion. Artur Cardoso de Lacerda, a senior official with Brazil’s finance ministry, and Billy Pizer, formerly of the US Treasury, outlined priorities from the point of view of a recipient and funder country.  Artur urged that funds go to support the recipient’s own climate plans.

Barry Carin from the Center for International Governance Innovation questioned whether funds should be transferred to developing countries at all, arguing from a real politik point of view that the funds would be easier to raise—and just as useful in addressing climate change—if the funds were spent on technology and emissions at home.  Would legislators be more inclined to appropriate funding if it were spent in their own countries?

Harnessing technology

A clear priority is the need to develop low-carbon (eventually zero-carbon), low-cost energy sources so that developing countries can meet their energy needs for poverty-reducing economic growth and advanced economies can maintain their standards of living. Michael Levi, a senior fellow at the Council on Foreign Relations, suggested “governments must play a crucial role in promoting innovation by funding research and development on new energy technologies.”

CGD senior fellow Arvind Subramanian suggested that advanced countries transfer technology to developing countries in exchange for imposing a border tax on their exports, based on his recent CGD book “Greenprint.”  Julia Bucknall, sector manager for energy in the South Asia region of the World Bank, provided promising evidence of a resurgence in support for climate-friendly hydropower at the World Bank.

However, despite advances in solar, wind, and other low-carbon energy technologies, Howard Herzog, senior research engineer in the MIT Energy Initiative, argued that without rapid advances in carbon capture and sequestration (CCS) technology it will not be possible avert runaway climate change.

“The largest growing energy source in the world is coal, and gas follows the same path” particularly in developing countries like China, he said. Efforts to capture and sequester greenhouse gas emissions (GHGs) have stalled and, lacking a high price on carbon emissions, the cost of sequestration will prove prohibitive. Herzog estimated that even once a number of plants are operational the cost will still be around $70-100 per ton of carbon sequestered.  In other words, funding brilliant new ideas for CCS and low/zero-carbon energy and finding ways to make these technologies available in fast-growing developing economies should be high on the agenda.

Leveraging private capital

With dim prospects for securing large amounts of public funding for climate, a persistent priority is to create innovative new financing products that will motivate institutional investors (who manage a global savings pool of $80 TRILLION) to invest in climate-friendly projects in developing countries.

In a lively panel moderated by Shilpa Patel, John Morton, vice-president for investment policy at the US Overseas Private Investment Corp. (OPIC); Ken Lay, senior managing director at the Rock Creek Group; and IFC’s Vikram Widge outlined exciting new ideas being explored at their respective institutions to lengthen maturities (beyond the 3-5 year timeframe offered by commercial banks), aggregate risk classes (like advanced and developing country cities), and apply risk-reducing insurance tools. Watch this space for more news about these exciting new green finance initiatives.

The critical role of forests

CGD senior fellow Frances Seymour, who arrived at CGD recently after six years in Indonesia as director general of the Center for Research on Tropical Forests (CIFOR), reminded the group that one important use of climate change finance must be to reduce the significant share  of global GHGs released by the deforestation of tropical rainforests.

In a moving lunchtime address, Seymour said that it’s time to refresh the forest agenda with rigorous analysis of why forests are important to climate change and development, and what can be done to stem forest loss. Under Seymour’s leadership, CGD is preparing to launch a new initiative aimed at refocusing attention on forests as a critical weapon in combating climate change  and  assessing the potential of “payment-for-performance” schemes to increase the flow of targeted funding  to reduce deforestation.

On this second point, Frances and others will draw on CGD’s extensive work on Cash on Delivery Aid. Jonah Busch, who recently joined CGD from Conservation International, outlined the lessons from ongoing pay-for-performance programs to reduce deforestation and forest degradation (REDD+).

Getting the most out of government and institution policies

What about using public climate finance to support policy reforms that will provide incentives for climate-smart investments?  A self-described right-wing Republican, Eli Lehrer, of The R Street Institute, made a compelling case for implementing a revenue-neutral carbon tax in the United States and offered a range of ideas on how to eliminate or reduce existing taxes and use new carbon tax revenues as an offset. Such a strategy, Lehrer suggested, could be politically appealing to Republican voters.  Ian Parry of the IMF’s Fiscal Affairs Department presented evidence from a new IMF book on the need to eliminate fossil fuel subsidies, which amount to $2 trillion annually globally.  And Xueman Wang from the World Bank’s Carbon Finance group outlined a program to develop market-based tools for GHG emissions reduction in 16 developing countries.

As the world looks to the Green Climate Fund and other mechanisms to facilitate the transfer of climate finance to developing countries, lessons from the ongoing Climate Investment Funds (CIFs), which were crisply summarized by the World Bank’s Patricia Bliss-Guest, senior manager of the CIFs, can help.  Many people think that the GCF should focus primarily on adaptation finance to the poorest and most vulnerable countries, and I outlined suggestions from my paper with Nancy Birdsall on principles for managing adaptation finance.

The conference, the second in a series of three organized by the Korea Development Institute, CGD, and CIGI, highlighted pressing priorities for spending climate finance, most of which would also deliver development and ecological benefits. The list of priorities should reassure public funders that there funds could be put to good use. Now if they could just deliver them.