I’ve mentioned the Green Climate Fund (GCF) a few times recently. It’s that $100 billion/year fund that was agreed in Cancun in 2010 that is meant to help developing countries reduce emissions and adapt to the impacts of climate change.
Finance is one of the major discussion streams here at COP19, so it’s worth describing this fund a bit. It’s interesting because, on the surface, this fund looks a lot like the other UN financial mechanism, the Global Environment Facility, which was established in 1991. But nuances in the GCF’s design make a big difference to the financial community.
Hela Cheikhrouhou, Executive Director of the GCF, explained why this fund is unique. Most importantly, the private sector has been heavily involved in the GCF’s design from the outset. In the past, there was less global consensus about the role of the private sector in these types of funds. But today that’s different.
There’s a very limited amount of public money floating around due to the global financial crisis, and a lot of money (trillions) is needed to transition to a low carbon economy. That’s why the GCF includes a “private sector facility” that enshrines the role of the private sector alongside the fund’s mitigation and adaptation windows.
This fund will be used to leverage private sector finance using newer and more sophisticated financial mechanisms, and will draw on what Ms. Cheikhrouhou calls “the universe of blended risk-sharing solutions” that are fairly recent financial innovations.
Another difference lies with risk appetite. Other multilateral financial institutions decided that they want to be AAA rated (more secure than US or UK government bonds). But that precludes them from investing in a lot of good projects, especially in developing countries where risk is inherently higher. The GCF will potentially accept higher risk investments, which will open up a swathe of projects that other funds can’t invest in.
Unlike bilateral climate funds, the GCF is more insulated from capricious political temperaments, too. A change in government can easily shut down a bilateral fund, but the GCF is multilateral and more representative.
Its board is split 50:50 between developed and developing country representatives, which can lead to more combative but ultimately more stable decision-making. It also instils a greater sense ownership over decisions, reduces the risk of imperious rulemaking, and tries to diffuse what can be a demeaning donor-recipient power dynamic.
Some observers are cautious about the fund, though, and fear that it’s expected to be too transformative. Just like some people pegged the Clean Development Mechanism as a miraculous innovation that would solve development, climate change, finance, and livelihoods all at once (but didn’t), sceptics don’t want to be disappointed by the GCF.
I understand that reticence. I’ve heard it referenced as the potential source of cash for making cities creditworthy, for de-risking carbon capture and storage, for bankrolling a global feed-in tariff facility, and more – essentially, a financial panacea.
There’s also concern that the GCF could be re-dubbed the “Green China Fund” if distribution caveats aren’t included.
There’s uncertainty about where the money’s going to come from, too. Depending on who you talk to, $100 billion is either an almost impossibly large sum, or so small in the context of global financial flows that it’s “peanut” (not even peanuts plural it’s so small!). It’s a question civil society is asking with the help of some racy red badges.
The source of funding will be an important question to answer over the next six months as the GCF starts being capitalised. Developing countries want some assurance that there’s money in the bank to help them reduce emissions and adapt to climate change. Without it, they’ll be reluctant to agree to a comprehensive, inclusive global deal in Paris in 2015.
The GCF has great potential, but like all negotiating streams, the devil’s in the details. Let’s hope those red badges remain a call to action rather than an exclamation.