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A Financial Last Straw for the UNFCC?

Inevitably, the UN climate negotiations involve an element of the blame game. The Kyoto agreement, and the earlier Rio Declaration were based on the premise that those who caused the problem (developed countries) would pay to clean it up. Few in the political world focused much on this, and business, to the extent they had a view, regarded it as part of the rhetoric.

It’s time to pay attention, because there is a lot of money at stake, and questions about “who pays, how much, to whom, and for what purposes” will be front and center at the UNFCC’s November meeting in Warsaw, and possible consequences include the collapse of the entire UNFCC process or, conversely, creating yet another stumbling block for federal action to put a price on carbon.

The Copenhagen Commitment

In the months leading up to Copenhagen in 2009, the premise that developed countries would foot the bill for climate change became a de facto financial commitment. Specifically, at Copenhagen, Hilary Clinton — with the full knowledge of the White House — made a very important commitment. In fact, if the check is ever cashed, it may be the single most expensive peacetime promise ever made by the United States: she said that the developed world was committed to “mobilizing (our emphasis) $100 billion / year for climate mitigation by 2020”.

Clinton picked her word deliberately. “Mobilizing” does not mean government aid, and spending in 2020 does not directly imply spending any time before then (there was a separate much smaller commitment for 2009-12). This commitment was based on the belief that the US and EU cap and trade markets could provide most of the money. The House had passed Waxman-Markey, Kerry and Lieberman were talking about their variant, and the assumption was that firms would buy offsets from developing countries or invest in other mechanisms that would support low carbon technologies in those regions; common sense supports encouraging the lowest cost reductions in GHGs wherever they can be found. The problem is that no one now believes cap and trade can deliver this kind of money.

The US Share: $40 Billion a Year?

If the apportionment of contributions between the developed countries follows GDP or emissions, this implies a US commitment of $30-50 billion a year – indefinitely – to what is now known as the Green Climate Fund (GCF), and other similar but as yet undefined mechanisms. (For the sake of simplicity we’ll use “GCF” as shorthand for the whole system, though the US insists it is only the supposedly narrower, more formal system). US government officials implied – to widespread skepticism – this would be new money, not repurposing of other aid or assistance funds. Let’s call it $40 billion a year  – more than the entire US aid budget for 2012 –$36 billion — which includes the significant security-related aid for Afghanistan, Iraq, Israel and Pakistan.

Where would the US get $40B? From taxpayers, the private sector, or some combination of the two, and even private sector money is likely to put the Treasury on the hook. Returns on clean energy investments in developing countries are so inherently low/risky that such investment would probably require a US government guarantee of portions of the anticipated revenue stream. Moreover, this issue is having a significant impact right now, as talk that U.S. obligations could be funded by ear-marking a major part of any federal carbon price revenues is creating a powerful argument against any such federal action.

Other countries face a similar challenge – even if all the money in the EU cap and trade system were diverted to the cause each year, it would not cover Europe’s likely obligations at current allowance prices. And the EU member states like Greece have their own pressing priorities for the money. Developing countries want it to come from governments. Problem: developed country governments are broke.

Subsequent developments

Since Copenhagen, all sides have danced around this issue. There’s been a lot of negotiation about the pipeline to deliver the money, but precious little agreement on where exactly it is going to come from, who gets it or what rules will govern how it gets spent.

On April 10-11, the US organized a very broad meeting of the potential donor side of this effort (the developed countries) to try to agree a common approach heading into a UNFCCC negotiating meeting in May and the Warsaw COP meeting in November. Notably (and wisely) the meeting pulled in finance and development experts as well as the usual environment and foreign ministry officials who attend the UN meetings. The communiqué (sorry, “Chair’s summary”) from the meeting is a masterpiece of obfuscation (It is here) but a few things are clear:

1. Most of the money isn’t coming from governments. No great shock there but it appears everyone on the donor side is on that page now, which is progress.

2. There is a continuing belief that if the right magic wand is waved, private sector investors will rush in to such projects. The official code for this is “Public – Private partnerships”. It is not clear whether governments really believe this, or whether they see it as the only plausible way to back out of the commitment.

3. There is recognition that a lot will need to be done to make the investment environment in developing countries suitable for investments on the scale envisaged.

On to Warsaw

In addition to these donor-side issues, major questions about who gets the money, and how, will also be on the table in Warsaw.

Who gets the money?

The poster children for the recipients of the fund are the least developed countries, including the ones most affected by climate change. But that $100 billion/year is equal to the annual GDP of the poorest 40 or so countries combined . Such economies could not absorb funding on this scale – still less give private investors acceptable returns – without risking major problems. The primary risk is a new version of the “Dutch disease” whereby other activity is driven out in favor of low carbon projects and domestic agriculture and manufacturing are destroyed by inflation and currency over-valuation.

Are China and India contributors or recipients from the fund?

They have many low cost mitigation opportunities and a lot of potentially serious adaptation needs, but for example, the US government borrowing money from the Chinese to give it back to them is not going to pass the smell test.

Who is in charge of the money?

Choices seem to be direct government to government payments, or competition between best projects with an independent body holding the purse (and of course taking an administrative cut). The GCF seems to be developing into the latter; at Doha, it was decided that South Korea will host the GCF’s bureaucracy, which may or may not end up as a relatively independent institution (as the US wants) or more closely subject to the “governance” of the COP process (as others want).

Interlinked is the question of who will ensure the money is being spent wisely (and who decides what is “wisely”?) Developing country governments see this as a matter of national sovereignty – they should decide their own spending priorities. But this will not fly with hard pressed western legislatures that will likely insist on mechanisms to ensure any such money is actually doing what it is supposed to do. Somewhere, we are sure, business people who have spent painful years on the Extractive Industry Transparency Initiative are updating their resumes for a consulting bonanza.

Further complications

The original pre-Copenhagen concept was that this money would pay developing countries for carbon mitigation. However, Doha opened the door wide to further open-ended arguments for aid and compensation “to address adverse impacts of response measures in developed nations on developing nations (we ask, “including OPEC?”) and loss and damages from impacts of climate change”. So what started out as a mitigation fund has started to adopt the flavor of compensation for adaptation broadly defined (“loss and damages from impacts”). The US has always pushed hard to remove any suggestion of “reparations” but whatever the official wording, that is how most of the developing world sees this pot of money.

In sum, developed countries have made highly qualified promises they are unlikely to be able to keep, and developing countries heard what they wanted to hear about large flows of money. Expectations have been allowed to get too high, and political will and resources to meet them are low and falling. A train wreck is in prospect. This being the UNFCCC ,it will be a slow motion one, spread over several meetings but hopelessly complicating the already challenging 2015 “son of Kyoto” negotiations. More parochially, the desire to siphon a great deal of money towards meeting this commitment, as many in the NGO movement would prefer, can only further complicate the already remote prospects of US federal action on climate.