International Climate Change Financing: Needs, Sources, and Delivery Methods
Released: 2011-05-05T00:00:00

Summary: 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 market-based 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 low-emissions 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.


subsections: section_title: Introduction
paragraphs: While some investigators disagree with the current risk assessments of climate science, most accept the findings of the U.S. National Academies that the Earth's climate has changed over the past century and that human activities—particularly emissions of greenhouse gases (GHG) through such activities as fossil fuel use, agricultural practices, and deforestation—have very likely caused most of the observed effects. Broadly agreed findings conclude that the world faces risks from the damaging effects of a changing climate unless GHG emissions are limited. There is some political consensus internationally to try to stabilize GHG concentrations in the atmosphere at approximately 450 parts per million by volume (ppm) carbon dioxide-equivalent (CO 2 e), a volume which is projected to limit global warming to around 2˚C above pre-industrial levels. Some people argue that a 2˚C target, if attained within a sufficient time frame, might prevent dangerous anthropogenic interference with the climate system, allow ecosystems to adapt naturally to climate change, ensure that food production is not threatened, and enable economic development to proceed in a sustainable manner. Others suggest different target levels of varying stringency.

Large-scale financial investments are projected to be needed to meet the global demand for energy, water, transportation, heating, and other infrastructure services in countries with growing populations and rising incomes. Financial requirements would be increased if countries made such investments with the additional consideration of addressing climate change. Proponents maintain that climate-relevant investments would promote low-emissions, high-growth economic development while simultaneously protecting the more vulnerable countries and communities from the effects of climate change. Some countries have begun to make moderate adjustments focusing, in particular, on energy efficiency strategies, low-emissions energy infrastructure, and sustainable land use, land use change, and forestry practices. However, despite expressions of concern and commitment, the shift toward climate-relevant investment has been deemed slow by many. Further, while industrialized countries continue to contribute a disproportionally large share of global GHG emissions, and historically have contributed most of the global GHG emissions over the past two centuries, future emission growth is projected to arise mostly from the developing world, whose populations and economic aspirations continue to grow. Thus, even if developed country emissions are significantly curtailed, climate targets may not be met without the deployment of similar abatement efforts in the developing world. 

While there is little doubt that the most efficient GHG reduction strategy would require efforts from all countries, a fundamental dispute centers upon who should pay for them and how. Most, if not all, low-income countries have argued that their success in abating GHG emissions and curtailing deforestation would depend critically on receipt of international financial and other support. They argue that reducing their share of GHG emissions and adapting to the effects of climate change would incur costs above and beyond their normal economic growth trajectories. These costs are particularly challenging to countries that have low incomes compared to industrialized nations, consider alleviating poverty as their first priority, and conclude that they have contributed only a minor share of the historical GHG emissions that force climate change. 

Higher-income countries, including the United States, have pledged financial assistance to lower-income countries in such fora as the United Nations Framework Convention on Climate Change (UNFCCC, 1992). While vaguely defined, the UNFCCC pledges are not voluntary commitments, but treaty obligations, signed and ratified by the U.S. government. More recently, the Copenhagen Accord (2009) stipulated—and the UNFCCC Cancun Agreements (2010) restated—that the wealthiest countries in aggregate would commit to provide up to $30 billion "fast start" financing in the 2010-2012 period and to mobilize $100 billion annually by 2020 to promote mitigation, adaptation, technology transfer, and capacity building efforts in lower-income countries. The funding is to come from "a wide variety of sources, [both] public and private, bilateral and multilateral, including alternative sources of finance." The Copenhagen Accord is a non-binding political agreement among countries; the implementation of the Cancun Agreements, as a product of the UNFCCC Ad Hoc Working Group on Long-term Cooperative Action under the Convention (AWG-LCA), is still under negotiation by Parties.

This report aims to inform congressional decision-making on U.S. provisions for financial assistance to low-income countries to address climate change. It proceeds by first framing some perspectives on the U.S. role in international financial assistance for climate change. It then addresses the following questions:

1. How much funding might be needed to address the problem? 2. What might the funding be used for? 3. Where might the funding come from? 4. How might the funding be delivered? 

The final section of the report summarizes past and current U.S. contributions to international climate change initiatives.

section_title: Perspectives on the U.S. Role in International Climate Change Financial Assistance
paragraphs: Calls continue domestically and internationally for high-income countries to increase financial assistance to low-income countries to address climate change. Many in Congress and the public at large may question why the United States should help finance other countries' efforts to reduce GHG emissions or to adapt to climate variability and 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 environmental protection, expanded commercial markets, and national security. 

Below is a brief outline of some of the arguments in support of and in opposition to the role of the U.S. government in foreign aid in general and international climate change assistance in particular.
subsections: section_title: In Opposition
paragraphs: Fiscal Constraints: Some critics of international climate change assistance to lower-income countries argue that the United States needs to retain available funds for domestic priorities, such as fostering renewed economic growth and creating jobs. They contend that the United States should not be burdened with higher taxes or prices for investments abroad. The burden is exacerbated during times of economic downturns, when governments are hard-pressed to generate fiscal resources to adequately address domestic challenges and maintain basic levels of public services and quality of life. For those who support some form of international development assistance, they may argue that aid should be directed to country priorities other than climate change, such as improving public health systems, water and sanitation resources, or infrastructure.

Misuse of Funds: Many critics have claimed that international financial assistance targeted to help average citizens in low-income countries often ends up supporting inefficient and bloated bureaucracies (e.g., recipient governments, donor-funded multilaterals, or non-governmental organizations). They argue that the national and international institutions that dispense financial assistance focus on "getting money out the door" to lower-income countries, rather than on delivering services; emphasize short-term outputs like reports and frameworks but do not engage in long-term activities like the evaluation of projects after they are completed; and put enormous administrative demands on lower-income country governments. Bilateral and multilateral development agencies have also been criticized for the fragmentation of foreign assistance across many small and uncoordinated bureaucracies, the lack of transparency about project procurement practices and operating costs, and the proportion of funds that is misused or lost through instances of graft, corruption, and other political inefficiencies. 

Poor Results: Some critics contest the overall effectiveness of foreign assistance in spurring economic development and reform in low-income countries. Many studies have examined the effects of international assistance provided to lower-income countries, including both bilateral and multilateral mechanisms, and have returned mixed results. Conclusions range from ineffective, to highly effective, to effective "in some countries under specific circumstances." The divergent results of these studies may make it difficult to reach firm conclusions and support continued contributions. Further, some commentators find that international environmental assistance poses even greater uncertainties than other forms of aid due to difficulties in assessing, measuring, reporting, and verifying environmental indicators. Some statistics have confirmed these perceptions, as the success rate for environmental projects is often far below those of education, health, or infrastructure. 

Development Inefficiencies: There is no satisfactory metric on the effectiveness of international financial assistance to lower-income countries. Some critics claim that it may do more harm than good. They assert that a reliance on foreign capital fosters an unhealthy economic dependence, making poor countries poorer and economic growth slower, and leaving recipients more debt-laden, inflation-prone, vulnerable to the vagaries of the currency markets, and unattractive to higher-quality investment. They claim that grant-based assistance as a platform for development is contradictory to sustainable economic growth and can squash private sector efforts in commercial markets. They claim debt-based assistance is worse, requiring loans to be repaid at the expense of recipient country's education, health, and infrastructure investments. Further, large inflows of foreign capital may have the effect of killing off a country's export sector by causing domestic currency to strengthen against foreign ones (referred to by economists as "Dutch Disease"). As a counter to the practice of international financial assistance, these commentators promote a strategy of development that emphasizes the role of entrepreneurship and private markets over an aid system based on cycles of transfer flows.

Lack of Consensus on Climate Science: Some critics point to scientific uncertainties and ambiguities within the fields of atmospheric chemistry and climatology as reasons to postpone and/or reconsider international climate change assistance policies and programs. They contend that the current scientific findings on climate change may not be sufficient to warrant government action, either domestic measures to mitigate GHG emissions and adapt to the effects of climate change or international policy actions and financial assistance to support other countries' efforts.

section_title: In Support
paragraphs: Commercial In terests : Some advocates argue that international climate change assistance to lower-income countries to support low-emission economic growth could benefit U.S. businesses through increased trade, commerce, and economic activity in the global marketplace. They contend that American clean energy and environmental management companies are well positioned to provide the innovative technology and services needed to meet the rapidly growing demand in emerging economies. Increased financing would not only promote development in the host country, but allow U.S. industries to make competitive inroads into rapidly expanding markets, improve the advancement and commercialization of U.S. technologies, mobilize greater investment in domestic sectors, and enhance job creation in the United States. Decreased funding may cede American influence in global markets to other economic powers still engaged with lower-income countries on environmental and natural resource issues (e.g., the European Union, China).

