A Complaint System under the Climate Change Financial Mechanism?, by Wen-Chen Shih Chapter 16: The Role of Experts within the Control of the Climate Change Regime Implementation, by

Anne-Sophie Tabau

Chapter 17: The Dispute Settlement within the Kyoto Protocol CDM, by Marion Lemoine

Part VI: Conclusion

Chapter 18: Conclusion, by Jiunn-rong Yeh & Wen-Chen Chang

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附件四

A complaint system under the climate change financial mechanism—using the GEF and CDM as examples Wen-chen Shih^＊ Abstract

A complaint system under the climate change financial mechanism plays an important role if such mechanism is to be perceived as legitimate. This article sets out to analyse the rationale and design of a complaint system under the climate change financial mechanism. This article will use the GEF and the CDM as examples to illustrate the need, controversies, and complexities of designing a complaint system under climate change mechanism. After laying out an overview of the climate change financial mechanisms and the rationale of adopting a complaint system, the article proceeds to introduce the respective complaint system under the GEF and the CDM, i.e. the World Bank’s Inspection Panel and the proposed appeal body of the CDM. After

comparing the World Bank’s Inspection Panel and the proposed appeal body of the CDM, four general points regarding the design of a complaint system are noted. Each of these points might not play an equally

important role in all types of climate change financial mechanisms. Nevertheless, these four points will influence the perception of whether the climate change financial mechanism is perceived as legitimate, accountable, and fair, and will have to be taken into consideration when design new mechanisms or reform existing ones.

Keywords: climate change financial mechanisms, complaint system, Global Environment Facility, World Bank Inspection Panel, Clean Development Mechanism

Table of content 1. Introduction

2. Climate change financial mechanism and the need for a complaint system 3. The World Bank Inspection Panel: complaint system for the GEF

4. Appeal procedures proposed under the CDM

5. Comparison between the World Bank’s Inspection Panel and the proposed CDM appeals procedures and its implication to the complaint system under the climate change financial mechanism

6. Conclusion

＊ Professor of Law, Department of International Business, National Chengchi University, Taipei, Taiwan.

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1. Introduction 

Estimates of the cost to address climate change in developing countries vary substantially from $480 billion to US$1.5 trillion per year.¹ Meanwhile, according to “The Landscape of Climate Finance 2012”, annual global climate finance flows is estimated to reach approximately $343-385 billion in 2010/2011.² This clearly shows the importance and urgency of scaling up climate finance. How can the various types of climate change financial mechanism respond to such daunting task largely depend on whether these mechanisms can be perceived as efficient, effective, and fair in mobilising, distributing and governing various financial resources that have been or will have to garnered. In particular, the institutions entrusted with managing new flows of climate finance need to be perceived by both contributors and recipients as legitimate if they are to succeed in raising resources and investing these resources effectively.³ The legitimacy of a financial mechanism from the perspective of its governance has been analysed in three dimensions: power,

responsibility and accountability.⁴ Whether grievance and inspection mechanisms, i.e. a complaint system, are in place to ensure that standards are followed is one of the criteria to gauge whether the financial mechanism is accountable.⁵

Complaint mechanisms have been adopted by many international financial institutions such as the World Bank and regional development banks to respond to the increasing demand for accountability.⁶ These mechanisms are designed to provide a platform for local communities that have been affected by projects funded by these institutions to challenge the decisions of these institutions regarding the design and

implementation of the project they funded. Many climate change financial mechanisms, such as the Global Environment Facility (GEF), play a similar function to that of these international financial institutions. It is, thus, not surprising that whether a complaint system is in place is one of the criteria to determine whether a climate change financial mechanism is accountable. On another front, climate change mechanisms, for example, the Clean Development Mechanism (CDM) of the Kyoto Protocol, channel resources from the private sector and interact directly with private sector participants in their governance structure. For example, decisions made by the Executive Board of the CDM will affect the interests of project applicants, many of which are private sector actors. As this distinctive feature closely resembles a global administrative body, criticisms concerning the lack of procedural safeguard and due process, including access to a complaint system, have been mounting.⁷ As a response, negotiations concerning the establishment of an appeal

mechanism under the CDM have been mandated by the fifth Conference of the Parties serving as the meeting of the Parties (MOP/COP) to the Kyoto Protocol in 2009.

1 Nakhooda, S., 1 Aug 2012, How much money is needed to deal with climate change”, Thomson Reuters Foundation, available from: http://www.trust.org/item/?map=how-much-money-is-needed-to-deal-with-climate-change/ (last visited: 1 Aug. 13).

2 Buchner, B. et al., 2012, The Landscape of Climate Finance 2012, Executive Summary, available from:

http://climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2012/ (last visited: 1 Aug. 13).

