Making the Most of Climate Finance: A Development Perspective

The Copenhagen Climate Change Conference underscored the urgent need to make additional financing for adaptation and mitigation available to developing countries. As we all know, the needs are enormous.

The World Bank’s World Development Report 2010 estimates the financing needs for mitigation in developing countries at over US$200 billion per year between now and 2030 if we are to limit the global mean temperature rise by 2ºC. Another World Bank study estimates the cost of adaptation in developing countries at $75-100 billion per year through 2050. With currently available climate financing covering only 5% of the needs, the political commitment from developed countries to provide a “new and additional” $30 billion by 2012, and mobilize $100 billion per year by 2020, is a welcome step. These resources must be delivered in full.

The World Bank Group’s experience in the innovative application and blending of various financing instruments, and in the use of dedicated climate finance to leverage private resources, can offer useful insights for a future climate finance architecture.

One example of exploring new ideas with our partners is the world’s first weather derivative developed in Malawi. This is an option on a rainfall index, linking rainfall and maize production, with a maximum payout of $5 million. As a result of the programme, over 2,600 farmers were insured in one season. Such programmes are now being replicated in other countries.

Supporting adaptation through climate-resilient development

Adaptation is key to the World Bank Group’s work in developing countries as it is critical to sustaining and furthering development gains. Our programmes range from supporting drought-resilient practices among rural communities in Kenya, Yemen, and India, to flood and storm protection in coastal cities in East Asia to dealing with the impact of rapid glacier retreat in the Andes. We are helping small island States like Kiribati and the Maldives to implement comprehensive adaptation strategies.

In order to match specific needs, these programmes utilize available financing sources, such as the Global Environment Facility (GEF), the Least Developed Countries Fund (LDCF), the Special Climate Change Fund (SCCF), and bilateral co-financing. Typically undertaken in partnership with UN and bilateral agencies, they draw on Bank Group resources to accelerate underlying development investments.

The most recent and largest initiative is the Pilot Program for Climate Resilience (PPCR), which mobilized $735 million in grants and concessional resources to help some of the most vulnerable countries improve climate risk management in core development planning. Work is underway to identify and start activities in nine low-income countries and through two regional programmes targeting small island States in the Caribbean and the Pacific.

Catalyzing climate-friendly investments through innovations in carbon finance

Given the size of the resource gap and the diversity of needs, both public finance and market instruments will play an important role. Having pioneered the carbon market and managing US$2.3 billion in carbon funds, the Bank Group continues to test innovative approaches. For example, the Forest Carbon Partnership Facility (FCPF) assists with country readiness and provides incentives for reduced emissions from deforestation and forest degradation (REDD). Much of the focus in our carbon finance work is on equity and facilitating access by poorer countries: while Africa accounts for only 2-3% of all Clean Development Mechanism (CDM) projects in the world, it represents 20% of projects in the World Bank’s carbon finance portfolio.

While carbon finance can provide a powerful incentive, its catalytic effect in removing barriers for low-carbon investments remains to be fully exploited. The Carbon Partnership Facility (CPF) that was launched in Copenhagen last December is designed to support programmatic and sector-wide interventions and broaden the impact of carbon finance on climate-friendly investment choices.

Leveraging finance for a transformational impact

Recognizing that transformative changes in the way development interacts with climate would require resources at a larger scale and flexibility, several multilateral development banks worked together to establish the Climate Investment Funds (CIF) in 2008. The idea was to leverage climate smart investments at scale that has not been possible before.

Designed through extensive consultations, the CIF is governed by a balanced representation of contributing and recipient countries, with the involvement of UN agencies, GEF, the Adaptation Fund, bilateral development agencies, the private sector, and civil society. These diverse stakeholders will gather in Manila, the Philippines, at the Asian Development Bank on 18-19 March 2010, in a Partnership Forum to continue a dialogue about CIF performance and lessons.

Nine investment plans have already been endorsed under the CIF’s Clean Technology Fund (CTF) resulting in the total financing envelope of about $30.6 billion, leveraging the CTF contribution nine-fold, of which one-third is private sector resources. The other CIF component, the Strategic Climate Fund, comprises the PPCR and the two newest programmes: the Forest Investment Program and the Scaling up Renewable Energy Program for low-income countries.

Sharing risks and knowledge to unlock climate action

In addition to dedicated financing, risk-mitigation tools can help mobilize additional long-term capital and lower borrowing cost. This is by increasing investor and lender confidence. The International Finance Corporation (IFC), the private-sector arm of the Bank Group, facilitates investments in clean technologies through several risk-sharing products, as well as via an integrated investment-advisory platform. IFC is also working with Standard & Poor’s on the first Global Emerging Market Carbon Efficient Index, expected to help carbon-efficient companies mobilize capital.

To conclude…

As the international climate finance architecture is being developed, experience by the multilateral development banks in delivering and leveraging finance and supporting implementation is worth looking at to clarify what works, when, and why. Knowledge gained by countries through participation in the FCPF, for instance, contributed to the advance of the REDD-Plus agenda in Copenhagen. CIF experience also offers unique lessons: in both innovative governance and flexible financing at scale.

Whatever future climate finance structure emerges, it should support recipient country priorities. It should channel resources quickly and efficiently, tailor financial products to project needs, and maximize synergies between development and climate finance. Above all, the future climate finance architecture should have balanced and equitable governance that is responsive to UNFCCC guidance and supported by transparent democratic processes fundamental for global trust, unity, and action.