Investment Efficienc ies : Some advocates claim that the costs of responding to tomorrow's climate-related catastrophes, instabilities, conflicts, and technological needs would be much higher than the costs of working today to prevent them through emissions reductions. "Each year of delay will lock in an increased amount of old [i.e., high-emissions] technology," according to the United Kingdom's Secretary of State for Energy and Climate Change. Economists often note that lower-income countries account for nearly all of the recent growth in global emissions and represent the cheapest opportunity to mitigate GHG pollution as part of a cost-effective solution. Additionally, some are concerned that locking in the developing world to a reliance on older, more GHG-intensive technologies during economic development may limit their flexibility and increase their costs to respond efficiently to future pollution abatement or climate resilient strategies. (Sometimes this is called a problem of "stranded capital.") Economists view some level of early investment as efficient, to hedge against these future risks. 

Natural Disaster Preparedness: Some advocates point to international climate change assistance as a means to assist in global disaster preparedness. They claim that recorded natural disasters continue to increase each year resulting in more casualties and mounting economic losses. They assert that extreme weather events have lead to increased droughts, food shortages, and resource competition, which, in turn, has lead in some cases to population displacement and migration. Some have proposed that increased international assistance to climate change adaptation programs could help avoid capital and other losses (e.g., buildings, infrastructure, etc.), minimize the redirection of strategic resources to ad hoc disaster response and urgent humanitarian needs, and avoid chronic humanitarian crises, such as food shortages, particularly for the resource poor in the least developed countries.

National Security: Some advocates argue that international climate change assistance could help address risks to national security. According to a 2008 National Intelligence Assessment, the impacts of global climate change may worsen problems of poverty, social tensions, environmental degradation, and weak political institutions across the developing world. In October 2010, Chairman Mullen of the Joint Chiefs of Staff highlighted that climate change creates conditions "that could lead to failed states and make populations vulnerable to radicalization." Combating environmental drivers such as climate change, desertification, biodiversity loss, and deforestation could reduce the instability caused by the scarcity of, and potential competition for, resources like water, food, and habitat. Some see international financial assistance for climate change as a means to help make lower-income countries less susceptible to these threats, for the benefit of both the lower-income country and the security interests of the United States.

International Leadership: Some advocates contend that international climate change assistance to lower-income countries helps the United States improve its leadership in global environmental issues. Through leadership, the United States may be able to influence and set important international economic and environmental policies, practices, and standards. But leadership—apropos of voting share—is tied directly to the level of financial contribution in many multilateral organizations. Some believe that delivering on financial pledges is an important opportunity for the United States to demonstrate credibility and support negotiations not just on environment, but on economic and security issues as well. Withdrawing commitments may cede American influence in world affairs to other economic powers still engaged with lower-income countries on environmental and natural resource issues (e.g., the European Union, China). Weakened influence could manifest in challenges to political negotiations, economic relationships, trade preferences, and future collaborations.

International Obligations: Many advocates stress that the commitment to international climate change assistance to lower-income countries is codified in current multilateral agreements. Under the United Nations Framework Convention on Climate Change (UNFCCC), signed in 1992, the United States and other industrialized countries listed in Annex II of the Convention committed to provide financial and technical assistance to help lower-income countries' efforts to meet their UNFCCC obligations. While these commitments are legally binding, they are vaguely defined, making them impractical to quantify and enforce. More recent negotiations have striven to produce more quantified figures, and the Copenhagen Accord of 2009 produced an agreement by the wealthiest countries to provide $30 billion of "fast start" financing in the period 2010 to 2012 and to seek $100 billion annually by 2020. However, these financial targets are not legally binding, and accounting and enforcement remain difficult.

Equity Issues: Some advocates consider international climate change assistance to lower-income countries a moral responsibility and a matter of climate equity. Not only have today's high-income economies generated about 80% of past fossil fuel-based emissions, but those same emissions have helped carry them to high levels of social and economic well-being. Past behavior arguably calls for the industrialized countries to provide funding to reduce the current and future risks imposed on others. 

section_title: Cost Estimates for International Climate Change Activities
paragraphs: The financial costs of coping with climate change may reach trillions of dollars. These costs would aim to address some combination of mitigation activities (i.e., actions taken to eliminate or reduce the long-term risk and hazards of climate change) and adaptation activities (i.e., actions taken to adjust to climate change, moderate potential damage, or cope with the consequences). Estimates of the projected costs vary widely depending upon assumptions made about the accepted levels of pollution, the ambitiousness of the global response, its structure, timing, and implementation, the potential climate-related damages, the affected sectors, as well as the methods of sourcing and delivering the necessary funds. The stricter the emissions target, the higher the estimate. The longer the response is delayed, the more threatening the damages may be, and the greater the resources required to respond to the threats. Bearing the costs of action (or inaction) are individuals, firms, local communities, national governments, and/or the international community.
subsections: section_title: Findings
paragraphs: A variety of international institutions and non-governmental organizations have used various climate change mitigation and adaptation analyses to estimate the climate-related financing needs for lower-income countries. Table 1 reports findings from a variety of studies on both the "net costs" and "associated financing requirements" for mitigation and adaptation efforts in lower-income countries. "Mitigation costs" refer to net incremental costs as factored over the lifecycle of the investment; and "mitigation financing" refers to the up-front capital investment needed over and above the business-as-usual (BAU) investment. Both mitigation costs and mitigation financing are estimated for stabilizing atmospheric concentrations at 450 ppm CO 2 e; adaptation investments are estimated for a variety of assistance categories for both 2010 and 2030. 

Focusing on the 450 ppm target, mitigation net costs in lower-income countries range between $150 billion and $190 billion a year by 2030. If the estimates for associated financing needs are included, the total costs increase to $287 billion to $614 billion a year. For adaptation, the most comparable estimates are the medium-term figures produced by the UNFCCC and the World Bank, which range from $30 billion to $110 billion annually. 

Currently, resources committed to address mitigation and adaptation in lower-income countries cover approximately 5% of the aforementioned estimates. One recent study has contributions for mitigation-specific assistance at approximately $20 billion annually. Very few studies have addressed current contributions for adaptation assistance. Many claim that assessing climate-related financial and investment flows is a formidable challenge, given the inconsistencies across reporting systems, the many data gaps (with the further challenge of identifying the contributions of underlying finance, which unlike specific climate finance is not reported as such), and the complex web of flows (with the possibility of double counting).

section_title: Methodology
paragraphs: Estimates of the total net costs and financing requirements needed for mitigation and adaptation activities in lower-income countries are often based on economic models of pollution abatement costs and/or adaptation investments aggregated across sectors and regions. This section discusses in more technical detail the economic modeling behind the various cost estimates presented in the previous section. Due to characteristic differences, estimates of net costs and financing requirements are often differentiated between the costs of mitigation and the costs of adaptation.
subsections: section_title: Mitigation Costs: Net Costs
paragraphs: Mitigation costs refer to the costs of actions taken to reduce or reverse the forces that contribute to global climate change. In higher and lower-income countries alike, mitigation measures aim to reduce current levels of emissions and to emphasize low-GHG development. Strategies include transitioning to a low-emissions energy supply; capturing the opportunities in energy efficiency improvements in buildings, transportation, and industry; reducing deforestation and improving sustainable forest management to better serve as GHG emissions sinks; and employing more low-emissions and sustainable agriculture practices. In the future, it could also entail actions that remove carbon dioxide from the atmosphere and sequestering it permanently, or other geoengineering technologies.

