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Wednesday, May 11, 2011

International Climate Change Financing: Needs, Sources, and Delivery Methods

Richard K. Lattanzio
Analyst in Environmental Policy

Jane A. Leggett
Specialist in Energy and Environmental Policy

Many voices, domestic and international, have called upon the United States to increase foreign assistance to address climate change. Proponents maintain that such assistance could help promote low-emissions and high-growth economic development in lower income countries, while simultaneously protecting the more vulnerable countries from the effects of a changing climate. Recent studies estimate the needs for climate change financing in the developing world to range from US$4 billion to several hundred billion annually by the year 2030. The United States has pledged funds in such fora as the United Nations Framework Convention on Climate Change (UNFCCC, 1992), the Copenhagen Accord (2009), and the UNFCCC Cancun Agreements (2010), wherein the wealthiest countries, in aggregate, agreed to provide up to $30 billion in “fast start” financing for the 2010-2012 period and to mobilize $100 billion annually by 2020. Pledged funds are to come from a wide variety of sources, both public and private, bilateral and multilateral, including alternative sources of finance. Lower income countries have sought assistance that is new, additional to previous flows, adequate, predictable, and sustained.

The fundamental dispute concerning international financing for climate change centers upon who should pay for it and how. The debate has been dominated by economic assessments of marketbased mechanisms aimed at changing price incentives so that investment in low-emissions development becomes more attractive (e.g., cap and trade, carbon fees, loan guarantees). Many agree that private sector investment will likely have a significant role to play in any lowemissions future, and that establishing a price on GHG emissions will likely have a part in any effective policy agenda. However, concerns remain whether such mechanisms can induce the required shifts in production and consumption patterns, mobilize the necessary investment, and contribute adequately to international financial assistance. From this perspective, public funds— including from national governments and international organizations—continue to be a key driver for climate change investment, specifically in low income countries.

Many methods for disbursing international climate change financing currently exist. All have a role in catalyzing climate action. They include private sector funding through such avenues as foreign direct investment (FDI), export credit markets, multilateral development banks and finance corporations, and the various U.N. Kyoto Protocol market mechanisms, as well as public sector funding through official development assistance (ODA), multilateral trust funds (e.g., the Global Environment Facility (GEF), Climate Investment Funds (CIF), Green Climate Fund (GCF)), and the concessional lending windows housed at the World Bank Group. Many contend that the financial architecture is underfunded, unnecessarily complex, and lacks both strategic mandate and adequate coordination. Debate has arisen over the proper financial instruments to employ in lower income countries as well as the role shared by the public and private spheres.

Up to this point, the United States has relied mostly on direct budget appropriations to finance climate change actions internationally, but recent Congresses have considered several alternatives that could generate new financing for international purposes. Many in Congress and the public at large may question why the United States should help finance other countries’ efforts on climate change. Some claim that international financing would incur costs to the United States, or redirect funds that could be used for domestic purposes and send them overseas. Others, however, contend that international financing may offer potential benefits to the United States in terms of global environmental protection, expanded commercial markets, and increased national security.

Date of Report: May 5, 2011
Number of Pages: 57
Order Number: R41808
Price: $29.95

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