Fast-Start Finance: Where Do We Stand at the End of 2012?

This piece was co-authored with Smita Nakhooda of the Overseas Development Institute, with inputs from Noriko Shimizu (IGES) and Sven Harmeling (Germanwatch).

Developed countries self-report that they have delivered more than $33 billion in fast-start climate finance between 2010 and 2012, exceeding the pledges they made at COP 15 in Copenhagen in 2009. But how much of this finance is new and additional? Developing countries and other observers have raised questions about the nature of this support, as well as where and how it is spent. Independent scrutiny of country contributions can shed light on the extent to which fast-start finance (FSF) has truly served as a mechanism to scale-up climate finance. Our organizations have analyzed the FSF contributions of the United Kingdom, United States, and Japan, and analysis of Germany’s effort is forthcoming.

Our analysis revealed four key insights into the FSF experience:

1) Developed Countries Have Ramped Up Climate Support

The FSF period has been a difficult one: Developed countries pledged their climate finance support at the advent of unprecedented economic difficulty brought on by the 2008 financial crisis. Nonetheless, developed countries have sustained support for climate change adaptation and mitigation in developing countries, despite fiscal austerity measures that have substantially cut back public spending. Indeed, all of the countries we reviewed appear to have significantly increased their international climate spending since 2010.

In many cases, data limitations impede a direct or accurate comparison of fast-start spending to related expenditures before 2010. But the UK appears to have increased its climate finance four-fold relative to environment-related spending before the FSF period. Germany has nearly doubled climate-related finance. Japan previously mobilized $2 billion per year in climate finance through the Cool Earth Partnership; under FSF, it reports average spending of more than $5 billion per year. Finally, through its Global Climate Change Initiative, the United States has increased core climate funding from $316 million in FY09 to an average of $886 million per year in FY10 to FY12.

2) But Countries Are Counting Very Different Things

The contributions we examined differ by an order of magnitude, from Germany’s $1.6 billion to Japan’s $17.4 billion. These figures, however, are not comparable, as there is major divergence in what forms of finance countries have “counted.” A large share of Germany’s FSF is directed through its International Climate Initiative, which is indirectly financed through revenues from its emission-trading mechanism. With the exception of its $615 million loan contribution to the Climate Investment Fund, all of its finance is provided as grants. By contrast, Japan and the United States include as FSF a large share of export credit and development finance for low-carbon infrastructure. In Japan’s case, some efficient fossil fuel options are also supported through these channels. Although the UK and Germany also have active development finance and export credit programs (which have sought to promote low-carbon technologies), they have not counted finance delivered through these channels as climate finance.

3) It’s Not Clear that the Full Spend Meets Agreed Objectives

There is more to the FSF commitment than the top-line $30 billion collective pledge. FSF was also intended to achieve a “balanced” allocation between adaptation and mitigation, to prioritize the most vulnerable developing countries, and to be new and additional.

Support for Adaptation

While support for adaptation activities has increased significantly over the FSF period, the majority of climate finance is directed to support mitigation. In the four countries we examined, the share of FSF for adaptation ranged from about 20 percent in Japan and the United States to about 35 percent in the UK and Germany. In practice, of course, adaptation and mitigation activities may be quite interlinked. A substantial factor has been contributor countries’ focus on instruments and channels that draw in private sector co-finance. Directing and identifying private finance tends to be much more straightforward for mitigation than it is for adaptation.

Prioritizing the Most Vulnerable

International agreements also stipulate that FSF should focus on the developing countries that are most vulnerable to the impacts of climate change, including Least Developed Countries (LDCs), Small Island Developing States (SIDS), and African countries. Forty percent of the UK’s contribution is directed to Africa. Of the U.S. contribution, 20 percent supports projects that occur at least in part in LDCs, SIDS, or both. But the United States does not always specify precisely how much finance is directed to individual countries (in part because it supports many regional programs). About 6 percent of Japan’s FSF is directed to LDCs and SIDS.

The Extent to Which Finance Is New and Additional Is Unclear

While funding has increased, many countries seek FSF “credit” for projects and programs that they were previously supporting. For instance, the United States counts its contribution to the Montreal Protocol Fund, which it has been supporting since the early 1990s, as FSF. A significant share of Japanese FSF was pledged prior to 2010 through initiatives such as the Cool Earth Partnership. All four countries count contributions to the Climate Investment Funds (CIFs) since 2010, although countries pledged to fund the CIFs at a cumulative level of at least $6.1 billion in 2008. These are important programs, for which sustained support is essential, but the pledges were made pre-FSF and can’t be considered “new.”

Furthermore, while efforts to mainstream climate change considerations into wider development assistance and finance programs are essential, it’s unclear that the resultant projects can be considered additional. Likewise, climate finance is not additional to the commitment to increase official development assistance to 0.7 percent of GDP in any of these four countries. Finally, only Germany has clarified how it defines “new and additional” in its self-reporting on climate finance.

4) Strengthening Transparency and Predictability of Long-Term Finance

There is a growing recognition of the need for better information on how climate finance has been spent, particularly to understand and increase the effectiveness of scarce public finance.

We observe improvement in the reporting practices of some countries over the past year. For example, in its 2012 FSF report, the United States presented a consolidated analysis of its contribution rather than more than 100 separate recipient country fact sheets. The UK and Germany, in part as a result of the common EU reporting approach, provide substantial detail on the projects they support in the form of a project list. Germany goes one step further by making this list easily accessible online. Indeed, Germany went so far as to commission an independent review of its FSF contribution.

Overall, however, it’s not presently possible to say with confidence how much funding has been disbursed or where it’s going. Further action to improve transparency on the delivery of climate finance would advance our understanding of these issues. Efforts to develop a common report framework under the UNFCCC are one opportunity if high standards can be agreed upon. Specifically, consistent FSF reports are needed that provide detailed lists of projects and programs supported—including the administering agency and any channeling institutions, the recipient institution, the financial instrument, the beneficiary country, and (where feasible) information on disbursement status. Countries currently report this information to varying degrees, but there is no consistency.

All the transparency in the world, however, is not a substitute for scaling-up finance in order to meet the increasingly urgent challenges of mitigating and adapting to climate change. Many observers warn that we are heading toward a “climate fiscal cliff” at the end of the fast-start period. While the economic circumstances in developed countries are difficult, there is a real need to find new sources of finance to meet long-term needs. This will require political commitment and leadership at the national level, as well as enhanced cooperation globally.