Estimates have been made of the incremental costs of various mitigation strategies. Figure 1 shows one example of what analysts refer to as an "Emissions Abatement Cost Curve." The purpose of the curve is to summarize the many emission reduction strategies available, and to characterize their emission reduction potential as well as their net costs, if the strategy is "pursued aggressively." The curve charts the amount of potential reductions (expressed along the horizontal axis in gigaton of CO 2 e abated per year) against the cost of specific measures (expressed along the vertical axis in cost per ton of CO 2 e abated). Of particular note, the curve shows that many abatement opportunities exist with net negative costs (approximately one-third of potential reductions), meaning that the measures may pay for themselves within the useful lifetime of the investment through efficiency savings (e.g., switching from incandescent light bulbs to LEDs would both reduce emissions and save money in the long run due to the extended product life and energy efficiency of LEDs). These negative cost options (shown on the left of the graph) are mainly found in energy efficiency measures in building, transportation, and industry as well as some fuel switching, recycling, and waste management practices. For emission reduction strategies in the agriculture and forestry sectors (e.g., improved agriculture practices, afforestation, reforestation), most options have low to moderate costs. Many of the low to moderate cost options fall within the curve's margin for error and are arguably breakeven estimates. Sectors with relatively high cost reduction opportunities are in some energy production options, with some emerging technologies having even higher costs than are represented on the graph given their nascent state of development. 

 Figure 1 demonstrates that ideally if all possible mitigation measures were taken on the cost curve in strict order from lowest-cost to higher-cost in sequence (i.e., from replacing all residential incandescents with LEDs all the way up to retrofitting all coal-fired power generation with carbon capture and storage technologies), global emissions abatement of 38 GtCO 2 e could be achieved in 2030. At this rate, the average cost of the abatement opportunities would be $5 per tCO 2 e in 2030, and the total cost for realizing the whole curve would be $187.5 billion in the year 2030. Transaction and program costs—not represented on the curve—are often estimated at an average of between $1.25 and $6.25 per tCO 2 e abated, making the total annual global cost approximately $250 billion to $375 billion by 2030. While an abatement cost of $6 to $12 per tCO 2 e is reasonable in light of current economic discussions on climate change, many commentators stress that mitigation costs are extremely sensitive to policy choices. They increase steeply with the stringency of the emission reduction target and with the desired degree of certainty of reaching it. Global mitigation costs would likewise rise to the degree that the world deviates from a least-cost emission pathway (e.g., not tapping low cost reductions in lower-income countries in the initial mitigation effort would increase global costs significantly). Further, the failure to allow for all mitigation opportunities would likewise increase overall costs (e.g., only concentrating on energy efficiency measures and not on forest and agricultural management could increase overall costs).

section_title: Mitigation Costs: Capital Intensity, or Up-Front Costs
paragraphs: Many commentators note that low-emission investments for mitigation activities often have high up-front capital costs, followed later by overall savings in operating costs. Figure 2 charts the incremental capital needs, or "capital intensity costs" (i.e., the extra investment needed at the onset of a project over and above the business-as-usual (BAU) technologies), as an alternative metric to the net cost curve of Figure 1 (which charts the additional net costs of a low-emission project over its entire lifetim e ). Figure 2 shows that in some cases the difference between capital intensity costs and net costs can be as much as a factor of two to four, depending on the rate of opportunity costs assumed. The McKinsey & Company estimate concludes that the total global upfront investment needed for abatement measures would be $1,012.5 billion per year in 2030—incremental to BAU investments. For financially constrained countries, specifically many lower-income countries, these high up-front capital costs can be a significant disincentive to invest in low-emission technologies. 

The McKinsey & Company estimate outlined above is just one of many assessments conducted on financial needs. See Table 1 above for other mitigation cost estimates from a variety of studies.

section_title: Adaptation Costs
paragraphs: Adaptation costs refer to the costs of adjustments made in natural or human systems in response to actual or expected climate change and its effects. Estimates of adaptation costs have focused on the additional amount of investment needed to reduce the impact of anticipated future damages caused by climatic trends or events, including measures to increase resilience, reduce the impacts of anticipated disasters, and cope with the aftermaths. Examples of adaptation measures include employing climate-resistant crop varieties, improving irrigation systems, integrating sustainable land management into agricultural planning, protecting water resources, managing coastal zones, designing infrastructure for extreme weather or for sea-level rise, and improving public health services.

From a global perspective, the adaptation challenge may be greatest in the developing world. Lower-income countries are generally more vulnerable to climate change because their economies are more dependent on climate-sensitive sectors such as agriculture, fishing, and tourism. Further, with lower per capita incomes, weaker institutions, and limited access to technology, lower-income countries are considered to have less adaptive capacity. See Figure 3 for one analysis of vulnerability and social capacity by country and region. The figure shows that in many cases a lower social capacity (as measured by literacy, education, health, and governance indexes) may make countries more vulnerable to the impacts of climate change.

Estimating the costs of adaptation with precision is difficult, not only because adaptation measures are widespread and heterogeneous, but also because the measures are embedded in the broader network of economic development strategies. While any investment in education, health, sanitation, and security, for example, may constitute good development, it also may help reduce socioeconomic vulnerability to both climactic and non-climactic stress factors. A variety of studies have tried to estimate the incremental costs of adaptation in low-income countries. Methods, definitions, and scopes of adaptation in these studies vary, accounting for many of the differences in cost estimates. In particular, many estimates assume that some portion of the incremental costs will be covered by the recipient countries themselves. Some studies attempt to consider "all" costs of adaptation to climate change and resulting damages (although none are comprehensive); some include just large-scale adaptation costs (i.e., not private measures taken by individuals); and some try to discern just the need for public financing for adaptation. The UNFCCC Secretariat estimates that the additional annual investment and financial flows needed worldwide would be on the order of $49 billion to $171 billion by 2030, with $30 billion to $73 billion needed for lower-income countries (the largest element of uncertainty in the UNFCCC estimate lies in the cost of infrastructure adaptation). Other sources have produced varying estimates. See Table 1 above for adaptation cost estimates from a variety of studies.

section_title: Total Costs for Mitigation and Adaptation Activities in Lower-Income Countries
paragraphs: A variety of international institutions and non-governmental organizations have used various climate change mitigation and adaptation analyses to estimate the climate-related financing needs for lower-income countries. One example by Project Catalyst ( Figure 4 ) sums the incremental costs for the period 2010-2020 to give an average total of $45 billion per year for mitigation needs in lower-income countries. Factoring in a higher rate of investment in lower-income countries and covering transaction costs and specific funding for emerging technologies brings the total financing requirement for abatement in lower-income countries to around $100 billion annually. Including projections for the additional costs of adaptation activities gives a final estimate of $126 billion per year for the period 2010-2020 in lower-income countries. 

section_title: Sources for International Climate Change Financial Assistance
paragraphs: As outlined in the previous section, trillions of dollars may be advocated over the coming decades to provide scaled-up, new, additional, predictable, and adequate financing for lower-income countries to enable and support their actions on climate change. These investments would aim to upgrade and expand energy, industry, and transport infrastructure; to manage land use, land use changes, and forestry practices; and to support the implementation of adaptation activities for reducing climate vulnerability and building climate resilience. Having estimated the potential financial costs for climate change investment, the next step in the process would be to consider the sources from which these funds may be generated. While markets that are privately constituted and self-regulated have delivered moderately to climate change investments world-wide, public institutions—including national governments, international organizations, and official financing mechanisms of the UNFCCC —continue to be key drivers for climate change investments, specifically in lower-income countries. In the past, these institutions have relied heavily on government revenues to finance their activities. But, with climate-related costs rising into the tens or hundreds of billions of dollars a year, it is unlikely that direct budget contributions from governments can meet the demand. Other sources of finance may be sought, and many proposals exist.

Potential sources of international climate change financing for lower-income countries can be divided into five broad categories: (1) private sector; (2) public interventions to stimulate private sector investment; (3) public sector; (4) innovative finance; and (5) voluntary actions. Most potential sources of finance would require some measure of government action or oversight—either directly, through budget contributions or a transfer of funds, or indirectly, through state-sponsored regulations or other incentives to leverage private sector investment. See Appendix A for an extended glossary of terms related to the various sources of climate finance discussed in this section. 

