7 Things to Look Out for in the UN's Green Climate Fund
February 13, 2014 · By Oscar Reyes
As the Green Climate Fund (GCF) Board prepares to meet in Bali, Oscar Reyes identifies some of the key issues that will shape an institution that is expected to become central in providing international climate finance.
1. Is the GCF a Fund or a Bank?
The main purpose of the Green Climate Fund (GCF), put very simply, is to receive climate finance from developed countries (in accordance with their obligations under the UN Climate Convention) and disburse that money for activities in developing countries. But there are considerable signs of mission creep and the paperwork framing discussions in Bali contains numerous references to the revenue generating capacity of the Fund’s loans, and the potential for bonds, to replenish the Fund’s coffers.
A key part of the value in having a GCF lies in its ability to fund projects and programs that commercial lenders wouldn’t touch. The GCF should not aspire to be a World Bank for Climate Change, let alone its Goldman Sachs. If the GCF focuses on supporting projects that have genuine development benefits, including most of those that address the need for adaptation to the effects of climate change, it’s unlikely that it can at the same time generate sufficient returns on investment to keep the Fund afloat – and nor should it. Climate finance is an obligation of developed countries for their disproportionate role in causing climate change, and the GCF should be based on regular financial replenishments from developed countries, supplemented by innovative mechanisms like Financial Transaction Taxes.
2. Will the GCF fund fossil fuel infrastructure?
It is often difficult to see the wood for the trees within the thicket of paperwork that surrounds GCF Board meetings. But any mention of phasing out fossil fuels through a transition to renewable energy is conspicuous by its absence. Unless there’s a rapid about-turn the GCF could, perversely, become a major source of funding for fossil fuel infrastructure, even as other international financial institutions are belatedly moving to phase out some of the coal-fired excesses of their energy portfolios.
There are still some ways to prevent this fate. The Fund’s “initial results management framework” seeks to measure only tonnes of greenhouse gas emissions, but could instead set strict performance standards (or output limits) that would rule out dirty energy. The GCF could draw up an exclusion list of dirty energy project types. It should also adopt strong environmental and social safeguards, so as not to avoid promoting the displacement of people and biodiversity loss that comes with large hydroelectric dams, as much as with fossil fuel projects.
The prospects that the GCF will exclude dirty energy projects look slim, given that its Board contains several members keen to promote fossil fuels (and their proxies like “carbon capture and storage”), while large transnational corporations, including Bank of America (dubbed “the coal bank” by activists), play a significant role in shaping the Fund. But resistance to this corporate capture is growing.
3. Whatever happened to the promise of civil society participation?
The GCF Secretariat recently invited observers to an event in Bali, swiftly followed by two recall messages and an instruction to disregard the first message. This little administrative blunder is an apt metaphor for how the Fund treats currently civil society participation: “invite – recall – recall – please disregard.” The Governing Instrument (in effect, the Fund’s constitution) asks that the Board should “develop mechanisms to promote the input and participation of stakeholders, including private-sector actors, civil society organizations, vulnerable groups, women and indigenous peoples, in the design, development and implementation of the [Fund’s] strategies and activities.” But the proposals tabled for discussion at Bali backtrack on a lot of this.
The proposed process for approving GCF financing gives no clear idea as to when and how the views of “stakeholders” will be considered, not least communities where projects are located. The “no objection” procedure, introduced to ensure active engagement from civil societies in the development of the climate strategies funded by the GCF, is reduced to a box ticking exercise that can assume “tacit” consent for projects. Instead of the “participatory monitoring” that the Governing Instrument suggests, the monitoring of GCF activities could be limited to greenhouse gas calculations and cost-benefit analyses, offering limited insight into the wider benefits (or harms) that a broader, qualitative framing could show up.
Civil society groups are becoming increasingly agitated on these issues as past promises have not been kept. For example, having decided to appoint civil society representatives to its Private Sector Advisory Group, the GCF Board and Secretariat have apparently snubbed the representatives chosen by the coalition of civil society groups observing the Fund. Instead, secretariat staff cherry picked advisors.
