The Global Climate Finance Architecture

The Global Climate Finance Architecture

Subject : Environment

Section : Climate Change

Context: Climate finance remains central to achieving low-carbon, climate resilient development. The global climate finance architecture is complex and always evolving. Funds flow through multilateral channels – both within and outside of the United Nations Framework Convention on Climate Change (UNFCCC) and Paris Agreement financial mechanisms  and increasingly through bilateral, as well as through regional and national climate change channels and funds.

Multilateral channels for climate finance

• Multilateral channels for climate finance are institutions and mechanisms that have been established to mobilize and distribute financial resources for climate change projects and programs in developing countries. These institutions operate at the international level and are typically funded by contributions from donor countries.
• Global Environment Facility (GEF)
  • GEF was established on the eve of the 1992 Rio Earth Summit to help tackle our planet’s most pressing environmental problems.
  • GEF is an operating entity of the financial mechanism of the UNFCCC, serving the same function for the Paris Agreement, with a long track record in environmental funding.
  • It is a financial mechanism for five major international environmental Conventions:
    • the Minamata Convention on Mercury,
    • the Stockholm Convention on Persistent Organic Pollutants (POPs),
    • the United Nations Convention on Biological Diversity (UNCBD),
    • the United Nations Convention to Combat Desertification (UNCCD)
    • the United Nations Framework Convention on Climate Change (UNFCCC)
  • As of December 2021, through the fourth, fifth, six and seventh Trust Fund, GEF had approved over 880 projects in the focal area of climate change amounting to USD 4.2 billion.
  • GEF also administers the Least Developed Countries Fund (LDCF) and the Special Climate Change Fund (SCCF) under the guidance of the UNFCCC COP. These funds support NAPs development and implementation
• Adaptation Fund (AF)
  • AF has been financed through a 2% levy on the sale of emission credits from the Clean Development Mechanism (CDM) of the Kyoto Protocol.
  • Now mandated to serve the Paris Agreement, a similar automated funding source from the new carbon market mechanism developed under the Paris Agreement is being set up.
  • Following agreement at COP26 in Glasgow, the AF will receive 5% of the share of proceeds from the sale of emissions credits under the new CDM-replacement mechanism (UNFCCC, 2021).
  • However, in times of low carbon prices, the AF is increasingly reliant on developed-country grant contributions to stay afloat.
  • Operational since 2009, total financial inputs amount to USD 1,160 million2, with total cash transfers to projects of USD 522 million.
  • The AF pioneered direct access to climate finance for developing countries through accredited National Implementing Entities that are able to meet agreed fiduciary as well as environmental, social and gender standards, as opposed to working solely through UN agencies or multilateral development banks (MDBs) as multilateral implementing agencies.
• Green Climate Fund (GCF)
  • GCF of the UNFCCC was agreed at the Durban COP and became fully operational with its first projects approved at the end of 2015.
  • Like the GEF, it serves as an operating entity of the financial mechanism of both the UNFCCC and the Paris Agreement and receives guidance by the COP. It is expected to become the primary channel through which international public climate finance will flow over time and is intended to fund the paradigm shift towards climate-resilient and low-carbon development in developing countries with a country-driven approach, and a commitment to a 50:50 balanced allocation of finance to adaptation and mitigation.
  • The initial resource mobilisation process for the GCF raised USD 10.3 billion. However, the failure by the United States to fulfil USD 2 billion of its USD 3 billion contribution agreement, in addition to exchange-rate fluctuations, means that only USD 7.1 billion were ultimately available.
• Standing Committee on Finance
  • At COP16, the Standing Committee on Finance was established under the UNFCCC to assist the COP in meeting the objectives of the Financial Mechanism of the Convention. The Standing Committee on Finance has been tasked with, among other things, preparing a biennial assessment of climate finance flows, the fourth of which was published in 2021 and details the finance flows from 2017–2018.
• Climate Investment Funds (CIFs)
  • It is established in 2008 are administered by the World Bank, but operate in partnership with regional development banks including the African Development Bank (AfDB), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD) and the Inter-American Development Bank (IDB).
  • The CIFs finance programmatic interventions in selected developing countries, with the objective of improving understanding of how public finance is best deployed at scale to assist transformation of development trajectories.

Multilateral development banks (MDBs)

• Multilateral development banks (MDBs) play a prominent role in delivering multilateral climate finance. Many have incorporated climate change considerations into their core lending and operations, and most MDBs now also administer climate finance initiatives with a regional or thematic scope.
• World Bank
  • World Bank’s carbon finance unit has established the Forest Carbon Partnership Facility (FCPF) to explore how carbon market revenues could be harnessed to reduce emissions from deforestation and forest degradation, forest conservation, sustainable forest management and the enhancement of forest carbon stocks (REDD+).
  • It also manages the Partnership for Market Readiness (PMR), aimed at helping developing countries establish market-based mechanisms to respond to climate change
  • BioCarbon Fund, which is a public-private partnership that mobilises finance for sequestration or conservation of carbon in the land use sector.
• African Development Bank
  • African Development Bank also finances enhanced climate finance readiness in African countries through the German-funded Africa Climate Change Fund (ACCF), whose first projects were approved in 2015.
  • The African Development Bank is also the Trustee for the Africa Renewable Energy Initiative (AREI) and will house the AREI Trust Fund with expected USD 10 billion in resources.

Bilateral channels for climate finance

• A significant share of public climate finance is spent bilaterally and administered largely through existing development agencies
• Germany’s Internationale Klimaschutzinitiative (IKI, international climate initiative) has provided over EUR 4.5 billion for more than 750 mitigation, adaptation, and REDD+ projects since its establishment in 2008. The initiative is innovatively funded partly through the sale of national tradable emission certificates, providing finance that is largely additional to existing development finance commitments.
• United Kingdom has committed GBP 5.8 billion to its International Climate Finance (ICF) from 2016 through to 2021. In 2019, it announced a doubling of its investments to help developing countries to combat climate change in the period 2021–2026 to GBP 11.6 billion.
• Norway’s International Climate and Forest Initiative (NICFI) has pledged USD 350 million each year since 2008 through bilateral partnerships, multilateral channels and civil society. Sizeable pledges have been made for REDD+ activities in Brazil, Indonesia, Tanzania, and Guyana.

Regional and national channels and climate change funds

• Caribbean Catastrophic Risk Insurance Facility (CCRIF) was established in 2007 through support of the World Bank and other development partners but is now also funded by premiums from developing countries. A 22 member-country risk pool, the CCRIF offers parametric insurance.
• Amazon fund
  • The Amazon Fund is a financial mechanism created by the Brazilian government in 2008 to provide financial support for projects that help to prevent, monitor and combat deforestation and promote the sustainable use of forests in the Amazon biome.
  • The Amazon Fund is managed by the Brazilian Development Bank (BNDES) in partnership with Brazil’s Ministry of the Environment and receives financial contributions from international donors
  • The Amazon Fund has received financial contributions from a number of countries, including Norway, Germany, and the United Kingdom.
  • As of 2021, the fund has received approximately $1.3 billion in donations, which has been used to support a range of projects, including the creation of protected areas, the strengthening of environmental monitoring and law enforcement, and the promotion of sustainable agriculture and forestry practices.