3 Ballestero, A. et al., 2010, Power, responsibility, and accountability: re-thinking the legitimacy of institutions for climate finance, World Resource Institute Report, p.2, available at http://pdf.wri.org/power_responsibility_accountability.pdf. (last visited:

5 Aug. 13).

4 Ballestero, A. et al., 2010, supra note 3, pp.4-6

5 Ballestero, A. et al., 2010, supra note 3, p.viii.

6 Bradlow, D.D., 2005, “Private complaints and international organisations: A comparative study of the independent inspection mechanisms in international financial institutions”, 36 Georgetown Journal of International Law 403, pp403-409.

7 See Part 4.a for more discussion.

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Climate change financial mechanism encompasses a wide range of institutional design. The need for and the institutional design of a complaint system will differ as the interests and concerns of two main camps of stakeholders, i.e. local communities and non-governmental organisations (NGOs), and private sector participants, can be very different. This article will use the GEF and the CDM as examples to illustrate the need, controversies, and complexities of designing a complaint system under climate change mechanism. Part 2 will give a brief overview of climate change financial mechanisms and provide the rationale for establishing a complaint system. Part 3 and Part 4 will respectively introduce the existing/proposed complaint system of the GEF and the CDM, i.e. the World Bank Inspection Panel and the proposed CDM appeals body. Part 5 will compare the World Bank’s Inspection Panel with the proposed CDM appeals boy and analyse its implication to the design of complaint system under the climate change financial mechanisms.

2. Climate change financial mechanism and the need for a complaint system 

Financial mechanism can be defined as: “Method or source through which funding is made available, such as bank loans, bond or share issue, reserves or savings, sales revenue.”⁸ In the “Glossary of climate change acronyms” from the UNFCCC website, financial mechanism is defined as “Developed country Parties (Annex II Parties) are required to provide financial resources to assist developing country Parties implement the Convention. To facilitate this, the Convention established a financial mechanism to provide funds to

developing country Parties. The Parties to the Convention assigned operation of the financial mechanism to the Global Environment Facility (GEF) on an on-going basis, subject to review every four years. The financial mechanism is accountable to the COP.” From these two definitions, financial mechanisms for climate change will be defined in this article in the broadest sense as follows: “A pre-determined standards and procedures set by an institution through which funding is mobilized and disbursed for the purpose of climate change

mitigation and adaptation.” Noted that, similar terms such as “climate finance”⁹ or “carbon finance”¹⁰ are also used in the relevant literature.

a. Various types of climate change financial mechanism 

There are a variety of financial mechanisms for climate change. Different types of financial mechanisms for climate change may be variously categorized by using different yardsticks, such as scale, sources of

funding, and the types of activities they fund. The following will briefly introduce the broad range of financial mechanisms for climate change by using these three different yardsticks.

i. Scale: multilateral, regional, bilateral, unilateral/national 

Depending on the scale or platform where a financial mechanism operates, there are

international/multilateral, regional, bilateral and unilateral financial mechanisms for climate change. For example, all of the financial mechanisms under the international climate change regime are

8 “Method or source through which funding is made available, such as bank loans, bond or share issue, reserves or savings, sales revenue.” Available from: http://www.businessdictionary.com/definition/financial-mechanism.html (last visited: 2011/5/21).

9 For example, Steward, R.B., Kingsbury, B. & Rudyk, B., 2009, Climate Finance: Regulatory and Funding Strategies for Climate Change and Global Development, NYU Press.

10 This term is used by the World Bank Group, for example, its “Carbon Finance Unit”:

http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/ENVIRONMENT/EXTCARBONFINANCE/0,,menuPK:4125909~page PK:64168427~piPK:64168435~theSitePK:4125853,00.html (last visited: 2011/5/21)

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international/multilateral financial mechanisms. The EU Emissions Trading Scheme (ETS), as well as certain financial mechanisms supported or administered by regional development banks (e.g. the Asian Development Bank operates three different types of carbon finance mechanisms¹¹) are regional financial mechanisms.

