The Little-Known Fund at the Heart of the Paris Climate Agreement

The Green Climate Fund is supposed to finance the world's shift away from fossil fuels. But fossil fuel-funding banks are eager to get on board.

Posted on 07/19/16
By Oscar Reyes | Via FPIF
The Green Climate Fund’s activities include funding adaptation plans such as the one to protect coastlines in Tuvalu, a country that climate change threatens with extinction. (Photo by Joe Hitchcock, Creative Commons License)
The Green Climate Fund’s activities include funding adaptation plans such as the one to protect coastlines in Tuvalu, a country that climate change threatens with extinction. (Photo by Joe Hitchcock, Creative Commons License)

Green Climate Fund — now there are three words guaranteed to raise the hackles of Republican members of Congress.


The fund is little known outside the world of climate skeptics and policy wonks. Yet the $10.3 billion fund, to which the United States has pledged $3 billion over four years, is supposed to play an important role in delivering on the Paris Agreement, the international climate treaty signed last December as part of the UN Convention on Climate Change.


The Paris Agreement, it’s worth recalling, is supposed to limit climate change to “well below 2 degrees Celsius of warming,” and aspires to a 1.5 degree target that most nations consider to be a safer limit for avoiding the worst impacts of dangerous climate change. There’s an underlying recognition that human actions produce the greenhouse gases that cause climate change, and that the historic responsibility — and much of the current responsibility — is borne by the United States, Europe, and other rich countries.


The UN convention requires rich countries like the U.S. to take a lead in cutting their own emissions (“mitigation”), as well as to provide money and technology to help poorer countries to do the same. They should also pay for measures that help poorer countries adjust to the effects of climate change that are already happening or are unavoidable (“adaptation”). This money is called “climate finance.”


Climate finance, in its original meaning, refers to the transfer of public resources from richer to poorer countries. Mitigation finance of this sort is estimated at around $15 billion annually, but what is actually needed is upwards of 20 times that amount. The adaptation financing gap is even starker, with around $5 billion per year flowing from richer to poorer countries, compared with the $150 billion annually that may be needed by 2020 — or the $500 billion needed by 2050 as the climate crisis worsens.


The Green Climate Fund will play only a small role in plugging these huge financing gaps. Its initial pledges amount to around $2.5 billion per year from rich countries, and it’s likely that a significant share of this is recycled from international aid budgets. The fund has so far allocated funding of just over $400 million.


An Opening for Banks

Creating the GCF was about more than just delivering new money, however. The GCF was a product of discontent over how climate finance was delivered. But while governments agree that the existing channels of funding are inadequate, they have contradictory accounts of why this is the case.


Some rich countries were looking to reduce the amount of public money they’re expected to provide by talking up the fund’s role in attracting private finance, while other, poorer countries called for far larger contributions. Some countries were concerned about how the World Bank and the big regional development banks had come to dominate the world of climate finance. Others — again, mainly the richer countries — wanted to consolidate the grip of these big financial institutions, to ensure that they could continue to have the leading say in how their contributions are spent and invested. But the fund, in its founding documents, spoke of the importance of “country ownership,” with decision-making largely devolved to the countries where funded activities take place.


The Green Climate Fund was born with these key issues unresolved. We can see the fallout in the workings of its governing board, which has 24 members drawn equally from developed and developing countries and operates exclusively by consensus. Meetings have often run into the small hours of the morning, with key decisions fudged or postponed. Voting is off the cards because they can’t agree on what system to use.


The resulting ambiguities in the fund’s rules could hand considerable power to its administrative secretariat to shape it in its own ideal image. That currently includes a secretariat staff of just 45 people, and a similar number of consultants — most of whom have a background in international financial institutions or the private sector. But recruitment problems, and the impending departure of the fund’s executive director (and two of four other directors), have left the secretariat over-stretched and directionless.


The original vision for the Green Climate Fund, set out in its founding charter, was that National Designated Authorities, or NDAs — government bodies with a responsibility to consult widely about national climate plans — should be key to shaping the fund. But these were sidelined in the tortuous process of negotiating the fund’s basic rules of operation, and in their place a series of other partners — dubbed “accredited entities” — have taken over that key role.


These accredited entities include the international financial institutions, commercial and national banks, government ministries, non-governmental organizations, and development agencies charged with managing and overseeing activities funded by the Green Climate Fund. Only accredited entities can submit funding proposals to the board. The 33 partners approved so far include the World Bank, all of the traditional multilateral development banks, and the UN Development and Environment Programs.


Most controversially, the Green Climate Fund has also signed up Deutsche Bank, HSBC, and Credit Agricole as partners, despite their record as leading fossil fuel financers and role in crashing the global financial system.


Over 80 percent of the funding allocated by the fund’s board already, or in the next year, is likely to pass through these big international institutions. In part, that is the result of pressure to finance projects rapidly, with the board having set an ambitious goal of allocating $2.5 billion by the end of 2016.


