D E V E L O P M E N T · C L I M A T E · A N D F I N A N C E Monitoring Climate Finance and ODA 54730 May 2010 INTRODUCTION ISSUES BRIEF #1 Low-carbon investment in developing countries consistent with a +2º Celsius climate stabilization target could cost $139­175 billion a year by 2030. In addition, some This Issues Brief examines the challenges $75­100 billion could be required annually over the next of monitoring financial flows related to 40 years to support adaptation to the inevitable impacts of climate change on developing countries. The resources that climate change. The first part focuses on have been committed so far to address mitigation and tracking, monitoring, and reporting various adaptation in these countries cover just 5 percent of the needs. Combating climate change will require tremendous types of flows, primarily from official devel- efforts and ingenuity to mobilize sufficient resources with- opment assistance (ODA) and other public out delay. It is important that efforts in mobilizing climate finance not erode current development assistance. In the sources but also from private sources. The Copenhagen Accord, developed countries committed second part explores possible ways of themselves to mobilizing "new and additional resources" tracking additionality in ODA flows, with the for climate investments approaching $30 billion for 2010­ 12 and $100 billion a year by 2020. aim of stimulating global discussion on this issue. A more comprehensive support The types and sources of financial flows are extremely broad and include both new instruments to address document on this topic can be found on the climate change as well as shifts in core development and World Bank website at beta.worldbank.org/ investment finance toward low-carbon and climate-resil- climatechange. ient solutions. In this complex landscape, keeping track of financial support for adaptation and mitigation will be a challenge. This is particularly the case in the context of measurable, reportable, and verifiable support to climate action in developing countries. 2 As a background for this discussion, it is important to bear in mind the evolution of the ODA concept. The original ODA is currently defined as the flows to countries and territo- ries on the Organization for Economic Co-operation and concept was developed within the context of increasing Development's (OECD's) Development Assistance Commit- income and productive assets. This context has changed tee (DAC) List of ODA Recipients and to multilateral devel- over time to include other development concerns such as opment institutions, on the condition that they are: environmental sustainability. When recording ODA flows · Provided by official agencies, including state and local that address climate change mitigation or adaptation, the governments, or by their executing agencies; and challenge is to assess the incremental value of the contribu- · Each transaction of which tion concerned. Ways should be found to: a) is administered with the promotion of the economic development and welfare of developing countries as its main · Channel funds to meet these incremental needs objective; and b) is concessional in character and conveys a grant element (driven by efficiency, effectiveness, fairness, and of at least 25 percent (calculated at a discount rate of 10 equity concerns) percent). · Report on financing allocated to meet these incre- mental needs. mechanism), Global Environment Facility (GEF) grants (multilateral concessional climate-change ded- icated funding), and domestic resources that govern- CURRENT PRACTICES AND ments in developing countries are mobilizing (such as CHALLENGES IN MONITORING the announcement by the Maldives of a daily tax on tourism, with proceeds earmarked for climate action). The complexity of the financial and investment flows to support climate action in developing countries can be seen · Underlying finance --the almost 10­20 times larger in Figure 1, which highlights the diversity of sources, chan- amount of financial and investment flows in develop- nels, and types. In light of ongoing discussions on moni- ing countries that are increasingly directed to climate toring and additionality, these can be grouped into two action. These flows come from multiple sources, streams (see Figure 2): public and private, international and domestic (such · Climate finance --the resources to catalyze the climate-smart FIGURE 1 FINANCIAL AND INVESTMENT FLOWS transformation of development FOR CLIMATE ACTION IN DEVELOPING trajectories by covering the COUNTRIES additional costs and risks of cli- mate action, creating an Government budgets Capital markets enabling environment and building capacity in support of adaptation and mitigation as Development Bilateral Multilateral Domestic well as encouraging research, cooperation Finance Finance UNFCCC Private sector budgets agencies Institutions Institutions development, and deployment of new technologies. Climate finance can be mobilized through a range of instruments O cial "New and Development Additional" Carbon markets from a variety of sources, inter- Assistance climate nance CDM Levy national and domestic, public funding the Industrialized Industrialized Industrialized Foreign Adaptation countries' ODA countries' countries' emission Direct Fund and private, such as primary commitments commitments to "new and reduction oblications Investment Clean Development Mechanism additional" nance for climate change (CDM) transactions (essentially private sector flows from indus- Total nance available for climate change mitigation and adaptive initiatives trial countries to developing ones through a market-based Source: A. Atteridge and others, Bilateral Finance Institutions and Climate Change: A Mapping of Climate Portfolios (Stockholm: Stockholm Environment Institute, 2009). 