Bilateral financial mechanisms often involve funding provided by one country (usually developed countries) that supports a particular types of projects or activities for climate change mitigation or adaptation undertaken by eligible country (usually developing countries). For example, the “International Climate Initiative” set up by Germany¹² in 2008 and the “Environmental Transformation Fund” set up by the UK¹³ in 2008 are two such type of bilateral financial mechanisms. Unilateral financial mechanisms are mostly established domestically, such as the “Brazil Amazon Fund” set up by Brazil in 2008¹⁴ and the “Indonesia Climate Change Trust Fund” set up by Indonesia¹⁵ in 2009.

ii. Sources of funding: public funding, private funding 

The sources of funding for a financial mechanism can come from the pubic sector and the private sector.¹⁶ At the international scale, public sources can come from the traditional Overseas Development Aid (ODA), concessional debt, loan guarantee, or technology transfer arrangements. At the domestic level, funding from the public sources might include government budgets (for example, carbon tax), special levy (for example, air pollution control fee). Funding from the private sector might include credit offsets in developed countries (for example, the EU ETS), insurance, or foreign direct investment. Currently, most of the financial mechanisms for climate change have their funding sources from the public sectors, including all of the financial mechanisms under the international climate change regime. However, some financial

mechanisms have their funding sources from both the public and the private sectors, such as most of the carbon funds administered by the World Bank Group. For example, the “Prototype Carbon Fund” raises its fund from seven private companies and six governments.¹⁷

iii. Types of activities funded: projects, programme, investment 

Financial mechanisms for climate change can support a wide range of activities, including project

lending, program or policy lending, and for investment only. Financial mechanisms for project lending refer to providing funding and/or technologies for a specific project (for example, a solar power plant). Financial mechanisms for program or policy lending support a program of action or a set of policies (for example, a set of subsidy programs to support renewable energy sector). Financial mechanisms for investment only use their fund to purchase offsets generated from emissions reduction projects, such as the certified emissions

11 http://www.adb.org/Climate-Change/funds.asp (last visited: 2011/5/21)

12 http://www.bmu-klimaschutzinitiative.de/en/home_i (last visited: 2011/5/21)

13 http://www.decc.gov.uk/en/content/cms/what_we_do/change_energy/tackling_clima/intl_strat/ietf/ietf.aspx (last visited:

2011/5/21)

14 http://www.amazonfund.org/ (last visited: 2011/5/21)

15 http://www.icctf.org/site/ (last visited: 2011/5/21)

16 Stewart, R.B., Kingsbury, B. & Rudyk, B., December 2, 2009, Climate Finance: Key Concepts and Ways Forward, Harvard Project on International Climate Agreements, available from: http://belfercenter.ksg.harvard.edu/files/Stewart%20Final.pdf (last visited: 2011/5/21).

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http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/ENVIRONMENT/EXTCARBONFINANCE/0,,contentMDK:21630008

~menuPK:5216148~pagePK:64168445~piPK:64168309~theSitePK:4125853,00.html (last visited: 2011/5/21)

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reductions (CERs) generated from the CDM projects). The CDM under the Kyoto Protocol is a typical

financial mechanism for project lending. The GEF started as a financial mechanism for project lending as well.

However, the GEF picked up the practices of program/policy lending in 2008 when it began to provide “a long-term and strategic arrangement of individual yet interlinked projects that aim at achieving large-scale impacts on the global environment.”¹⁸ Some of the carbon funds administered by the World Bank Group are the type of financial mechanism for investment purposes.

b. Rationale for a complaint system   

A financial mechanism for climate change comprises the following three key elements: resource mobilization (generation), resource disbursement (delivery), and governance of institutional arrangements (administration).¹⁹ The governance structure of a financial mechanism is crucial to ensuring that the

generation and delivery of resources can be designed and implemented in accordance with the various guiding principles in resource mobilisation and resource distribution.²⁰ In particular, whether the governance structure can be perceived by both contributors and recipients as legitimate will affect their ability in raising resources and investing these resources effectively.²¹ An institution widely perceived as legitimate is more likely to gain the confidence of contributors, private investors, and recipient, which is essential to raise resources and to ensure that investments are owned and implemented in the host country.²² The legitimacy of a financial mechanism from the perspective of its governance has been analysed in three dimensions: power,

responsibility and accountability.²³ Whether grievance and inspection mechanisms, i.e. a complaint system, are in place to ensure that standards are followed is one of the criteria to gauge whether the financial

mechanism is accountable.²⁴ Thus, having a complaint system, a crucial institutional underpinning for any climate change financial mechanism to be perceived as legitimate, will provide confidence to the contributors, including the private sector which is fast becoming the most important source of climate finance.²⁵ This is vividly reflected in the call for establishing an appeal procedure for decisions made by the CDM Executive Board,²⁶ as these decisions will affect the financial and investment interests of project applicants, many of which are private sector actors.

On the other hand, projects funded or invested by various climate change financial mechanisms, although

18 GEF, Adding Value and Promoting Higher Impact through the GEF’s Programmatic Approach, available from:

http://www.thegef.org/gef/sites/thegef.org/files/publication/Programmatic_Approach.pdf (last visited: 2011/5/21)

19 e.g., Bird, N. & Brown, J., 2010, International Climate Finance: Principles for European Support to Developing Countries, EDC 2020 Project, Working Paper No.6, available at http://www.edc2020.eu/fileadmin/publications/EDC_2020_

Working_Paper_No_6.pdf (last visited: 5 Aug. 13); Parker, C., et a., 2009, The Little Climate Finance Book: A guide to financing

options for forests and climate change, available at http://www.odi.org.uk/sites/odi.org.uk/files/odi-assets/publications-opinion-files/5640.pdf (last visited: 5 Aug. 13).

