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 purpose, scale, sources of funding, and the types of activities they fund. The following paragraphs will briefly introduce the broad range of financial mechanisms for climate change by using these four different yardsticks.
1. Purposes of Financial Mechanisms
Based on their purpose, financial mechanisms for climate change can be categorized as for mitigation, for adaptation, or for both purposes. The Emissions Trading Scheme of the European Union (EU ETS) is a type of financial mechanism for mitigation, as its main purpose is to reduce the emissions of GHGs within the EU.8 Under the international climate change regime, the Adaptation Fund set up under the Kyoto Protocol at its third meeting of the parties9 is a financial mechanism for climate change
8. However, the revised EU ETS will become a type of financial mechanism for both climate change mitigation and adaptation. According to the revised ETS Directive adopted on April 23, 2009, member states can determine how to use the proceeds from the auction of allowances. Nevertheless, 50% of the proceeds must be used according to Article 10.3 of the revised Directive, which includes funding for both mitigation and adaptation measures.
9. UNFCCC, Conference of the Parties Serving as the Meeting of the Parties to the Kyoto
adaptation. The GEF mainly funded projects for mitigation purposes, although adaptation projects are funded as well from the Least Developed Countries Fund and the Special Climate Change Fund, both of which were established at COP 7 of the UNFCCC and are administered by the GEF. At the same COP, Parties to the UNFCCC also instructed the GEF to support pilot and demonstration projects for certain adaptation programs.10
2. Scale
Depending on the scale of a financial mechanism or the platform on which, it operates, it may be categorized as an international/multilateral, regional, bilateral, or unilateral financial mechanism for climate change. For example, all of the financial mechanisms under the international climate change regime are international/multilateral financial mechanisms. The EU ETS, as well as certain financial mechanisms supported or administered by regional development banks (e.g. the three different types of carbon finance mechanisms operated by the Asian Development Bank11) are regional financial mechanisms. Bilateral financial mechanisms often involve funding provided by one country (usually a developed country) to support particular types of projects or activities for climate change mitigation or adaptation undertaken by an eligible country (usually a developing country). For example, the International Climate Initiative established by Germany12 in 2008 and the Environmental Transformation Fund set up by the UK13 in the same year are two such bilateral financial mechanisms. Unilateral financial mechanisms are mostly established domestically. Examples include the Brazil Amazon Fund set up by Brazil in 200814 and the Indonesia Climate Change Trust Fund set up by Indonesia15 in 2009.
3. Sources of Funding
The sources of funding for a financial mechanism can come from the
Protocol, Dec. 3-15, 2007, Bali, Decision, at 3, FCCC/KP/CMP/2007/9/Add.1, 1/CMP.3 (Mar. 14, 2008).
10. Adaptation,GLOBAL ENVIRONMENT FACILITY (GEF), http://www.thegef.org/gef/adaptation (last visited Sep. 30, 2011).
11. Climate Change, ASIAN DEV.BANK, http://beta.adb.org/themes/climate-change/main (last visited Sep. 30, 2011).
12. INTERNATIONAL CLIMATE INITIATIVE, http://www.bmu-klimaschutzinitiative.de/en/home_i (last visited Sep. 30, 2011).
13. Environmental Transformation Fund, WASTE &RESOURCES ACTION PROGRAMME (WRAP), http://www.wrap.org.uk/recycling_industry/information_by_material/organics/etf.html (last visited Sep. 30, 2011).
14. AMAZON FUND, http://www.amazonfund.org/ (last visited Sep. 30, 2011).
15. INDONESIA CLIMATE CHANGE TRUST FUND (ICCTF), http://www.icctf.or.id/ (last visited Sep.
30, 2011).
public 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 public sources may include government budget allocation (a carbon tax, for example), or special levy (for example, an 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, including all of those under the international climate change regime, receive funding from the public sectors of different nations.
However, some financial mechanisms such as most of the carbon funds administered by the World Bank Group, receive funding from both the public and private sectors. The Prototype Carbon Fund, for instance, raises funds from seven private companies and six governments.17
4. Types of Activities Funded by Financial Mechanisms
Financial mechanisms for climate change can support a wide range of activities, including project lending and program or policy lending, and may also be used for investment only. Financial mechanisms for project lending entail providing funding and/or technologies for a specific project such as a solar power plant. Financial mechanisms for program or policy lending are meant to support a program of action or a set of policies, for example, a set of subsidy programs to support the renewable energy sector. Financial mechanisms for investment only use their funds to purchase offsets generated by emissions reduction projects, such as the certified emissions reductions (CERs) generated by the Clean Development Mechanism (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, but began program/policy lending in 2008 when it started 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 financial mechanisms for investment purposes.
16. RICHARD B.STEWART ET AL., CLIMATE FINANCE:KEY CONCEPTS AND WAYS FORWARD 3 (2009),http://belfercenter.ksg.harvard.edu/files/Stewart%20Final.pdf.
17. Prototype Carbon Fund, supra note 6.
18 . GLOBAL ENV’T FACILITY (GEF), ADDING VALUE AND PROMOTING HIGHER IMPACT THROUGH THE GEF’S PROGRAMMATIC APPROACH 5(2009),
http://www.thegef.org/gef/sites/thegef.org/files/publication/Programmatic_Approach.pdf.
C. Design Elements and Guiding Principles of Financial Mechanisms for