3 climate finance is not reported as such), and the FIGURE 2 MAPPING CLIMATE FINANCE, By complex web of flows (with the possibility of ORIGIN Climate double counting). Table 1 summarizes the major nance monitoring issues along the main categories Carbon Market Resources under UNFCCC identified in Figure 2. (More detailed informa- (chie y CDM) (GEF, Adaptation Fund, etc.) tion, including on amount, is available in the Domestic resources (core budget, scal and support document on the website.) pricing reforms) Climate-speci c concessional funds (CIF, etc.) Going forward, improving monitoring of finan- Domestic International cial and investment flows for climate action will Non-DAC ODA support Philanthropia entail progress on harmonization and consistency of reporting systems. It will also necessitate adopting a dual-tracking system (on both sources Other public and private ows and endpoints), in particular as the many flows Underlying branch out. Both will require continued efforts nance to strengthen the statistical capacity of develop- ing countries. Getting a full view of climate- as foreign and domestic private sector investment, specific and climate-related financial and national development budgets, and international investment flows could undoubtedly help build trust and development assistance). accountability, as recipient countries could monitor how assistance is delivered in line with commitments. In addi- In this complex landscape, getting a full view of climate- tion to identifying and quantifying climate-related finan- related financial and investment flows is a formidable chal- cial and investment flows, this may also help monitor lenge, given the possible inconsistencies across existing progress and facilitate the implementation of domestic reporting systems, the many data gaps (with notably the climate-related priorities. Measuring success in attracting challenge to identify the contributions of underlying climate finance and leveraging underlying finance is crucial finance to mitigation and adaptation, which unlike specific for evaluating which instruments are or may be most appropriate to stimulate climate action. TABLE 1 MAIN MONITORING ISSUES Amount Amount ($bln p.a.) ($bln p.a.) Type of flow climate non-climate Monitoring issues · Multiple and confidential primary transactions Carbon markets (avg. 2006-08) 6.6 ­ · Actual payment and investment flows unknown Resources under UNFCCC (avg) 0.4 ­ ­ · Consistency and double-counting issues (multiple contributors Climate-specific concessional funds (avg.) ~4 ­ and channels) · Additionality · Co-benefits of development activities, notably for adaptation ODA (avg. 2005­07) 3.6 ­ · MDBs do not report yet, in a consistent manner · Non exhaustive coverage (both sources and recipients) Non-DAC donor support (2007) ? ­ · Purposes unclear · Non exhaustive coverage (both sources and recipients) Philanthropia (2007) ? ­ · Purposes unclear Domestic resources ? ? · Very scarce information, not harmonized (core budget, fiscal and pricing reforms) Underlying finance (2007) GFCF ? 3,990 · Non exhaustive coverage FDI ? 522 · Purposes unclear 4 TRACKING PROGRESS -- (UNFCCC) by promoting efforts to reduce or limit green- house gas (GHG) emissions or enhance GHG sequestra- PERCEPTIONS, BASELINES, tion. Partial data indicate that over the past few years DAC BENCHMARKS, AND TOOLS donors have allocated $3­4 billion per year for mitigation- change-related aid (about 3­4 percent of total ODA). As Numerous papers provide different views on the question the application of the Rio Markers by donor countries of how to measure additionality of climate change relative reporting to DAC was not mandatory until recently, trends to ODA. While a number of international financing revealed by them cannot be meaningfully measured until mechanisms currently under discussion could be regarded 2013­14. as additional and reportable under ODA, for a large part of financial flows addressing mitigation or adaptation action this distinction remains challenging. Whichever method DI F F E RI NG V I E WS for monitoring is adopted, it is critical that public financ- ing sources for achieving the Millennium Development Most developing countries consider climate change financ- Goals (MDGs) and climate change action are scaled up ing as entitlement rather than aid. They think that it hand in hand. should be considered as an obligation for those who caused the emissions historically and should not be structured as repayable loans. ODA is meant to help developing coun- TO WHAT E x TE NT DOE S ODA S UP - tries achieve the MDGs, and the global commitment of PORT C LIMATE A CTION? INS IG HT S OECD countries is to allocate 0.7 percent of their gross WITH TH E RIO MA RK E RS domestic product (GDP) to this end by 2015. Funds addressing climate change are not part of this commit- In addition to specific bilateral and multilateral donor ment. Several developing countries have already taken support, which has been critical to mobilizing resources for measures to minimize GHG emissions without jeopardiz- climate action over the last 18 months, ODA can also ing the goals of economic growth and poverty alleviation. deliver climate co-benefits (for instance, energy efficiency These efforts need to be accelerated and scaled up with improvements and