Based on the foregoing definition of financial mechanisms for climate change, as well as drawing on relevant research work relating to climate change financial mechanisms,19 a financial mechanism for climate change should comprise the following three key elements: resource mobilization (generation), resource disbursement (delivery), and governance of institutional arrangements (administration). The guiding principles in each element will be briefly introduced below.
1. Generation: Resource Mobilization
This element refers to how the resources/funding of a financial mechanism are generated. As indicated in the previous section, sources of funding may be derived broadly from both the public and private sectors.
According to Article 4.3 of the UNFCCC and paragraph 1(e) of the Bali Action Plan adopted at the COP 13, five principles are crucial for resources mobilization: adequacy, predictability, sustainability, equity and common but differentiated responsibilities and respective capabilities, and measurability.20
These five guiding principles are equally important when designing the methods by which resources are to be generated under a financial mechanism for climate change. However, the importance and role of each of these guiding principles will differ depending on a given mechanism’s timeframe, sources of funding, and objective and purpose. For example, if the source of funding comes from the ODA through a governments’ annual budget, the principles of measurability and predictability will both be satisfied for the particular year of that budget’s approval. But from a long-term perspective, such a source of funding might be incompatible with these same two principles because each government’s annual budget is hard to predict. Furthermore, Article 4.3 of the UNFCCC requests that the Annex II Parties provide “new and additional” financial resources, which means that an Annex II Party cannot rely on its existing ODA to meet this financial obligation under the UNFCCC. On the other hand, when the source of funding comes from the private sector, as in the case of private investment,
19. E.g., Neil Bird & Jessica Brown, International Climate Finance: Principles for European Support to Developing Countries (Eur. Dev. Co-operation to 2020 (EDC 2020), Working Paper No.6, 2010), available at
http://www.edc2020.eu/fileadmin/publications/EDC_2020_Working_Paper_No_6.pdf; CHARLIE PARKER ET AL.,THE LITTLE CLIMATE FINANCE BOOK:AGUIDE TO FINANCING OPTIONS FOR FORESTS AND CLIMATE CHANGE (2009).
20. PARKER ET AL., supra note 19, at 31.
such funding might be more “adequate.” Nevertheless, it might also be more difficult to achieve measurability and predictability, since the availability of such types of funding depends largely upon the willingness and capacity of private investors to provide the necessary resources.
2. Delivery: Resources Distribution
Resources distribution refers to the ways in which the resources of financial mechanisms are delivered. First, it may refer to modes of distribution. Funds can be delivered through grants, concessional loans, or an investment channel such as a CDM project. Second, it may refer to the types of activities that the resources will fund, that is, projects or programs/policies. Third, it may also refer to the channel through which funding reaches its target recipients. Here the recipients can have direct access to the fund, or may have to apply for the use of funds via an appropriation or review mechanism. According to Article 11 of the UNFCCC, paragraph 1(e) of the Bali Action Plan, and the Paris Declaration on Aid Effectiveness, the following five principles are crucial in the delivery of resources: effectiveness, efficiency, equity, appropriateness, 21 and, national ownership.22
These five guiding principles are equally important when designing the distribution channel of resources for a financial mechanism for climate change. However, the importance and role of each of these guiding principles will vary depending on the given modes of resource disbursement, funding activities, and channels of disbursement. For example, when funding is provided in the form of a loan to support certain types of programs or policies, conditions might be imposed to ensure that the recipient country can use such funding effectively. This is, however, very likely to run counter to the principle of national ownership. When the resources come from a private sector source that wants to deliver the funding in the most effective and efficient manner, the funding might be directed specifically toward one particular type of activity, a particular sector, or even toward a particular region or country. Under these circumstances, the principle of equity might be compromised.23
21. Id. at 84.
22. National ownership refers to the extent to which recipients exercise leadership over their climate change policies and strategies. See Bird & Brown, supra note 19, at 9.