20 Shih, W.C., 2011, “Financial Mechanisms for Climate Change: Lessons from the Reform Experiences of the IMF”, 6:2 National Taiwan University Law Review 581, pp.590-591.

21 Ballestero, A. et al., 2010, supra note 3, p.2.

22 Ballestero, A. et al., 2010, supra note 3, p.3.

23 Ballestero, A. et al., 2010, supra note 3, pp.4-6.

24 Ballestero, A. et al., 2010, supra note 3, p.viii.

25 For example, one research estimated that private finance accounted for 63% of the total climate finance flow in 2010/2011.

Buchner, B. et al., 2012, supra note 1.

26 See Part 4.a for more discussion.

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they are designed to lower emissions and build resilience, may also entail environmental and social risks.²⁷ These risks mostly, if not solely, affect the livelihood and interests of the local communities. It is, thus, important to have systems in place to identify and assess risks, safeguards that manage risks, and grievance mechanisms that allow local people and communities to raise concerns.²⁸ This is another rationale for adopting a complaint system for climate change financial mechanisms, in particular for those types of financial mechanisms that invest or fund project activities which have a demonstrated environmental and social impact in their track record. Having a system to review complaints in such nature from this category of stakeholders can ensure that projects intended for good cause (i.e. climate change mitigation or adaptation) will not accidentally or intentionally cause negative environmental or social impact.

Adopting and operating a complaint system will, of course, bring extra burden on the climate change financial mechanism as it requires staff time and resources. Nevertheless, a complaint system is crucial in determining whether any climate change financial mechanism is legitimate as it enhances the accountability of such financial mechanism to all types of stakeholders that are involved. On the one hand, it will give confidence to the private sector participates by providing a chance to challenge (unfavourite) decisions made by governing body of a financial mechanism that might affect their financial interests. This confidence, in turn, will affect the ability of any climate change financial mechanism to mobilise resources. On the other hand, a complaint system that provides a chance to affected local people and communities to raise their concerns also enhances the accountability of climate change financial mechanisms to the public in general, as public

interests in ensuring that projects funded by climate change mechanisms will not cause environmental or social harm can be safeguarded. All these illustrate the rationale of having already a complaint system in place or contemplating of creating one. The following two Parts will briefly introduce an existing complaint system (the World Bank Inspection Panel for the GEF) and a proposed one (the appeals body for the CDM), before undertaking further analysis on the complexities of creating such a system.

3. The World Bank Inspection Panel: Complaint system for the GEF

The “Instrument for the Establishment of the Restructured Global Environment Facility” does not provide for a complaint system for projects funded by the GEF. As this Part will demonstrate, GEF-funded projects administered by the Bank can be subject to the jurisdiction of the World Bank Inspection Panel. This Part will briefly introduce the World Bank Inspection Panel, including its objective and function, eligibility,

subject-matter of requests for inspection, institutional coverage, and procedures. After ascertaining the jurisdiction of the Inspection Panel over the GEF-financed project administered by the Bank, this Part will briefly discuss five such panel cases, as well as one panel case concerning a project, which is also an CDM project, funded by one of the Bank’s carbon funds.

a. Objective and Functions of the Inspectional Panel

In response to the concerns with the efficiency of the Bank’s work, as well as criticisms regarding the Bank’s inadequate attention to the standards reflected in its rules,²⁹ the Executive Directors adopted the

27 Ballestero, A. et al., 2010, supra note 3, p.46.

28 Ibid.

29 Shihata, Ibrahim F.I., 1994, The World Bank Inspection Panel, Oxford: Oxford University Press, pp.5-9.

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“Resolution establishing the Inspection Panel (No. 90-13 for the IBRD and 9306 for the IDA)” (the

“Resolution”) in September 1993. The Inspection Panel was, thus, formally established.

According to the Bank’s President’s Memorandum submitted to the Board on the eve of adopting the

“Resolution”, the objective of an inspection function in the Bank should be to “provide independent judgment that would help resolve major differences in cases where it is asserted that rights and interests of parties are adversely affected because the Bank has failed to follow its operating policies and procedures in the design, appraisal and/or implementation of Bank lending operations”.³⁰

The main function of the Inspection Panel is to review project funded by the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) when

The main function of the Inspection Panel is to review project funded by the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA) when