Returns on Investment

The rhetoric surrounding the GCF stresses its potential to spur “transformative” change. “GCF projects should not just be plain vanilla,” according to Zaheer Fakir, the South African co-chair of the fund’s board, but some of the projects already approved look so bland as to be virtually flavorless.


The largest slice of funding approved to date — a $49 million loan to CAF, the Latin American Development Bank, for a large solar power plant in Chile — is a case in point.


Solar developments in the Chilean desert are so numerous that they’ve outstripped the capacity of the local grid, causing producers to give electricity away for free. Nor does the project benefit vulnerable communities: The vast majority of electricity produced in northern Chile goes to the mining sector, while the company implementing the project is based in Bermuda for tax avoidance purposes. Moreover, the project had been stuck in its development phase for six years before CAF submitted it to the Green Climate Fund. By all appearances, the fund is being used as a cheap source of finance for some business-as-usual activities that development banks have declined to support.


Another risk is that the Green Climate Fund could put Wall Street banks and financial innovation ahead of innovative approaches to helping the poor and vulnerable address climate change.


While most of the activities funded so far rely on grants, the United States (and other developed countries on its board) hope that the fund will open up new markets for big banks and investors. Under this model, the fund could reduce the risks of clean energy investment in emerging markets, and could even help redirect some share of the trillions invested by pensions, equity funds, and big international banks.


But international climate finance at the Green Climate Fund is a poor and inappropriate means to reform the financial sector, which is mainly a job for national policies and regulations. The Green Climate Fund will remain a small player at a table where the big banks and investors hold most of the cards.


The fund’s next board meeting in October will see Deutsche Bank angling for support for a renewable energy investment fund, while the European Investment Bank is looking to the fund to support the expansion of a “fund of funds” that it runs out of tax-friendly Luxembourg. That would, in turn, support other investment funds focused on renewable energy and energy efficiency, but initial project documentation suggests it could also back controversial biodiversity offsets and biofuels. These types of schemes, respectively, stand accused of privatizing nature and fueling land grabs.


If the Green Climate Fund backs these big investment funds, the likelihood is that it would be subsidizing already profitable investments, while providing some reputational “greenwash” to these banks along the way. Pursuing this model would likely lead to the fund chasing after a high credit rating, as advocated by the fund’s former private sector director. That would make it less likely to offer grants for adaptation or fund climate projects in some of the world’s poorest countries that investors might deem too risky, but which are core to the purpose of the fund in the first place.


Local Input Makes the Difference

However, other signs are far more promising.


The first private sector project to be approved, a renewable energy investment fund in East Africa run by a non-profit company, hopes to direct money to “early stage” local companies to provide off-grid clean energy for rural communities. It puts considerable emphasis on plugging gaps that can hold back investment, such as training for the local financial sector. It also offers a program to protect consumers from losses if start-up companies fail to deliver — the type of measure that could increase confidence in local suppliers and help to accelerate the uptake of renewables.


On the adaptation side, some of the fund’s initial activities also indicate that a positive start has been made. A $38 million scheme to protect coastlines in Tuvalu is central to the country’s adaptation plans. Though it will directly benefit just over 3,000 people, that’s around one-third of the population of a country that climate change threatens with extinction.


Another project to help smallholder farmers in Sri Lanka drew praise from citizens’ groups in the country, who noted that it had been “developed in full consultation with local communities and draws from [their] experience” — a marked contrast to the usual complaints that civil society level at development banks.


The common thread is that the Green Climate Fund could succeed if project developers go the extra mile to consider local needs. Achieving this won’t be easy, given the marginalization of the national institutions (i.e. NDAs) that could have steered the fund in this direction. But it is essential if the fund is to deliver on the national contributions at the heart of the Paris Agreement. Financing national plans is the core purpose of the Green Climate Fund, as the largest “financial mechanism” of the UN Climate convention.


Confusingly, delivering on national climate plans won’t actually deliver on some of the larger climate aspirations that are written into the Paris Agreement, because there is a huge gap between what individual countries have promised and the collective goal that they have signed up to. The Paris Agreement is so full of holes that it will leave us far short of where we need to be to address climate change.


On climate finance, the Paris Agreement encourages “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” But that is a job for domestic policy and regulation in developed countries: phasing out fossil fuel subsidies, regulation on emissions limits, better public transport and the like. The Green Climate Fund will never be a significant player in shifting the trillions of dollars that need to be invested in cleaner, greener infrastructure — let alone reorienting the global economy so that it can better deliver public needs rather than short-term profits.


But the fund could — and should — play an important role in funding measures that reduce the harm climate change does to some of the world’s poorest people. Paradoxically, thinking big on climate change means thinking smaller on the Green Climate Fund.


Oscar Reyes is an associate fellow at the Institute for Policy Studies.

This article first appeared at the FPIF. Click here to go to the original.

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