23. The uneven distribution of the current CDM projects is one such example. More than 70% of the registered CDM projects are in only three countries, China, India and Brazil. China alone has attracted more than 40% of the CDM projects.
3. Administration: Governance of Institutional Arrangement
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 aforementioned guiding principles. It is thus not surprising that most of the research on climate change financial mechanisms focuses on institutional arrangement and governance. The legitimacy of a financial mechanism from the perspective of its governance has been analyzed in three dimensions: power, responsibility, and accountability.24 Power is “the capacity to determine outcomes. Power is distributed both formally and informally among Parties, and between Parties and the institutions they create.”25 This includes decisions regarding membership, decision-making rules, governing bodies, and administrative and management staff.26 Responsibility refers to “the exercise of power for its intended purposes, specifically, to ensure that resources entrusted to a financial mechanism are programmed effectively and equitably.”27 This includes responsibility exercised in allocating resources and in leading the design and implementation of projects and programs, as well as ensuring country ownership in the host country.28 Accountability refers to “the standards and systems for ensuring that power is exercised responsibly.”29 This is the key element in gauging the degree of legitimacy in a financial mechanism. Institutions entrusted with climate finance must be accountable both to contributors and recipients. Accountability begins with a determination of an institution’s precise goals and objectives, as well as agreement on measurable indicators of successful performance. It also includes fiduciary standards, the specific duties attributable to the trustee of a trust fund holding money for the beneficiary of that fund. Furthermore, environmental and social risks and impacts of projects and programs supported by the financial mechanism must also be managed responsibly.30
Four guiding principles are crucial for a governance structure according to Article 7 of the UNFCCC. These are transparency, efficiency, effectiveness, and balanced representation of all parties.31 These principles determine whether financial mechanisms are perceived as legitimate and impartial, and are equally important when designing the governance structure of a financial mechanism for climate change. Depending on the
24. BALLESTEROS ET AL., supra note 7, at 4-6.
25. Id. at 4.
26. Id.
27. Id.
28. Id. at 4-5.
29. Id. at 4.
30. Id. at 43-48.
31. PARKER ET AL.,supra note 19, at 123.
scale of the financial mechanism (international, regional, bilateral, or unilateral) as well as the type of activity supported (projects, programs and policies, or investment), there can be a variety of institutional arrangements.
Thus, the importance and roles of each of these guiding principles varies.
For example, for a financial mechanism operating at the international level, such as the GEF, the principle of balanced representation of all parties plays a bigger role in the design of the governance structure. The principle of efficiency might be compromised, however, should such a financial mechanism adopt a large decision-making body or a complex decision-making mechanism in order to balance representation of all parties.
Similarly, in the case of the Prototype Carbon Fund where the World Bank as trustee bears fiduciary duty toward all investors, transparency of the governance structure might come second to the principles of effectiveness and efficiency.
As shown in this Part, financial mechanisms for climate change can take a variety of forms. In addition, each of the three design features of a financial mechanism for climate change, i.e. generation, delivery, and administration, possesses its own set of guiding principles. The effectiveness of a mechanism in achieving its objectives depends mostly on whether its governance structure entails a democratic process for producing fair and equitable resources generation and allocation. Some of the financial mechanisms for climate change, such as the GEF, have already adopted a novel governance structure different from the traditional international financial mechanisms for development assistance, which began their operations in the 1940s. After more than five decades of calls for reform, the leading international financial mechanism for development assistance, the IMF, finally began governance reform in 2008. It is too soon to evaluate whether these reforms will be effective in addressing all of the concerns behind the calls for reform, as the reform process is still underway.
Nevertheless, there might be valuable lessons to be learned from this process with the potential to guide many of the emerging financial mechanisms for climate change that are still “under construction.” The next Part will discuss the IMF’s experience with governance reform and the lessons learned.
III.GOVERNANCE REFORM OF THE IMF AND LESSONS LEARNED