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Sharing the global climate finance effort

01 December 2015

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Frank Jotzo is Director of The Centre for Climate Economics and Policy at Crawford School, and director of the School’s Resources, Environment and Development program. He currently teaches the graduate courses Domestic Climate Change Economics and Policy and Issues in Development and Environment.

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A big boost to climate finance will be critical at the Paris climate change summit, write Jonathan Pickering and Frank Jotzo.

One of the critical issues for securing a global deal at the Paris climate change summit is how to boost funding to help low-income countries tackle climate change. With Prime Minister Malcolm Turnbull and Ministers Greg Hunt and Julie Bishop attending the summit, Australia is sending a positive signal about its constructive involvement in the climate talks. By the same token, Australia’s credentials on climate finance will be under scrutiny, along with those of other wealthy countries.

At the Copenhagen summit in 2009, developed countries pledged to mobilise climate finance of US$100 billion a year by 2020. A recent OECD report found that wealthy countries were already over halfway there. But developing countries have contested the methods used by the report to work out what counts as climate finance, arguing that the funding gap is much larger.

Wealthy countries are increasingly conscious that the “$100 billion question” poses a major credibility test for them at the Paris summit. In the lead-up to the summit, a number of countries have made substantial pledges for the period between now and 2020, including Germany, France and the United Kingdom. Over the past weekend Japan and Canada have also announced new funding.

These pledges build on the US$10 billion that the United Nations Green Climate Fund raised last year for its initial operations. Australia pledged A$200 million to the Fund’s initial operations, or just under 2 per cent of the initial target. Australia has also recently resumed its role as co-chair of the Fund’s governing board.

In the light of financing pledges by other wealthy countries, Australia will be under pressure to show its hand at Paris.

But how can we tell whether countries are pledging their fair share? And how can those falling short be encouraged to do more?

Recent UN climate talks have embraced a “bottom-up” approach to finance and mitigation. In other words, national targets are based on voluntary national pledges rather than a mandatory or “top-down” approach, whereby targets are set according to a universal formula. In a bottom-up context, countries have wide discretion to choose whatever measure of fairness they prefer. Many analysts consider that fair shares should be based on the UN Climate Convention’s principle of “common but differentiated responsibilities and respective capabilities”.

In applying this principle to climate finance, responsibilities are often equated with cumulative national greenhouse gas emissions, while capabilities are taken to refer to national income. But often countries also base their shares of climate finance on precedent, such as the share of funding that they’ve pledged for development assistance or contributions to the World Bank.

What’s likely to happen when states have so much latitude over what counts as their fair share? In a new article co-authored with Peter J Wood and published in the journal Global Environmental Politics (open access working paper also available here), we model three scenarios based on the degree of international coordination on measures of effort-sharing.

Our first scenario is a top-down approach where national shares are based on a uniform formula that gives equal weighting to each country’s emissions and capacity as a proportion of all developed countries (or Annex II countries in climate policy jargon). Because of Australia’s wealth and high greenhouse gas emissions per person, its share of finance is the highest under this scenario (over 3 per cent).

Our second scenario is a bottom-up approach where each country can choose from a wide range of indicators of its fair share, including emissions, income and previous funding pledges. Each country, looking out for its short-term interests, picks the indicator that minimises its own contribution. Under this scenario, Australia’s share is 1.8 per cent, based on its contribution to the fifth replenishment of the Global Environment Facility (Australia’s contribution to the sixth replenishment, which was beyond our period of analysis, was around 2.4 per cent).

The third scenario in our paper is somewhere in the middle. It assumes that countries pick the indicator that minimises the financial cost to them, but this time they can only choose from indicators of emissions and income. They cannot choose among previous pledges, which can be unreliable if countries consistently do less than what more objective measures of their fair share would require. In Australia’s case, under this “hybrid” scenario its share rises to around 2.4 per cent, which is its share of developed countries’ GDP.

These scenarios highlight that an uncoordinated approach to effort-sharing could lead to significant shortfalls in funding. The wider the latitude that countries have in their choice of indicators, the greater the funding gap will be.

But while a top-down approach to effort-sharing appears to be a promising way for eliminating the gap, it is highly unlikely in practice that all countries would sign up to a common formula. The US and other countries have made their opposition to formula-based approaches very clear. The hybrid scenario still gives countries some flexibility about how they determine their own shares. But the shortfall decreases compared to the bottom-up approach because national income and emissions levels are correlated.

But how could we approximate our hybrid scenario, with its advantages over a completely uncoordinated approach, in the real world? A critical step will be to develop shared understandings of credible principles for effort-sharing. Shared understandings don’t have to mean that everyone immediately agrees on a single formula. But countries will need to converge at least on some fundamental parameters.

Perhaps most importantly, countries need to agree on which claims about fair shares are blatantly self-serving.

Shared understandings could emerge in a number of ways. First, the United Nations Framework Convention on Climate Change (UNFCCC) could introduce requirements for contributing countries to justify the fairness and ambition of their funding pledges (as occurs with mitigation contributions). Second, the Green Climate Fund could establish more structured mechanisms for deliberation among contributors through periodic replenishments modelled on those for the Global Environment Facility or the World Bank.

Third, the UNFCCC could take a more active role in comparing financing pledges against a range of effort-sharing measures. Finally, it will be essential for non-government organisations to build public support for shared understandings of fair shares, and to hold countries to account for their levels of support.

The Paris summit provides an opportunity for the UNFCCC to introduce some of these reforms. But the most immediate priority is for countries that are yet to make financing announcements for Paris, such as Australia, the US and Japan, to issue pledges that are based on credible measures of effort.

Based on our analysis, Australia’s contribution would need to be at least in the 2-3 per cent range to be seen as credible. How much that translates into in taxpayers’ dollars will depend on how much public finance countries expect to raise collectively.

The $100 billion target comprises private as well as public funding, but the split between the two needs to be clarified, along with the respective roles of financing from national budgets and from multilateral development banks. Even if the public share is less than half of the $100 billion, Australia’s funding will need to scale up several times beyond previous levels of around A$200 million a year, as Robin Davies of the Development Policy Centre details here.

As we outline in our paper, the overall effort required by countries in the Annex II “club” would fall if other high-income countries outside the club came on board, such as South Korea, Mexico and wealthy oil-producing nations. But the onus remains squarely on Annex II countries, including Australia, to show leadership.

A serious boost to climate finance will be critical for generating the trust between developed and developing countries needed to secure a deal at Paris. Given our status as a wealthy and high-carbon country, a substantial contribution will be essential for Australia’s credibility in the climate talks.

This article was first jointly published by Policy Forum at Crawford School and The Policy Space.

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