natural resources management). additional funds from industrial countries. Tracking these contributions to climate action in full is difficult, with the exception of targeted funds and initia- Many OECD countries have expressed the view that tives (such as the Climate Investment Funds). As ODA is climate financing and development financing are closely also increasingly delivered at a programmatic, strategic linked at the project level and difficult to separate. level (with low-carbon growth or climate resilience as one Therefore all concessional aid irrespective of its use should of the outcomes), matching downstream results to specific be recorded as a part of their ODA. Some countries also upstream support is not an easy task. For instance, it can be see climate finance as part of their ODA contribution to hoped that a policy and institutional reform in solid waste support the MDGs related to environment. management with ODA support translates into better practices and additional investment in more-sustainable The UNFCCC makes it clear that industrial countries waste management with mitigation benefits. The question have to support developing countries in their efforts to is, How to quantify these benefits and how to attribute mitigate GHGs. Specifically, Articles 4.3 and 4.5 of the them specifically to upstream policy and institutional Convention call for developed countries listed in Annex II reform? to provide "new and additional" financial resources to meet the "agreed incremental cost" of developing country imple- To what extent does other than climate-specific bilateral mentation of other measures under Article 4.1. ODA already support climate action? OECD DAC intro- duced a system of monitoring aid that targets the objec- tives of the Rio Conventions (the so-called Rio Markers) As they report their aid activities to the OECD Creditor in 2008 for mitigation and in 2010 for adaptation. The Reporting System database, DAC members also indicate the markers can provide a qualitative answer by identifying aid policy objective of aid activities (in this case, mitigation) and activities that contribute to the objectives of the United score its relevance with one of three values: "0­not targeted," Nations Framework Convention on Climate Change "1­significant objective," or "2­principal objective." 5 Monitoring by multilateral development banks (MDBs): Drawing on their experience in providing economy-wide support for sustainable development and emerging climate finance instruments, MDBs have been responding to growing demand in "climate- smart" investments and in institutional and policy measures. They are a large source of development assistance with significant climate benefits, and they are engaged in sectors that are critical for climate action. It is estimated that over 2006­07 MDBs invested about $4.2 billion annually in low-carbon activities, with an approximate leverage factor of 3.8--that is, activity volumes that compare with bilateral ODA. MDBs do not, however, report their activities in a consistent manner across institutions, and information on adaptation is often scarce. Discrepancies relate to the classification of sectors and categories or to investment figures that combine their own resources with climate-specific resources and instruments (for example, GEF or carbon finance). In addition, similarly to bilateral ODA marked under the OECD DAC reporting system as a "significant objective," there is no indication of a specific share of an MDB's resources (be it ODA or not) that is dedicated to climate action. MDBs are actively improving their monitoring systems in this respect, in particular with regard to consistency across agencies. There are strongly divergent views on the links between the · New climate finance relates to sources from which ODA commitments and targets and the climate finance of they are raised or channels through which they flow OECD countries. Those that have reached the 0.7 percent · Additional climate funds are those that exceed exist- of GDP can easily consider all climate finance as additional. ing targets or flows But for those countries still below the commitments or without explicit targets, this will be more complicated. Funds accumulated from internationally agreed levies--such as the Adaptation Fund from CDM or possible flows from taxes on aviation, maritime transportation, or currency CO M PLEx ITy transactions--can be considered new funding as they are raised in direct response to the climate change challenge. In many situations it is difficult to separate climate action Such funds are not a part of the discussion on additionality from development action, particularly in the case of adap- with regard to ODA. tation. For instance, as can be seen from Table 2, building a seawall against rising waters is clearly an adaptation action, However, should OECD countries for some reason cut their whereas climate-resilient road construction has strong ODA contributions while such complementary climate funds developmental implications. grow, in total there would not be an additional effect. Ter m i nol ogy Cu rre n t mo n it o rin g me t h o d s There are incremental costs due to mitigation and adapta- So far, the Rio Markers system is the most advanced initia- tion to climate change that should not be an extra burden tive to monitor, report, and verify financial and investment to developing countries and should therefore be covered by flows across a range of countries at both ends and in additional funding. However, new funds are not necessarily sectors. Relatively