Each of the categories identified above could potentially generate funds to address climate change in lower-income countries. Each has advantages and disadvantages. There is no single set of criteria for comparing these options. Some of the criteria employed by commentators include the potential magnitude of funds that could be generated by each source; the economic and/or the GHG-related efficiency of each source; the practicality and predictability of generating funds from each source; the plausibility of assessing the "additionality" of each source; the overall accessibility and transparency of the funds provided and their use; and the equity and incidence effects as expressed among countries or between higher and lower-income countries. A brief summary of some of the more significant outstanding issues regarding the choice of sources is included in a discussion at the end of this section " Caveats Regarding Sources "; and a tabulated comparison of the various sources is offered in Appendix B .
subsections: section_title: Private Sector Sources
paragraphs: Private capital markets can provide one source for mobilizing financing for low-emission investments in lower-income countries. Instruments such as foreign direct investment, portfolio investment, microfinance, and public-private partnerships could be promoted to scale up private financing for climate change mitigation and adaptation activities. Incentive structures may need to shift in order to favor such investment, and economic and/or regulatory policies may need to be implemented to define targets and raise the profitability of alternatives. The section below outlines possible sources for international climate change financing in a privately constituted and self-regulated market. Public sector interventions to stimulate private capital investments are addressed in the next section.

Foreign Direct Investment : Foreign direct investment is the long-term participatory investment in the ownership of productive assets—such as factories, mines, and land—by a multinational corporation in a developing country's energy, industry, or transport sector. It can be a relatively stable source of financing. It has the greatest advantages in mitigation activities, in terms of transferring technology and standards which could allow economic development to leapfrog into more climate-friendly sectors such as energy efficiency and renewable energy. Many high-emission sectors—such as road transport, metals, mining, chemicals, timber, and cement—are dominated by large multinational corporations, and their investments and practices may likely have a big influence on the timing of alternative development pathways in lower-income countries. However, given that foreign direct investment tends to lag rather than lead economic growth, it is unlikely to play a significant role in the early stages of a shift onto such a development pathway, particularly given the initial high degree of uncertainty and the absence of the in-country inputs that large international firms need in order to operate efficiently. 

Portfolio Investment : Portfolio investment is the purchase of stocks, bonds, and money market instruments by foreigners for the purpose of realizing a financial return but not resulting in foreign management, ownership, or legal control. It could also be a stable source of international climate change financing. Investment could be mobilized through venture capital funds or specific "green" funds. It could appeal to investors willing to allocate investments to options that might generate less return but have greater potential in terms of climate change mitigation and socially responsible business practices. Currently, almost all "green" investment opportunities are concentrated in the more industrialized countries or the countries with emerging economies. Funds made available through this channel to lower-income countries have been both limited and skewed in favor of one or two countries. Without other incentives, the amount of resources that can be raised is likely to remain quite small.

Microfinance : Microfinance is the provision of financial services, in the fora of small loans at market value, to lower-income country clients who traditionally lack access to banking and related services. It could serve as another vehicle for mobilizing local private resources for investments in climate-friendly development. Over the past three decades, microfinance has grown dramatically, with more than 7,000 microcredit institutions in 2006, serving about 80 million people in about 65 countries. Climate-relevant microfinance has expanded beyond merely encompassing programs of credit provisioning to include schemes of microsavings and microinsurance. Given the close links between poverty reduction and climate vulnerability, scaling up microfinance has been considered a possible source of finance for climate adaptation programs. However, observers note that scaling up microfinance for long-term investment in productive activities and sustainable development would require support through a broader development strategy, including investments in infrastructure and human capital. 

Public-Private Partnerships : Public-private partnerships are business ventures funded and operated through a partnership between government and one or more private companies. They involve a contract between a public-sector authority and a private party, in which the private party provides a public service or project and assumes substantial financial, technical and operational risk in the project. Public-private partnerships have helped stimulate private financing for energy efficiency and renewable energy projects in lower-income countries. Likewise, they have assumed a growing importance as a vehicle for financing climate change adaptation programs, in the form of infrastructure projects and the delivery of health services.

section_title: Public Interventions to Stimulate Private Sector Investment
paragraphs: Much of the economic policy debate on climate change has been dominated by the search for market-based solutions to the problem of market failure (i.e., the external costs of GHG pollution). Successful policy would address the externalities of GHG pollution in the market and reveal the costs of choosing high-emissions over low emissions technologies. Once determined, these costs could be internalized through economic incentives (e.g., setting emissions levels or compliance pricing, etc.) to help drive pollution abatement. Funds for public or private sector contributions to international climate change financial assistance for lower-income countries could be derived and transferred in any number of ways from the finances generated by the market-mechanism.

In general, market-based mechanisms to reduce GHG emissions specify either the acceptable emissions level (quantity) or the compliance costs (price) and allow the marketplace to determine the economically efficient solution for the other variable. For example, tradable permit programs set the amount of emissions allowable under the program (i.e., the number of permits available limits, or "caps," allowable emissions), while allowing the marketplace to determine what each permit will be worth. Likewise, carbon fees set the maximum unit cost (per ton of CO 2 e) that one should pay for reducing emissions. Private decisions would determine how or how much pollution actually gets reduced. In one sense, preference for a carbon fee or a tradable permit system depends on how one views the uncertainty of costs involved and benefits to be received.

Tradable Permit Systems : Tradable permit systems—better known as "cap and trade programs"—set an overall cap on GHG emissions and then issue tradable permits to firms which would allow them to emit specified quantities of GHG. Firms are required to hold a number of permits equivalent to their level of pollution. Those firms that need to increase their permissible quantities would purchase permits on the market. Those that could reduce their emissions more cheaply could potentially sell their allowances on the market. Some cap and trade programs would auction all permits during the initial issuance. Some programs would phase in permits through a period of free or reduced price allocations of permits. Some programs include a mechanism whereby firms could gain emission credits through pollution reductions performed in economic sectors outside of the regulated market (e.g., agriculture, forestry, or in countries or regions not covered by the program). This is referred to as an "offset" market. In each case, revenue for international climate change assistance can be generated in a number of ways. 

a. Revenues from domestic auctioning of emission allowances in domestic emission trading schemes : This would involve auctioning of domestic credits (as in the EU Emission Trading Scheme phase III, or any potential domestic cap and trade program) and transferring some part of associated revenues to international climate change financing. b. Revenues from international auctioning of emission allowances in international emission trading schemes (such as Assigned Amount Units under the Kyoto Protocol): An Assigned Amount Unit (AAU) is a tradable "carbon credit" representing an allowance to emit GHG under the UNFCCC Kyoto Protocol emissions trading market. AAUs are issued up to the level of initial "assigned amount" of an Annex 1 Party. Some countries support sourcing revenue for international climate change activities by retaining some allowances from the Annex I countries and then auctioning them. c. Revenues from offset levies : This would involve withholding a share of offset revenues from emissions trading markets—such as the Kyoto market or any domestic market—as an international source of climate change financing. This is currently done with the Kyoto Protocol's Clean Development Mechanism (CDM), which capitalizes the UNFCCC Adaptation Fund through a 2% levy on the proceeds from its certified emission reductions.

Emission-Based Fees, and Other Levies : An emission-based fee is an environmental fee that is levied on the GHG content of fuels or other sources of emissions. By increasing the cost of emissions, emission fees raise public revenue, any or all of which could be transferred and used for international climate change assistance to lower-income countries. Emission fees are occasionally referred to as "carbon taxes"; under guidelines of the U.S. Office of Management and Budget, a "tax" is primarily for generating revenues, while a user (i.e., emissions) fee is primarily to charge for an entity's use of a resource (e.g., the atmosphere as a place to discharge waste emissions). 

a. Revenues from GHG fees : This would involve a tax on GHG emissions in countries raised on a per ton emitted basis. b. Revenues generated from taxes on international aviation and shipping : This would involve either a levy on maritime bunker/aviation jet fuels for international voyages, or a levy on passenger tickets of international flights. c. Revenues generated by removing fossil energy subsidies : This would involve public funds made available by the removal of fossil energy subsidies which could be diverted towards international climate change financing. While not a levy per se, redirection of subsidy grants or increases in tax receipts by reducing credits and deductions would function in a comparable economic manner to an emission tax on consumers. d. Revenues from fossil fuel extraction royalties/licenses : This would involve a redirection of a portion of existing government receipts associated with domestic fossil fuel production for use in international climate change financing.

section_title: Public Sector Sources
paragraphs: Allocating resources in a national public budget directly to international climate change assistance is a straightforward way for governments to finance activities in lower-income countries, and historically public funding has played an important role in both mitigation and adaptation financing. In practice, public funds may be mobilized similar to, or as part of, official development assistance (ODA); or, public funds may flow through international financial institutions as grants or grant-equivalent (i.e., "concessional") loans. While some see public funds as a practical, equitable, and potentially predictable source of international climate change financing, political acceptability in the donor countries over the longer term may depend on national circumstances and on the size of the contribution. Further, global fiscal cycles can place public finances in many high-income countries under extreme pressures and could make it difficult to generate sufficient and reliable financial flows over the required period or in the required order of magnitude. 