4. Will the GCF balance mitigation and adaptation?
One of the key decisions that will be taken in Bali is on “allocation”, setting guidelines for how the GCF’s funding will be distributed. The headline figure here concerns the balance of mitigation (reducing future emissions) and adaptation (tackling climate change impacts that are already happening). An initial assessment by the Fund’s Secretariat suggests that it should aim for “50/50 as the medium-term allocation target.” But the proposal that the Board is being asked to decide upon magically transforms this into a “target range of 30-50 per cent for both adaptation and mitigation.” Fans of math will note that both targets could be hit without adding up to 100 per cent, whilst followers of climate finance have long complained that support for adaptation repeatedly falls short in the finance provided by developed countries and via other international financial institutions.
The Board will also discuss a target of 20 per cent of GCF financing going to its Private Sector Facility. As that’s widely expected to focus on mitigation, that could make any broader balance more difficult to achieve.
5. What protection will GCF environmental and social safeguards offer?
Safeguards set out some basic ground rules to ensure that finance will “do no harm”, a principle that encompasses social, gender, economic and environmental impacts. The GCF is formally committed to building upon the “best practice” elsewhere. Although no decision on safeguards will be taken until May 2014, the meeting in Bali will introduce the first draft of the Fund’s proposed safeguards. To describe these efforts as “disappointing” would be an understatement. The proposed standards offer a short and apparently voluntary set of guidelines based upon the UN’s Adaptation Fund, whose lending practice are far narrower and less risky than what the GCF is likely to engage in. As a broad coalition of civil society has already suggested, any safeguard policy worth its salt will be mandatory, and must be particularly careful in how it treats finance via intermediaries, with the Fund directly disclosing and monitoring the impacts of sub-projects.
6. What are “intermediaries” and why does their role keep expanding?
The role of intermediaries merits just one mention in the GCF Governing Instrument, but the scope and use of the term has grown considerably since then. In setting out how “direct access” to GCF financing will happen, a definition has now been offered of “intermediaries” that widens their scope still to include “financial structuring”, “origination of structured products for financial engineering” and “insurance mechanisms,” as well as other tasks “to be defined as they become relevant and appropriate.”
In the same vein, intermediaries are now defined as “a broad concept not limited to banking institutions.” That’s the equivalent of opening up the GCF to the murky world of shadow banking, where entities such as hedge funds or private equity funds could be recipients of GCF financing. Later in the year, the GCF Board will discuss offering other forms of financing, such as risk guarantees and taking equity (ownership) stakes in companies. It’s a worrying trajectory, although it’s not yet too late for the Fund to take a different path, rejecting a broad role for intermediaries and refocusing on the grant and concessional lending that the GCF has a mandate to engage in directly.
7. How concessional will GCF concessional lending be?
When the GCF finally starts funding projects, it will finance them through a mix of grants and concessional loans. The “concessional” part means offering rates that are more favorable than those available from commercial lenders, but the extent of the concession remain open for debate. The GCF secretariat is proposing to offer “softer” and “harder” concessional loans, but the terms of these compare unfavorably with those offered by the Clean Technology Fund (one of the World Bank-led Climate Investment Funds) and the International Development Association, the part of the World Bank Group that is generally seen as a standard-setter for “concessionality.”
The biggest issue here is that the GCF would set interest rates according to the “benchmark” for a chosen currency – US 10-year Treasury bond rates, or Euribor rates in the Eurozone. While those are at all-time lows, that’s not true globally. For example, benchmark rates in India are currently eight per cent, while in Nigeria they’re 12 per cent and close to 20 per cent in Argentina. By contrast, CTF and IDA concessional lending interest rates don’t rise about one and a half per cent. Adopting “benchmark” rates could discourage lending in local currencies, which is often key to both avoiding public indebtedness and allowing small to medium-sized enterprises to participate without significant risks.
Moreover, no definition is given as to whether interest rates would be fixed or variable during the period of concessional loans: if the latter, changes in interest rates for dollar loans could add billions to developing country debt, as happened following the Volcker shock when US rates rose sharply in the early 1980s. The GCF Board should reject this idea of “benchmark” rates. At the same time, it should also decide a clear policy to insist upon grants for public lending in so-called “vulnerable” countries, so as not to increase indebtedness.
The Green Climate Fund’s 6th Board meeting takes place from 19-21 February in Bali, Indonesia. More details of the IPS Climate Policy program’s work on the GCF can be found at www.climatemarkets.org
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