simple and transparent to apply, the additional if they result in a decrease of other ODA. The mandatory application of Rio Markers by all OECD coun- following definitions could be used: tries in reporting their ODA is a step in the right TABLE 2 STRENGTHENING CLIMATE RESILIENCE IN COUNTRy-LED DEVELOPMENT PROCESSES Action Financing Examples Core Development Domestic Budgets plus ODA Investments in education & health, income-generation programs; etc. Climate Resilient Increased ODA plus Additional Accelerated agricultural diversification; climate resilient road construction & irrigation Development Climate Finance systems, climate forecasting; capacity building, etc. Adaptation New & Additional Climate Seawalls; dikes; additional shelters & water-storage Finance Adaptation is a priority for developing countries. Synergies between climate finance and development finance and win-win opportunities can help enable most effective and efficient adaptation. Source: World Bank. "How Will the World Finance Climate Action?", Bali Brunch, April 2009. 6 direction. Those adaptation or mitigation projects marked positive results that lead to a further refinement of the Rio with score 2 can be interpreted as being fully dedicated to Marker system to provide more quantitative data. climate action. However, those marked with score 1 can have several other thematic objectives, as double counting Before systematic data are available from Rio Markers or with other policy objectives is not excluded. It will still similar systems, several agencies (including the World take some years before there are data with sufficient cover- Bank) have embarked on portfolio review exercises (or will age to allow meaningful analysis of all ODA contributions. do so soon) that will provide results on ex-post analysis of In the meantime, tests with more comprehensive scoring their core grant or lending programs. Such ad hoc research or marking systems by some agencies will, it is hoped, yield coupled with regular data on flows to climate-specific funds will help to monitor the implementation of agreements. P O S S I B L E O P T I O NS To make headway in understanding the complexities in monitoring climate finance flows, in improving the accu- racy of tracking them, and in addressing the issue of addi- tionality in relation to ODA, this section offers some topics for consideration in the international discussion on this issue. Re d e f in in g O DA o r Co in in g Ne w Te rms ? Although the context for ODA has expanded from economic development and welfare to include environmen- tal sustainability, redefining ODA would make the moni- toring of long-term trends prohibitively difficult and place a considerable burden on the reporting institutions. For the sake of transparency and comparability of data, it is advis- able to seek other ways to track climate and non-climate contributions within the existing definition. Moreover, all international commitments are based on the current defi- nition and might need to be renegotiated to take changes in the definition into account. A second way to address the issue of additionality via the composition of ODA is to maintain the current definition but work on a system to measure specific ODA compo- nents. OECD countries report resources provided to other countries as ODA if they meet specific criteria rather than being based on channels through which they are provided, as climate change is increasingly considered necessary in the promotion of sustainable economic development and welfare. Recognizing this inevitability and aiming at improving the tracking of climate finance within ODA, the flows for development purposes could be called "ODA Classic." A part of voluntary concessional contributions by OECD DAC countries for climate action will continue to 7 be recorded as ODA. To make a distinc- tion from ODA Classic, such flows could FIGURE 3 "ODA CLIMATE" IN RELATION TO be called "ODA Climate." "ODA CLASSIC" TODAY LATER ON Mitigation will often be linked to measur- able GHG targets and commitments, thus Additional support ODA target making it easier to monitor progress and (e.g., 0.7% GNI by 2015 or interim target) trends in both action and financing. Finding ways to distinguish and track mitigation action as ODA Climate will be Climate relatively straightforward. support ODA On the other hand, assistance to develop- support ing countries for adaptation to climate change is closely intertwined with actions targeting other development objectives, Can additionality can be demonstrated There is provision of additional and tracking the share of ODA Climate in (even if ODA support is growing resources for climate action toward target)? these cases will not be equally accurate. Determining what is incremental in short (in 2004 dollars) against aggregate commitments climate action in development programs even after adjustment for the lower than expected GDP. A and projects will remain a challenge. second challenge is that the 0.7 percent of GDP has a 2015 deadline attached. Therefore, only at that date would For monitoring ODA Climate flows, the same baselines as benchmarking vis-a-vis that target make sense. for ODA could be used. Within this context, it is impor- tant to demonstrate a trend in development assistance that grows in the direction agreed in international negotiations P o s s ib le me t h o d s and that does not have a negative impact on ODA directed Contributions to climate change in ODA flows to core toward MDGs (see Figure 3). multilateral funds and bilateral programs will remain an approximation. Over