Voluntary Budget Contributions: Voluntary contributions involve public revenues provided to recipient countries—either directly or by international financial institutions—through national budgetary decisions. Voluntary contributions have played—and likely may continue to play—the most important role in publically funded international climate change finance. Voluntary contributions may draw revenue from a domestic base (e.g., through taxes or fees) and allow for contributing governments to (1) pursue different options at different times as public opinion evolves, (2) divert only a portion of revenue from a particular source for international climate change financing, rather than the entire revenue flow, and (3) retain control over annual spending, rather than provide some kind of automated mechanism. But voluntary contributions in many countries are subject to legislative decision making and annual appropriations, making predictability and reliability difficult to ascertain. 

Mandatory or Assessed Budget Contributions : Some lower-income countries have proposed that UNFCCC Annex I parties contribute from 0.5%-1.0% of their gross national income to climate change financing in non-Annex I countries, to be channeled through a multilateral fund under the authority of the Convention. This would generate approximately $150 billion to $300 billion per year at pre-crisis income levels of major Organization for Economic Cooperation and Development (OECD) economies. Others have proposed assessed contributions formulated on the basis of some combination of a contributing country's GHG emissions, population, and gross domestic product, in accordance with the principle of common but differentiated responsibilities and respective capabilities. Supporters propose that mechanisms should be put in place to make contributions legally binding. The source for these funds would be similar to voluntary contributions (i.e., domestic taxes or fees). 

Public Debt Instruments: Public debt instruments raise money for public entities by borrowing from bond markets. Most high-income country governments can borrow money at a discount because their chance of default is considered low compared to privately held companies. Multilateral Development Banks (MDB) and other International Financial Institutions (IFI) use the same principle for raising capital for lower-income country governments. Using their good credit rating, which is based on the fact that they are backed by the capital subscriptions of developed country governments, IFIs and MDBs borrow money at favorable conditions to lend at a lower interest rate or accept a higher risk, a benefit that they can pass on to their clients in the interest of development and climate protection. Increased capital subscriptions from higher-income countries would allow these institutions to increase lending to lower-income countries.

section_title: Innovative Finance
paragraphs: Despite the spectrum of sources available for international climate change financing, many observers consider current funding inadequate, and look to more innovative methods of finance. Various proposals have been made for raising revenues for climate action from sources not closely linked to GHG emissions. While these proposals have the capacity to generate large quantities of financial assistance, they may be perceived as arbitrary in their choices and by the numerous competing causes that could benefit from their financing. Two of the more heavily discussed proposals include a financial transaction tax and special drawing rights.

Financial Transaction Tax : A Financial Transaction Tax (FTT) is a levy on international financial transactions. The level of estimated revenues from the FTT is driven by the tax base, the tax rate, and the elasticity of the transaction volume to the tax rate. A global FTT, as currently debated, would be a new and additional source for climate finance. Strong international coordination and allowances for international implementation could increase the efficiency of such a source. However, critics point out that FTTs are unconnected to GHG emissions in any practical way, and the unresolved issues of incidence on both higher and lower-income countries would make it difficult to implement universally. 

Special Drawing Rights : Special Drawing Rights (SDRs) are an accounting mechanism—sometimes called "virtual currency"—typically held as a reserve asset in financial organizations such as the International Monetary Fund (IMF). SDRs supplement IMF member countries' official reserves and generate liquidity in the event of balance of payments difficulties. The value of an SDR is based on a basket of key international currencies. In some proposals to capitalize a fund for climate change financing, SDRs could be issued in exchange for real currency to generate revenues. In other proposals, bonds could be issued on the back of paid-in SDRs to generate liquidity and contributors would receive an equity stake in the fund proportional to their contribution. In either case, the IMF would not necessarily be the entity issuing these proposed SDRs or managing the system. Most policymakers have not supported the use of SDRs to capitalize resources for climate change finance because the effort would undermine the primary purpose of the SDR system, present legal and political/financial challenges in implementation, and offer few if any advantages over traditional capitalization.

section_title: Voluntary Actions
paragraphs: Some sources for international climate change financing may be found in philanthropic or voluntary markets. Proponents note that some companies and some consumers have already begun to implement voluntary changes and have already begun to make voluntary contributions in order to reduce GHG emissions. Many believe that absent more aggressive governmental intervention, it is unlikely that these trends would be quantitatively sufficient and timely enough to make a significant impact on climate change. Voluntary action may also hurt relative competitiveness and increase costs in the short term, reducing incentives to adopt more stringent standards in the future.

Philanthropy : Many philanthropic organizations already provide contributions to climate change mitigation or adaptation financing in lower-income countries. Many work closely with nongovernmental and civil society organizations to promote education, knowledge sharing, and human capital advancements to further climate change investment in lower-income countries. 

Voluntary Offsets : Voluntary offsets are "carbon neutral" certificates that are sold by some private entities in exchange for climate-related services (e.g., a contribution to an international climate change fund). Companies currently sell offsets in exchange for assurance that the funds will be used to reduce GHG emissions (e.g., by planting trees). This may differ from general philanthropy in the sense that funds are, in principle, directly in exchange for quantified emissions reduction performance and could be issued through aggregators of small, diversified projects or through brokers. 

section_title: Caveats Regarding Sources
paragraphs: The Role of Market s : The economic debate within international climate change policy has been dominated by assessments of market-based 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 investment will likely have a predominant role to play in any low-emissions economic 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 and mobilize the necessary investment. Some assert that price mechanisms are unreliable guides in cases where investments are large, where returns are not immediately visible, and where conditions are dependent upon unpredictable policy initiatives. The uncertainties in investments are heightened when the climate and development challenge takes place against a backdrop of systemic financial market failure and natural resource price volatility. As such, some policymakers believe that market mechanisms would contribute only a partial role in a larger package of measures that includes a reliance on regulations and large-scale public investments.

The Role of Governments : Notwithstanding economic considerations, the "private funding" versus "public funding" debate also has political, legal, and equity components. For example, some recipient countries contend that donor governments should provide public funds as the main source of climate change assistance because they understand climate finance as an international equity issue, with contributions serving as reparation for past environmental loss or damage. Others assert that developed country governments—not private corporations—have signed onto legally binding international environmental agreements to provide assistance to lower-income countries. Some may believe public monies would be more direct and easier to generate, and therefore more predictable and sustained. They may not consider or recognize the challenges in some countries to appropriating federal funds for international purposes. Similarly, some recipient countries may be suspicious of foreign private investment and would prefer the funding to be under the control of local governmental decision-makers, hoping this would better reflect local priorities and indigenous cultures. Conversely, donor countries tend to underscore the costs of extending such financing, including the direct outlays of funds, the secondary costs to their domestic economies for investing abroad at concessional terms, and the losses accrued by passing funds through governments institutions or other intermediaries.

The Requirement for Scaled Up, New and Additional , Predictable and Adequate Financing : Most, if not all, low-income countries have stated that fulfilling their commitments under the UNFCCC would depend on financial and technical support from higher-income countries. As noted above, they seek resources that can be defined as "scaled up, new and additional, predictable and adequate." While the term "scaled up" presumes an increase in funding from existing sources, the terms "new," "additional," and "adequate" are subject to diverse interpretations and controversy. "New" funds could signify entirely unique funding sources arising from new public levies, new international allocations, or new multilateral mechanisms; or, it could simply refer to funds from a new fiscal year, a new multilateral replenishment contribution, or a new domestic or international program that takes the place of an expiring one. Some are concerned that funding is not shifted merely from one type of development assistance to climate change assistance, with little or no increase comparable to the stated needs. "Additional" is meant to denote an increment above and beyond "business-as-usual." However, speculating as to counterfactual development assistance trajectories that would have taken place if not for the "additional" funding is rife with debate. Finally, the term "adequate," with respect to needs, is a wholly subjective quantity. 

section_title: Methods for Delivering International Climate Change Financial Assistance
paragraphs: The previous section outlined many of the existing and proposed funding sources for investment in climate change mitigation and adaptation activities in lower-income countries. The next step would be to consider the methods through which these funds could be transferred from contributing countries to their recipients. A variety of mechanisms, organizations, and institutions for disbursing international climate change financing already exists. All have a role in catalyzing climate action: mobilizing additional resources; reorienting public and private flows toward low-carbon and climate-resilient investments; supporting the research, development, and deployment of climate-friendly technologies; and strengthening the institutional capacities of recipient countries. Mechanisms can be divided into three broad categories: (1) private or quasi-private sector, (2) public sector bilateral, and (3) public sector multilateral. Foreign Direct Investment (FDI), Export Credit markets, non-concessional lending at the Multilateral Development Banks (MDB), and the various Kyoto Protocol market mechanisms at the UNFCCC (e.g., the Clean Development Mechanism (CDM)) would be classified as private or quasi-private sector mechanisms. Public sectors mechanisms would include contributing countries' Official Development Assistance (ODA) as well as many of the multilateral environment and development trust funds (e.g., the Global Environment Facility (GEF)) and the concessional lending windows housed at the various institutions at the World Bank Group. 

