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Loans for Climate?

Posted by NYCA Blogger on July 1, 2011


By Rishi

Another take on climate finance

A debate raged in the Nepali and Bangladeshi civil societies regarding the decision by the two governments to participate in the Pilot Program on Climate Resilience (PPCR) of the World Bank. The fundamental purpose of the PPCR is to pilot ways in which climate resilience can be integrated into the ‘core development agenda’. The reason for the controversy is simple- these countries agreed to the optional loan component of the program. As the Climate Investment Funds (CIFs) meet this weekend, there has been some effort to put pressure on the British government (one of the primary supporters of the PPCR) for providing funds as capital. It’s worth looking at this issue again as we can expect similar debates to rage in other countries as well.

First, climate resilience straddles across adaptation and regular development assistance. The fundamental design revolves around integrating climate considerations into development policies and programs. From a climate justice perspective, it is a total outcry to ask a least developed country to take out a loan to pay for integrating climate change related aspects into its development programs. Furthermore, prima facie, on the part of the countries, the decision to ask for a loan in the assistance package is in contradiction with the long held LDC position that adaptation financing should be grants and not loans (more on this later).

Second, loans for what purpose exactly? I believe this should be one of the central questions of the debate. If the loan is for technical assistance only, the charges leveled against the program are valid. However, if the loan is a means to engage the private sector in climate resilience activities, loans may not be all that bad. If the loan goes to productive investments that the private sector is willing to make, this is in fact a good thing. Governments, by taking out these concessional loans (on extremely favorable terms- read 0.1 per cent interest for 40 years) can make funds available to private entities on a very cost competitive basis- domestic capital markets in these countries simply can’t match such favorable terms. This also explains the reason why the Ministries of Finance find this package very attractive- they normally don’t see such favorable loan terms. I think the civil society has played an important role in shining the spotlight on these types of assistance programs, but we must also remember that the devil is always in the details.

Third, something that has gotten completely lost in the debate is the critical question of how much adaptation will really cost countries like Nepal and how the financing can be mobilized. Based on the report prepared by the High Level Advisory Group on Climate Finance, it should be abundantly clear that grant based funding alone cannot meet the levels of financing that developing countries need to pursue climate resilient low carbon growth paths. Funds will have to be raised from a variety of sources, including carbon abatement revenues, leveraged by the Multialteral Development Banks. Hence, while it makes sense to push and advocate for hundred per cent grant based funding, I’ll leave the reader to decide how practical this really is.

Furthermore, the slow progress of UNFCCC underscores the need to vitalize other options for climate finance. The UNFCCC has been moving very slowly and we will have to wait for a number of years before key components of the global climate architecture are formalized- even the 100 billion dollar Green Climate Fund won’t be of enough scale. As a result, the role of multilateral development banks is crucial in helping to fill this gap as well as to provide essential input based on their experience with pilot funds.

All of this firmly makes the case for innovative sources of funds. Financial Transactions Tax (FTTs) on speculative transactions could generate the scale of funding necessary and has the potential of finally relieving developing countries from having to rely purely on regular ODA (which can be highly uncertain and of insufficient scale and of varying degrees of country ownership). Without such out of the box financing strategies, it’s easy to suspect that climate finance will suffer the same fate of ODA by being limited and far short of target levels.

We can’t keep our eyes off the big question of how to address adaptation, particularly through development programs. It will no longer be able to distinguish climate funding from development funding as a key measure to increase the resilience of vulnerable countries to climate change is by taking the development agenda forward (and making sure it happens in a climate sensitive way). This big picture needs to be kept in mind as this will help us guide what the sources of financing could be, who could play what role, and how development planning can be synchronized.

The fundamental metric for any sort of financing should be whether it builds enough national and local capacity to tackle on the challenges of climate change and prepares ground for the tremendous shift in the development trajectory we’re currently in.

Original Post: http://www.whatswiththeclimate.org/2011/06/25/loans-for-climate/

Please read the NYCA position on financing Pilot Program for Climate Resilient (PPCR) 

NYCA Position on PPCR loan

Join Facebook group: Say NO to Climate Loans

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