a period of time, the Rio Markers Benchm arkin g ? introduced to OECD DAC reporting on ODA will provide a basis for comparing trends in overall contribu- Members of the European Union have set interim targets tions on the one hand and trends in climate financing on for their ODA growth before reaching the collective target the other. The mandatory and consistent application of Rio of 0.7 percent of GDP by 2015. EU Members are aiming Markers by all OECD countries in reporting their ODA to reach a collective total of 0.56 percent of GNI in net could advance the process of distinguishing and tracking ODA with a minimum country target of 0.51 percent in contributions to emerging climate-specific funds as ODA 2010. Such targets could provide a baseline for measuring Climate before more-accurate tracking methods can be the change in the contributions of such countries with agreed upon. regard to climate financing as well. Interim targets until 2015 might be politically sensitive, as countries with ambi- Also, contributor, recipient country, or sector-specific port- tious interim targets may be penalized for such an ambi- folio analysis can provide useful indications of trends in tion. Benchmarking vis-à-vis the 0.7 percent of GDP will the implementation of international commitments. be more politically feasible, as it is universal and applicable to all countries, but technically challenged as many coun- tries are below the target today. The expected ODA level As there is currently no universal agreement on ODA for 2010 is $108 billion (in 2004 dollars), an increase of targets, one possible option could be to design and intro- $28 billion--or 35 percent in real terms--over 2004, with duce voluntary guidelines for appropriate levels of addi- the ODA/GDP ratio rising from 0.26 percent in 2004 to tional climate finance based on agreed criteria (mixing an estimated 0.32 percent in 2010. Despite this strong ability to pay and emissions record), and then use them to performance, ODA for 2010 is expected to fall $18 billion track trends by country. 8 CO N C LUS IONS NExT STEPS As this process continues, somewhere between 2013 and The development community can directly or indirectly 2015 it will be possible to assess how OECD countries contribute to improving the monitoring of and access to have met their commitments in ODA in general and in climate finance through, for instance, the following climate finance in particular. At that time, the issue of activities: baselines and targets can be revisited. An assessment of the usefulness of the Rio Markers and the introduction of a · Make the use of Rio Markers for both mitigation and well-tested, more refined, and comprehensive system adaptation compulsory and consistent in reporting on should be considered then. all ODA flows by OECD DAC countries. · Non-DAC donors may wish to consider establishing In summary, the technical solutions for monitoring official systems that record and report on their ODA in a ODA and non-ODA financial flows toward climate action way comparable to that of OECD DAC countries. will most likely be a combination of: · Build capacity in developing countries to assess the magnitude of the public DAC and the non-DAC and · Current and improved Rio Markers private sector flows related to climate action. · More consistent reporting by MDBs · Development agencies such as the U.N. Development · Reporting by the UNFCCC on new funding through Programme (UNDP), the U.N. Environment levies and so on. Programme, and MDBs should continue to strengthen the capacity of CDM Designated National Increasingly reliable, comprehensive, and transparent reporting Authorities to record data on the status of CDM is needed to demonstrate that new climate finance instruments transactions and progress on CDM investments in are not introduced at the expense of those targeting other developing countries. objectives. · MDBs should improve the monitoring and reporting on mitigation and adaptation actions in their own Providing exact and comparable figures on additional portfolios in a manner consistent with, but not contributions to fund incremental expenses resulting from restricted to, methodologies adopted by OECD adaptation to and mitigation of climate change is extremely DAC. complex and probably not possible in an aggregated fashion. · Monitoring non-ODA climate financing flows (espe- Experience with the GEF and carbon finance has demon- cially non-DAC countries concessional funds and strated that proving the incremental costs related to climate private non-concessional flows) would help any future action while maintaining the environmental integrity of assessments of progress made. projects remains a challenge. In this context, while improv- · The UNDP/World Bank joint Climate Finance ing the monitoring of inputs and development of climate Knowledge Platform, complementing the UNFCCC- finance flows, it is crucial not to lose sight of the key objec- led Financing Platform, will be launched in 2010 to tive of all ODA: sustainable development outcomes. improve developing countries' access to information on sources of finance for climate action, best prac- tices, and tools for investment decision making. D E V E L O P M E N T · C L I M A T E · A N D F I N A N C E Authors: Ari Huhtala, Sr. Environmental Specialist; Stefano Curto, Sr. Economist; and Philippe Ambrosi, Environmental Economist The World Bank Group Tel: 202-473-1000 1818 H Street, NW Fax: 202-477-6391 Washington, D.C. 20433 USA Internet: www.worldbank.org/climatechange Help desk: climatehelp@worldbank.org