 Figure 5 presents a comparison of the financial flows for energy and infrastructure development—including development specific to climate change mitigation—in low-income countries per annum (in this example, the analysis compares flows for the year 2007). The figure shows that total investment in all "mitigation-relevant" sectors (i.e., funding for economic development in all key sectors that shape future GHG emissions in developing countries, including energy, transport and water infrastructure, industry, waste management, agricultural, and forestry) amounted to an estimated $316 billion, of which over 80% was from private sector funds. It should be noted that "mitigation-relevant" investments need not be GHG reducing investments (e.g., both wind power generation and fossil fuel power generation are "mitigation-relevant" investments). "Mitigation-specific" investments (i.e., investments in which the primary objective is to reduce GHG emissions) amounted to $20 billion in 2007—or 6% of total key sector investment—of which approximately 60% was from private sector funds.

All of the mechanisms identified above could potentially deliver funds to address climate change in lower-income countries. Each has advantages and disadvantages, and there is no single set of criteria for comparing these options. Many critics contend that the overall architecture of financial mechanisms to address climate change is underfunded and unnecessarily complex. The array of funds and financial institutions lack both strategic mandate and adequate coordination, leaving many gaps, overlaps, and inefficiencies. Divisions have arisen over the proper financial instruments to employ in lower-income countries (e.g., grants or loans) as well as the role shared by the public and private spheres. A brief summary of some of the more significant outstanding issues regarding the choice of sources is included in a discussion at the end of this section under " Caveats Regarding Mechanisms ."
subsections: section_title: Private Sector Mechanisms
paragraphs: The sheer magnitude of the required investment for climate change mitigation and adaptation activities necessitates capital flows from the private sector. Currently, the private sector accounts for over 85% of global investment in those economic sectors relevant to climate change mitigation and adaptation activities, although governments largely control the underlying infrastructure investments that affect the opportunities for low-emissions economic development. Similarly, public sector financing has been more prominent in low-income countries—particularly the least developed countries and the small island states—in which private entities are still reticent to invest. To this point, private capital markets have filled in the gaps in climate change financing in lower-income countries, and, in some cases, have taken the lead in market-ready mitigation investment to create a low-carbon economy, such as energy-efficient machinery, cleaner cars, and renewable energy. 

Foreign Direct Investment : Over the past two decades, the international climate change agenda has shared a stage with an expanding global economy. As such, particular attention has been paid to foreign direct investment (FDI) in lower-income countries to address climate change. FDI has many potential benefits, including financing infrastructure expansion without contributing to public debt, supporting technology and knowledge transfer, and acting as a catalyst for further capital inflows. Despite considerable efforts to attract FDI in the last several years, actual levels of such investment into the energy and industry sectors in many countries with economies in transition have been moderate. Similarly, FDI tends to lag rather than lead economic growth, and, as such, is not likely to play a significant role in the early stages of a shift to lower-emission development trajectories. Mobilization of the necessary capital resources requires an attractive investment climate—a business-friendly environment, favorable macroeconomic performance, and a regulatory environment that is predictable, fair, transparent and efficient. 

section_title: Quasi-Private Sector Mechanisms
paragraphs: Several mechanisms function predominantly in the private sector but were set up initially by public sector entities or are currently backed by guarantees (whether financial or institutional) from them.

Export Credit Agencies: Export Credit Agencies (ECA) are private or quasi-governmental financial institutions or agencies that provide financing to domestic companies for their international trade activities. ECA services can include such instruments as direct loans, loan guarantees, and insurance for companies in order to help promote exports. These programs are implemented in cases where the private sector is unable or unwilling to provide financing to ensure equitable competition for U.S. exporters due to potential commercial, exchange rate, or political risks and uncertainties in overseas markets. The primary objective of ECAs is to remove the risk of repayment to exporters by shifting the financial burden of uncertainty onto themselves, for a premium. The U.S. Export-Import Bank and the Overseas Private Investment Corporation are two examples of export credit and overseas investment agencies connected to the United States government.

Development Banks: Non-Concessional Lending : The International Bank for Reconstruction and Development (IBRD) and the International Finance Corporation (IFC) are the facilities within the World Bank Group that make non-concessional or "hard" loans to middle-income countries as well as provide services for private sector ventures and projects in developing countries. While similar in structure to a commercial lending facility, the IBRD focuses primarily on investments that support poverty reduction, economic development, and global public goods, including food security and climate change. The IBRD currently has plans to increase lending to support renewable energy and energy efficiency projects in lower-income countries, and it continues to serve as a center for research and knowledge-sharing on development practices, promoting lessons learned and identifying innovations to combat the effects of climate change. The regional banks in the World Bank Group have similar non-concessional lending windows. The United States supports the IRBD through its capital subscription to the IBRD General Capital Increase (GCI).

UNFCCC Kyoto Protocol Mechanisms : The UNFCCC introduced three market-based mechanisms to assist countries with commitments under the Kyoto Protocol to limit or reduce greenhouse gas emissions. The mechanisms include International Emission Trading, the Clean Development Mechanism, and Joint Implementation. Most relevant to developing country assistance, the Clean Development Mechanism (CDM) allows entities with emission-reduction or emission-limitation commitments under the Kyoto Protocol to implement emission-reduction projects in lower-income countries in order to earn saleable certified emission reduction (CER) credits which can be counted towards meeting Kyoto targets. Though the CDM has been used far less than many had initially envisioned (in part because of slow processes and governance issues), its board says that it has issued more than 1.7 billion tons of CO 2 e GHG reductions ($2.9 billion expected by end of 2012), and has leveraged US$33 billion from investors in 2007 alone. Similar programs include the World Bank's Carbon Finance Unit, which uses donations from private and public entities to purchase GHG emission reductions in client countries.

section_title: Public Sector Mechanisms
paragraphs: As a complement to private sector investment, many countries also contribute funds to climate change initiatives in lower-income countries through various public sector mechanisms, organizations, and institutions. Governments may choose to contribute these funds either directly to recipient countries (i.e., bilateral assistance) or in combination with other donors through an international institution (i.e., multilateral assistance). Bilateral assistance is often provided through a contributing country's development agency (e.g., U.S. Agency for International Development (USAID)). These direct and long-standing relationships between donor and recipient countries' development agencies can enable cooperative implementation plans with respect to environmental issues. Many climate change initiatives share a sensitivity to other development sectors (e.g., agriculture, biodiversity, health, and infrastructure) and provide an opportunity to implement innovative cross-sectoral programs. Further, bilateral assistance gives contributors more control over where the money goes and how the money is spent. For example, contributing countries may have more flexibility to allocate funds to countries that are of geopolitical strategic importance, but not facing the greatest development needs, than might be possible by providing assistance through a multilateral organization. By building a clear link between the contributing country and the recipient country, bilateral assistance may also garner more goodwill from the recipient country than if the funds had been provided through a multilateral organization.

