One of the few bright spots in the climate negotiations was the news that the governance of climate funding has received some attention in the run-up to the Pittsburgh G-20. Much needs to be settled, but at least the issue is on the table.
Early this month Nancy Birdsall delivered a major speech calling on the G-20 to pave the way for action. Last week, a new paper from Oxfam International, “Beyond Aid: ensuring adaptation to climate change works for the poor," considered governance for adaptation assistance.
The Oxfam authors (Catherine Pettengell, Anju Sharma and Robert Bailey) are highly critical of current arrangements for adaptation assistance. Adaptation is poorly funded, they argue, and pledges are often not fulfilled. Five funds compete over scarce resources and burden recipients with different planning and reporting requirements. Recipients are poorly involved in fund governance, and receive scant support in developing adaptation plans. Looking ahead, Oxfam fears that high-income countries will re-label development aid as adaptation assistance, rather than provide additional resources.
Oxfam’s prescription is clear: generate reliable resources from emission permit auctions, or UN-style assessed contributions. Make sure developing countries integrate adaptation into their development plans, then provide budget support. Bundle all adaptation assistance in a single international fund. The fund’s board would answer to the UNFCCC, have a majority of recipient members, and also manages funds for emission reductions, technology development, etc. (This, essentially, is the governance proposal that the G-77 and China have been promoting in the Copenhagen negotiations.)
Oxfam’s report raises important points, but prompts further questions, including on how to manage budget support, and which institutions can deliver.
Calling for budget support and demand-driven assistance is compelling. Reducing the administrative burden on developing countries is an imperative. In addition, most development projects will enhance climate resilience (from water management to social insurance), and many (whether infrastructure or health systems) will need additional funds for climate ‘safety margins’. (The new World Development Report neatly discusses what adaptation may really mean in developing countries.) Thus, where governments have the capacity to produce and deliver a strong and climate-smart development plan, it makes sense to simply fund national priorities.
However, ensuring accountability will pose challenges. Oxfam proposes “international reporting … based upon agreed performance indicators demonstrating increased resilience to climate impacts,” which is a great idea (and one on which CGD has done much work). But how would funding be handled in countries with poor governance? And how would the international community deal with moral hazard in budget support? (Imagine adaptation funds are misused, and do not improve resilience. Then, a drought hits the country. Does the international community use funds needed elsewhere to help?) These questions have plagued aid management for decades. Oxfam’s prescription – community participation in monitoring and “an appeal and dispute settlement body” safeguarding stakeholder interests – is useful, but seems unlikely to put them to rest.
A UNFCCC ‘superfund’ managing all climate funding would enjoy legitimacy with developing countries and may have scale economies. Yet, there may also be significant drawbacks:
The fund’s board would need a very extensive support structure to fulfill its many duties (vet proposals, oversee funding, monitor progress, etc.). Establishing this capacity from scratch would take time, and transaction costs could be high. Relying on a single new fund is also risky: what if the world’s sole adaptation fund ended up being dysfunctional?
At least in the short run, there are thus good arguments for bringing in technical expertise from other actors, under UNFCCC oversight. Regional development banks have much to offer, as do the WTO and OECD/DAC in their fields of expertise, and the private sector, for instance, in auditing. A key question will be the role of the World Bank.
The bank has been very innovative in carbon finance, from pioneering carbon funds to financing forest protection. At the same time, as Nancy noted in her speech, “dominance of decision-making by the high-income countries undermines the bank’s legitimacy,” especially in managing climate funds.
Still, perhaps there is scope for a win-win approach that brings in the bank’s expertise and makes headway on reform of the international financial institutions. Nancy suggests that a separate climate wing of the bank might be set up, with more representative governance. The Clean Investment Funds board structure is a move in this direction, with an equal numbers of seats for contributing and recipient countries.
Such experiments could yield a climate governance structure that works for both contributors and recipients. And bringing climate finance, a major and growing branch of the bank’s business, under a more equitable governance structure could build trust and pilot concepts for broader reform.