The road to UNFCCC COP 18 and beyond - Energy and Climate Change Contents

7  Finance

Green Climate Fund

66. Established through the Cancun Agreements, the Green Climate Fund (GCF) aims to deliver large scale financial resources to developing countries for climate change adaptation and mitigation. A key outcome of COP 17 in Durban was the decision to adopt the governing instrument for the GCF.[91] Developed countries "committed to provide funds rising to US$100 billion per year by 2020".[92]

67. Given the severe fiscal constraints in most developed countries, it is politically and economically unlikely that budgetary contributions amounting to US$100 billion per annum by 2020 will be reached unless an innovative mechanism is developed to deliver them. The UN Secretary General's commission into finding a solution to this problem suggested that for every dollar from international development banks, three to four dollars could be raised from the private sector—in this way the target could be reached.[93]

Private investment

68. It is important to encourage private funds to assist with climate finance. Prof. Jouni Paavola said that "private funding alone will not cater for all needs, and excessive reliance on public, politically pledged funding has its own problems."[94] Sir David King stated that instead of public funds the EU should "push for reliable and innovative sources of long-term climate finance to be established."[95] He suggested these innovative sources could include "a price on the emissions of aviation and/or maritime bunker fuels, a financial transaction tax, and auctions of emission allowances in regional trading schemes such as the EU-ETS."[96]

69. Prof. Jacobs has emphasised the role of public finance in leveraging private investment.[97] He elaborated in oral evidence, remarking that, for example, the multilateral development banks could give a capital multiple, allowing more to be borrowed and then lent. Financial instruments could be designed to take some of the risk away from private investor, using public finance to partially cover the risk. These investment "risk-mitigation" measures could also include guarantees and co-investments that could be used for both mitigation and adaptation.[98]

70. DECC noted that they plan to use public funding to "add value, test out and demonstrate approaches that can be scaled up and replicated by others, to enable longer term shifts in low carbon investment to happen." In addition they reported that:

Where technologies are further along the innovation chain, e.g. solar PV, or abatement costs are cheaper, e.g. energy efficiency, we are supporting interventions that unlock private capital and create market pull, by addressing non price barriers, testing innovative business models and partnerships with the private sector.[99]

71. We recommend that the United Kingdom exploit its expertise in financial services to develop innovative mechanisms for levering in more private investment to help achieve the US$100 billion target to make up for the almost inevitable shortfall in public funds.

Balance with mitigation

72. In terms of risk management, the more mitigation of emissions occurs now, the less adaptation will be required later. Spending 50% of funds on mitigation and 50% on adaptation has been working well up to this point, but we were warned that if global mitigation efforts are insufficient, adaptation will be very costly and this 50/50 split will have to be revisited.[100]

73. However, we also heard from academics that there is currently a shortfall in adaptation funding internationally. Adaptation has only recently risen up the international agenda as a deserving recipient of funding, so is not yet receiving enough money.[101] However, in this country, DECC stated that "the UK is committed already to spending up to 50% of its climate fund on adaptation measures".[102]

74. We applaud DECC for pledging up to 50% of its climate fund on adaptation and recommend this is maintained.


75. WWF-UK recommended that the UK and other EU member states should "follow Germany's lead and allocate a minimum of 50% of aviation ETS revenues for international climate finance.".[103] Sir David King added that it would create good-will with other nations if the some of the funds generated from the auctioning within the EU-ETS formed part of the Green Climate Fund.[104]

76. When the Minister of State, Gregory Barker MP was asked what DECC's view was on using EU ETS revenues for climate finance, he responded "I think it is more the Treasury have a view on that."[105] He then added that "when we came into power as a Coalition the forecast revenues for the ETS were already spent.".[106]

77. We note that witnesses have argued that the revenues from EU ETS should be allocated for climate finance and we recommend that the Government consider matching these revenues by an increase in the budget for the UK's International Climate Fund.


78. A multiple instrument bureaucracy with legally binding agreements and various funds for adaptation and mitigation is clumsy. A single cap-and-trade instrument could create the cash flows—from the developed to the developing world —that are needed through the tradable commodity of carbon dioxide permits. However the introduction of such an instrument is likely to be a very long way into the future and Sir David King, a leading proponent of this idea, also said that there is a need for other funds "in the shorter term". [107]

79. We heard from other witnesses that especially for small communities (when an economic case can be difficult to make for adaptation), it is important that in the intervening period until the adaptation funds (Green Climate Fund, Fast Start Finance) are developed and put in place, some public money is still available as it can be used to leverage additional funds from the private sector.[108]

80. Governments themselves are not going to adapt even though they need to implement policies for adaptation. It is businesses, communities, local authorities and households who will be doing the adapting. They need access to money. An overarching approach to climate finance (as suggested by Sir David) may be attractive, but its bureaucracy may not guarantee that those in most need are able to access the fund. Hence, having a set of different sources and types of funding is important.[109]

81. In his evidence the Minister said that DECC are not in favour of "a complicated institutional architecture". He added that "there is scope within the UNFCCC framework to have a more streamlined approach."[110] We recommend that DECC clarify how the international finance architecture could be streamlined.

91   UNFCCC, "Green Climate Fund-Report of the Transitional Committee to COP 17", 18 November 2011 Back

92   "The Cancun Agreements: Financial, technology and capacity building support", UNFCCC, April 2012 Back

93   Q 103 Back

94   Ev 91 Back

95   Ev 84 Back

96   Ev 86 Back

97   "Leveraging private investment: the role of public sector climate finance", Overseas Development Institute, April 2011 Back

98   Q 153 Back

99   Ev 63 Back

100   Q 49 Back

101   Q 155 [Prof. Paavola, Dr. Falkner] Back

102   Q 211 Back

103   Ev 77 Back

104   Q 104 Back

105   Q 203 Back

106   Q 206 Back

107   Q 103 Back

108   Q 38 Back

109   Q 150 [Prof. Jouni Paavola] Back

110   Q 198 Back

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© Parliamentary copyright 2012
Prepared 25 July 2012