Multilateral organizations offer different benefits for contributing countries. Multilateral organizations pool the resources of several contributors, allowing countries to share the cost of development projects (often called burden-sharing). In this way, one country's multilateral assistance is said to "leverage" additional funds from other contributing countries, as well as from implementing agencies, non-governmental organizations, the private sector, and even the recipient countries themselves. Further, long-standing and established multilateral institutions dedicated to climate change initiatives and sustainable development practices may hold a level of expertise and may benefit from knowledge carry-overs that are not as prevalent in the smaller bilateral assistance agencies of some contributing countries. Additionally, contributing countries may find it politically sensitive to attach or enforce policy reforms to bilateral assistance, and multilateral organizations can usefully serve as a shield for imposing and enforcing conditionality that may be politically sensitive to attach bilaterally. Finally, many believe that providing funds to multilateral organizations plays a role in a contributing country's leadership in the world economy.

 Table 2 lists some of the most prominent bilateral and multilateral financing mechanisms for climate change activities in lower-income countries. Below are descriptions of the various public sector mechanisms currently employed by the United States. Commentary on the effectiveness of each mechanism can be found in the topical discussion at the conclusion of this section as well as in the respective CRS reports footnoted under each heading.
subsections: section_title: Bilateral: Official Development Assistance74
paragraphs: Official Development Assistance: Official Development Assistance (ODA) programs, funded primarily through the U.S. Agency for International Development (USAID), aim to advance and sustain U.S. engagement with specific developing countries on critical global issues such as food security and climate change. ODA-funded programs are designed to support the efforts of recipient governments and their private sector and non-governmental partners to implement the political and economic changes needed for sustainable practice. USAID has targeted "adaptation," "clean energy," and "sustainable landscape" programs as the three pillars of the Obama Administration's Global Climate Change Initiative to assist vulnerable countries adapt to the impacts of climate change and reduce net GHG emissions in their economies. USAID estimates that approximately one-sixth of its agency-wide Development Assistance account is earmarked for the Administration's Global Climate Change Initiative programs. 

U.S. appropriations for bilateral climate change initiatives through USAID's or the Department of the State's ODA programs is subject to congressional approval. Congressional committees of jurisdiction include the U.S. House of Representatives Committee on Foreign Affairs, (various subcommittees); the U.S. House of Representatives Committee on Appropriations, Subcommittee on State, Foreign Operations, and Related Programs; the U.S. Senate Committee on Foreign Relations, Subcommittee on International Development and Foreign Assistance, Economic Affairs, and International Environmental Protection; and the U.S. Senate Committee on Appropriations, Subcommittee on State, Foreign Operations, and Related Programs.

ODA is a significant component of international climate change assistance. The Organization for Economic Cooperation and Development (OECD) has estimated bilateral, climate-specific support to low-income countries at an annual average of about $3.4 billion from 2003-2007, as reported in their Creditor Reporting System. This climate-specific financing represented about 0.01% of contributing countries' Gross Net Income (GNI) for that period, and about 3.4% of contributing countries' total bilateral ODA for all purposes. Accordingly, the United States' contributions represented about 0.002% of GNI and about 0.1% of all bilateral ODA, in both instances below the international average. Given the vagaries of definitions and reporting, the OECD estimates that all bilateral financing support for climate mitigation represented about US$8 billion to $53 billion in 2007—no more than one-sixth of the total estimated flows of about US$314 billion going to the sectors relevant to climate mitigation actions (i.e., energy, transportation, agriculture, water supply, industry, minerals, and mining). 

section_title: Multilateral: International Financial Institutions
paragraphs: International Financial Institutions: International Financial Institutions (IFI) are the primary multilateral mechanisms for climate change financing to lower-income countries. IFIs coordinate multiple donor country contributions and provide loans, grants, and investment services to developing economies to promote growth, alleviate poverty, and aid in targeted programs such as climate change and food security. IFIs were designed to provide professional advice and technical support to address the economic impediments to developing country investment. In the United States, climate-related funding for IFIs is managed primarily through the Office of International Affairs at the U.S. Department of the Treasury.

U.S. appropriations for multilateral climate change initiatives through authorized International Financial Institutions are subject to congressional approval. Congressional committees of jurisdiction include the U.S. House of Representatives Committee on Financial Services, Subcommittee on International Monetary Policy and Trade; the U.S. House of Representatives Committee on Appropriations, Subcommittee on State, Foreign Operations, and Related Programs; the U.S. Senate Committee on Foreign Relations, Subcommittee on International Development and Foreign Assistance, Economic Affairs, and International Environmental Protection; and the U.S. Senate Committee on Appropriations, Subcommittee on State, Foreign Operations, and Related Programs.

a. Development Banks: Concessional Lending: The International Development Association (IDA) is a facility within the World Bank Group that makes grants and highly concessional or "soft" loans to the world's 79 poorest countries. IDA remains the single largest source of development finance globally across a range of sectors, including climate change mitigation and adaption initiatives as well as climate-relevant programs in primary education, basic health services, clean water and sanitation, environmental safeguards, business improvements, infrastructure, and institutional reforms. The United States was a driving force behind the creation of IDA in 1960 and remains its largest shareholder. The United States currently supports IDA through appropriated contributions pledged to IDA's 16 th replenishment period. b. Tropical Forests Conservation Act: The Tropical Forest Conservation Act authorizes debt relief for low- and middle-income countries to support conservation of tropical forests. Under the program, treated debt is reduced and redirected to provide for grants to local non-governmental organizations and other entities engaged in forest conservation in the recipient country. The United States uses appropriated funds to pay for the budget cost of the debt restructuring. "Debt-for-nature" initiatives like the TFCA may be structured as either bilateral or multilateral programs and may employ third-party non-governmental organizations as brokers or rely on direct government-to-government agency coordination. To date, the United States has concluded 17 TFCA agreements in 14 countries, generating over $260 million for tropical forest conservation and the consequent GHG emission savings. c. Global Environment Facility: The Global Environment Facility (GEF) is an independent and international financial institution that provides grant-based financing to cover the additional or "incremental" costs associated with transforming projects with national development benefits into ones with global environmental benefits. GEF partners with international institutions, nongovernmental organizations, and the private sector to assist lower-income countries with environmental projects related to six areas: biodiversity, climate change, international waters, the stratospheric ozone layer, land degradation, and persistent organic pollutants. Since its inception, GEF has allocated $9.2 billion—supplemented by more than $40 billion in co-financing—for more than 2,700 projects in 165 countries. GEF estimates that approximately 50% of its implemented projects assist climate change activities. The United States currently supports GEF through appropriated contributions pledged to GEF's fifth replenishment period (2010-2014). d. Clean Technology Fund: The Clean Technology Fund (CTF) is one of two Climate Investment Funds administered by the World Bank Group that aim to help finance lower-income countries' transitions toward low-carbon and climate-resilient development. Implemented in 2008 by the United States, the United Kingdom, and Japan, and joined by several other donors in the international community, the CTF seeks to provide financing—principally to larger emerging economies and to regional groups—for demonstrating, deploying, and diffusing large-scale clean energy investments with the potential for long-term avoidance of GHG emissions. The fund promotes renewable energy and energy efficient technologies as well as energy efficiency strategies in the transportation, building, industry, and agricultural sectors. Eight contributing countries have pledged $4.4 billion to the CTF since September 2008 in support of programs in 18 lower-income countries. The U.S. pledge of $2 billion—split between the CTF and the SCF—is currently supported through annual appropriated contributions. e. Strategic Climate Fund: The Strategic Climate Fund (SCF), founded in conjunction with the CTF as the second of the World Bank's two Climate Investment Funds, supports three programs that aim to pilot new and scaled-up approaches to address climate change challenges in lower-income countries. The Pilot Program for Climate Resilience assists many of the poorest and most vulnerable countries prepare for and respond to the impacts of climate change by integrating climate adaptation measures into core development planning. The Forest Investment Program works to reduce deforestation in lower-income countries through improved forest management. The Program for Scaling-Up Renewable Energy in Low Income Countries supports a select number of the poorest countries in their efforts to expand energy access and stimulate economic growth through the deployment of renewable energy solutions. Ten contributing countries have pledged $2.5 billion to the SCF since September 2008 in support of programs in over 30 lower-income countries. The U.S. pledge of $2 billion—split between the CTF and the SCF—is currently supported through annual appropriated contributions. f. Green Climate Fund: The Green Climate Fund, currently under negotiation in the UNFCCC Ad Hoc Working Group on Long Term Cooperative Action as set forth by the Cancun Agreements in December 2010, is to be designated as the official financial mechanism of the Convention. Upon creation, it would support projects, programs, policies, and other activities in lower-income countries using thematic funding windows for mitigation, adaptation, forestry, capacity building, and technology transfer, among others. All program attributes have yet to be agreed upon by negotiating Parties, including provisions for its trustee, governance structure, administration, funding levels, and its official status under the Convention.

section_title: Caveats Regarding Mechanisms
paragraphs: The Debate between Bilateral and Multilateral: Contrasting models of foreign assistance have arisen through the years in programs like the Marshall Plan, involving bilateral aid arrangements between countries, and the Bretton Woods process, involving multilateral arrangements like the IMF, the World Bank, and others. Historically, bilateral assistance has dominated the foreign aid landscape, and it remains potentially the most direct and timely method of reaching a destination and working for a recipient government. Environmental contributions by multilateral organizations have been criticized for a lack of cost efficiency, a focus on economic development in lieu of the environment, and the imposition of requirements for global environmental benefits as opposed to local, environmentally sound development. But proponents stress that multilateral assistance tends to be less tied to the political self-interest of individual donor countries, allows for the efficient pooling of financial resources and the leveraging of additional monies, helps ensure that different bilateral arrangements do not work at cross-purposes, and serves to develop a sense of cooperation among nations with the additional advantage of reducing conflict.

