February 2012

December’s UN climate change summit in Durban, South Africa, failed to take the hard decisions that would meet the global goal of holding global heating to 2 degrees centigrade, the maximum level climate scientists consider compatible with avoiding catastrophic runaway climate change. Here’s what the summit did: postponed until 2015 the deadline to commit to effective emissions reductions; designed an institutional structure for climate finance, the Green Climate Fund, without finding sources of funding; created institutions and processes to manage adaptation, again without funding; and left open major questions on REDD+, the UN mechanism to pay countries to preserve and better manage their forests.

Little noticed outside the climate policy community was the adoption of a new “Durban Platform” that essentially scraps the “Bali Action Plan,” a 2002 agreement to move ahead on several fronts in tandem. While this disappointed some advocates, this may open the way for more rapid progress on some issues. Certainly the old approach, which tried, for example, to link reductions of heat-trapping gasses to the provision of funding for adaptation, has not worked well.

So what does the international climate change policy agenda look like for 2012? This letter provides an overview of three areas where finance plays a central role: adaptation assistance, forest protection, and climate finance for emissions reductions.

Adaptation

While Durban focused mainly on setting up institutions, like an Adaptation Committee, to promote knowledge sharing, negotiators have yet to solve the problem of raising money for vulnerable developing countries—those that will suffer the worst impacts of climate change and that are least resilient, lacking policies and institutions to cope. Nor has there been much systematic discussion of how that money would be allocated.

There has been progress on the analytic under-pinnings of such an allocation process, such as CGD’s online tool, Mapping Impacts of Climate Change. David Wheeler, who retired from CGD last month but remains affiliated with us as a senior fellow emeritus, has combined physical and institutional vulnerabilities into an index ( Quantifying Vulnerability to Climate Change: Implications for Adaptation Assistance) that can be used to allocate financing for adaptation. The index was a focus of a meeting in Paris last November organized by CGD and Fondation pour les Etudes et Recherches sur le Développement International on climate vulnerability indices. The meeting brought together experts from a range of organizations who have such indices.

At a recent discussion of Climate Change Adaptation in a Post-Durban World at the Brookings Institution, CGD president Nancy Birdsall made a presentation based on a forthcoming paper that she and I have jointly authored. As Climate Science Watch reported after the conference, Nancy argued that “adaptation funding involves fundamental issues of international equity, economic justice, and moral obligation. Developed nations have an obligation to take up the burden of payment, and to ensure that the benefits of payment are shared equitably within low-income countries. This is likely a matter that cannot be left to the for-profit market and will require public funding.”

REDD+ (Reducing Emissions from Deforestation and Land Degradation and promoting sustainable forest management)

In a recent blog in Foreign Policy, my CGD colleague Charles Kenney noted that while negotiators in Durban hashed out a number of issues related to REDD+, they are still a long way from a final agreement. Louis Verchot, Principal Scientist at CIFOR, noted “We are seven years into REDD and we’re still looking at what the options are. We’re not making the hard decisions.”

Questions remain as to which countries would receive funding, how much they should get and how to avoid penalizing countries that have maintained forests rather than destroying them. The debate continues over whether sources of funding should include private carbon markets or only public budgets.

While negotiators churn away to develop a mechanism to implement REDD+, CGD colleagues David Wheeler, Robin Kraft and Dan Hammer have been analyzing deforestation results on the ground. The team has developed a tool called FORMA (Forest Monitoring for Action) that uses freely available satellite imagery to identify monthly clearing activity in humid tropical forests.

Using FORMA, a tool based on NASA’s MODIS sensor, the team concludes in a recent paper (Forest Clearing in the Pantropics: December 2005-August 2011) that total forest clearing has dropped during the global recession period, 2005-2011, but with enormous variation within countries and across regions. They observe both large declines in forest clearing in some countries (Brazil, Indonesia, Paraguay, Bolivia) and large increases in others (Myanmar, Peru, Malaysia, Venezuela). For more on these surprising findings, see CGD’s Global Prosperity Wonkcast, where David reflects on his recent retirement as well as his work at CGD.

Looking at the factors that determine forest clearing in more detail in Indonesia, the FORMA team, with Susmita Dasgupta and Brian Blankespoor, analyze the role of economic forces and forest conservation practices. Their paper, Economic Dynamics and Forest Clearing, concludes that economic factors such as prices and demand for forest products, exchange rates and real interest rates all have an important influence on rates of forest clearing. The availability of communications infrastructure, zoning, rainfall and terrain slope can also play a role. Until the time when a full fledged REDD+ incentive scheme is in place, forest conservation programs will need to factor in these other determinants of forest clearing.

To figure out how to determine funding levels using the REDD+ mechanism, the focus has been on defining baseline forest cover and establishing “reference emissions levels,” measuring actual emissions from different kinds of forests and even the same kind of forests with different slopes and precipitation.

A more straightforward approach proposed by Wheeler and his team would pay countries each month if they manage to keep deforestation at a rate below that which would be expected given long-term development trends. As countries get richer they also clear less forest. By the time a country's per capita gross domestic product hits around $10,000, it is likely to see a zero rate of net deforestation. In From REDD to Green: A Global Incentive System to Stop Tropical Forest Clearing the team proposes that if a developing country manages to slow its rate of clearing, and deforests less than its average income would suggest in a given month or year, it would get paid. FORMA could provide the data to make such a scheme workable.

Climate Finance

The Durban meeting moved ahead with setting up a new institution to manage climate finance, the Green Climate Fund, without actually mobilizing any new funding. Given the magnitude of financing that will be needed to reduce emissions (mitigation), respond to climate impacts (adaptation), and to develop and transfer new technologies, most analysts conclude that there must be an important role for private finance. This continues, however, to be hotly debated within the UNFCCC negotiations.

There are signs that the private sector is becoming discouraged and going its own way. We were therefore encouraged to see that the International Finance Corporation (IFC) and DFID recently announced the creation of the Climate Catalyst Fund, "a private equity fund of funds focused on providing growth capital for companies delivering resource efficiency and low-emission products and services in emerging markets."

Similar to the Green Venture Fund proposed by CGD, the Climate Catalyst Fund will seek to assemble a diversified portfolio of private equity funds managed by established and emerging fund managers. It also intends to make direct co-investments in early and growth-stage companies that are developing innovative technologies and helping reduce climate change. The Climate Catalyst Fund can provide a precedent for proposals like the Green Venture Fund, demonstrating demand from private investors for this type of fund-of-funds vehicle with public backing.

Michelle de Nevers