Money in Copenhagen

The Copenhagen climate negotiations are at heart about countries agreeing on reduction of carbon emissions. But they are much more. A central element as far as developing courtiers are concerned is money. How much money are developed countries prepared to put on the table for developing countries so as to bring them into the negotiations. Thus far, developing countries are asking for what many regards as large sums (perhaps $200-$300 billion per year after 2012), while developed countries are talking of much more modest amounts ($10 billion per year after 2020).

What is confusing about this wrangling over money is that it is being conducted within the language of the climate talks, rather than simply being acknowledged as the financial transfers to poorer countries that they are. The debate is focused on the size of two funds, the Adaptation Fund and the Innovation Fund, which were established as part of the 1997 Kyoto Protocol. The Adaptation Fund is the major focus of the discussion.

As originally conceived in Kyoto the Adaptation Fund was to help developing countries to adapt to climate change. The term “Adaptation” is somewhat vaguely defined, but refers to repaired infrastructure (road, bridges), repaired damage to eco systems, dealing with sea level rise (water defences), and other such expenditures. The funds held in the Adaptation Fund, and Fund activities were to be overseen by a Board comprising a subset of UN members countries.

Countries would then apply to the UN Fund on a project by project basis, justifying each application with the specifics of anticipated damage and estimated costs of adapting to them or offsetting them.

The Fund as it has emerged since 1997 has had two main features. One is that it has been painfully slow to set up, and has only come into receipt of funds this year. The second is that the amount of money in the fund is very small relative to the current requests of the developing countries. The Fund receives the proceeds of a 2% levy charged on all projects administered as part the emissions trading between developed and developing countries that the Kyoto embodies under the Clean Development Mechanism.

The result has been a $30-$60 million dollar a year fund only coming in to operation effectively this year with limited administrative experience of its operation, criteria to be used in selecting successful projects, oversight and supervision.

The problems this creates are several. First, for a fund perhaps poised to grow from to $200-$300 billion/ year its operational history is extremely limited, and seemingly the dramatically changed size of the fund would at least in its initial years, overwhelm its operation. How legitimacy of applications to the Fund and credibility of financial estimates of cost of adaptation are to be established remains unclear. And with so many countries involved as potential beneficiaries, the quantum increase in the Fund could set off a stamped as countries try to get funds before others.

Second, it is far from clear that the Fund as currently setup is the best way to achieve the objective of facilitating adaptation. Funds are to be awarded largely in anticipation of damage. A more effective mechanism could be for funds to be used to subsidize insurance for climate related damage, with payments from the Fund to be made expost. This would allow the Fund to supplement private sector insurance and other financial arrangements, which will surely grow and multiply with accelerating damage from climate change. The Maldive Islands, for instance, has established a sovereign wealth fund to buy land in India to be used by Islanders when they homes are under water. Financial markets globally may become increasingly dominated by climate related instruments; global flooding bonds, global warming bonds bought by governments and private citizens from private sector financial institutions with payoffs made when physical damage (sea level rise, temperature change) occurs. If the Adaptation Fund money were coming with this activity it might be more effectively spent.

Third, if the money in the Adaptation Fund is effectively a system of financial transfers to get developing countries to join in global commitments, it might be better to explicitly recognize these transfers as such. The concern is that because the Adaptation Fund exists and climate change has political momentum as an issue, that developing countries will understandably use this structure to get money ever if the money is in effectively deployed. If the money were simply given as transfers, developing countries governments could pay off debts, cut distorting taxes, provide money to the poor and choose among a range of options.

A lot of money is being talked about in Copenhagen, and understandably poor developing countries want it. To simply funnel it through an existing, small, untested and potentially poorly focused mechanism seemingly loses the opportunity for potentially more worthwhile deployment.