The Complex Institutional Architecture : Whether it is the United Nations family of agencies, the World Bank Group, or any number of countries and their development agencies, the plethora of actors engaged in climate financing is unwieldy to many recipient countries. Larger bureaucracies tend to slow and dampen performance, reduce flexibility and transparency, and heighten transaction costs. As mechanisms for climate finance proliferate, each new or special-purpose fund carries with it a set of challenges, including redesigned institutional and governance functions, inefficient allocations, and limitations on scaling up. These challenges threaten to reduce the overall effectiveness of climate finance because as transaction costs increase, recipient country ownership lags and alignment with country development objectives becomes more difficult. 

The Limitations of Current Market Mechanism s : The UNFCCC Clean Development Mechanism has demonstrated that markets can stimulate emission reductions, provide essential learning, and build capacity. But some attest that mechanisms such as the CDM contain inherent inefficiencies, including a relatively weak and inefficient UNFCCC governance structure, an inability to successfully generate local economic co-benefits, an uneven distribution of projects that is geared toward higher-income emerging economies, a weakness in incentives to foster real transformations to a low-carbon economy, and a debate over the additionality of a given project's reductions (i.e., a debate over if the enacted emission reductions paid for by the mechanism are additional to actions that otherwise would have occurred). 

The Choice between Top-Down or Bottom-Up: Whether purposeful or not, the international community is currently operating under a disjointed set of mechanisms which encourages fragmentation of the global response to climate change. Some argue that the "bottom-up" approach offers competition for market share, flexibility in international commitments, and a greater leeway to manage climate change action on individual terms, including accounting for different views of national circumstances, domestic politics, legal backgrounds, economic costs, and competitiveness exposures. The United States and other higher-income countries, as well as some emerging economies such as China, often stress the bottom-up approach as a way to protect international political issues (such as sovereign rights) and international economic issues (such as the globalization of markets). Others find fragmentation to be a great detriment to effectiveness, efficiency, and equity at a time when the international community may wish to bring together a myriad of elements into a single, functioning, strategic framework. Most lower-income countries tend to support a centralized, top-down mechanism situated in the UNFCCC, or the United Nations at large. They may perceive a heightened sense of coordination, consistency, and transparency afforded by these institutions through their "one country: one vote" paradigm. 

section_title: U.S. Contributions to International Climate Change Financial Assistance
subsections: section_title: Congressional Authority, Oversight, Appropriations
paragraphs: The United States has relied mostly on direct budget appropriations to finance climate change actions internationally. Congress is responsible for several activities in this regard, including (1) authorizing periodic appropriations for federal agency programs and multilateral fund contributions, (2) enacting those appropriations, and (3) overseeing U.S. interests in the programs. Oversight may come in the form of guidance; please see box "Some Examples of Legislative and Executive Branch Guidance" in this section for examples. Currently, direct budget contributions from the U.S. government are appropriated to relevant federal agencies to support their bilateral and multilateral contributions to international climate change initiatives. These appropriations are requested on an annual basis by the Administration and enacted on an annual basis by the Congress. 

The majority of bilateral and multilateral contributions to international climate change initiatives is funded through programs at the Department of State, the Department of the Treasury, and the U.S. Agency for International Development. Funds for these programs are appropriated in the Administration's Executive Budget, Function 150, for State, Foreign Operations, and Related Programs. Historical budget authority for these programs through 2009 is presented in Table 3 . The current Administration's budget authority and budget requests are presented in Table 4 . 

Congressional committees of jurisdiction for international climate change programs at the Department of State, the Department of the Treasury, and the U.S. Agency for International Development include 

the U.S. House of Representatives Committee on Foreign Affairs, (various subcommittees); the U.S. House of Representatives Committee on Financial Services, Subcommittee on International Monetary Policy and Trade; the U.S. House of Representatives Committee on Appropriations, Subcommittee on State, Foreign Operations, and Related Programs; the U.S. Senate Committee on Foreign Relations, Subcommittee on International Development and Foreign Assistance, Economic Affairs, and International Environmental Protection; and the U.S. Senate Committee on Appropriations, Subcommittee on State, Foreign Operations, and Related Programs. 

Currently, no federally legislated system exists to require or assure future, predictable public financing for international climate change assistance (e.g., a mandated allocation of redirected fossil fuel subsidies). Similarly, no federally legislated market-based mechanism has been instituted that would contribute funds generated from the private sector for international climate change assistance (e.g., a GHG cap-and-trade program, which could incentivize international private capital investment through offset markets or provide internationally targeted funds through an allocation of auction or offset revenue).

section_title: Historical Contributions
paragraphs: U.S. participation in international negotiations for global environmental assistance stretches at least back to the 1972 United Nations Conference on the Human Environment (UNCHE), the first concerted effort by the international community to focus on the environment as a major topic of concern and attention. Therein, discussions among representatives from both industrialized and lower-income countries gave rise to a compromise on a doctrine to address both environmental and developmental policy. Governments at the time agreed that (1) the environment and development are two mutually reinforcing sides of the same coin, and (2) that industrialized countries would accept the principle of "incrementality" by which they would pay some or all of the additional costs of environmental initiatives in the developing world above and beyond the basic costs of development. The relationship between the environment and development was further developed at the 1992 United Nations Conference on Environment and Development, in the document called Agenda 21 , wherein a blueprint was detailed for putting sustainable development into practice. Agenda 21 also doubled the pledge by the industrial world to assist lower-income countries in poverty alleviation and environmental protection. Although Agenda 21 was impressive in its scope and comprehensiveness, the policy was non-binding; and some observers note that "the whole enterprise [was] heavily dependent on strong leadership from major countries, adequate financing, and effective institutional arrangements for follow-up ... none of which materialized."

Financial pledges were made to support climate change initiatives specifically under the 1992 United Nations Convention on Climate Change (UNFCCC). The United States, as a Party to the UNFCCC, has committed to providing financial and technical assistance to lower-income countries' efforts in meeting their respective obligations. Historically, some of this assistance has flowed through the Global Environment Facility—the official financial mechanism of the UNFCCC—to which the United States has contributed funding since 1993. Further, at the 2009 UNFCCC Conference of Parties (COP) in Copenhagen, Denmark, and at the 2010 COP in Cancun, Mexico, the United States helped negotiate a package that included developed country pledges of an aggregated $30 billion of "fast start" climate financing for the period 2010 to 2012 and $100 billion annually by 2020. This funding is to come from a wide variety of sources, public and private, bilateral and multilateral, including alternative sources of finance, and be delivered through both new and existing fund arrangements, with governance structures providing for equal representation of developed and developing countries. These negotiations are still pending and are currently non-binding. The 2011 COP is scheduled to meet during December in Durban, South Africa to further negotiations toward a potentially binding treaty. The Obama Administration has not yet specified what share of pledges it envisions the United States providing, nor a strategy for how to fulfill the long-term pledge.

Historically, the United States' credibility on international climate change financing has been impaired by periodic under-funding. The United States is currently $217 million in arrears for its assessed contributions to the Global Environment Facility (i.e., 10% of the total U.S. pledge of $2,185 million since 1994). Also, though the Bush Administration helped establish the Clean Technology Fund in 2008 under the World Bank and pledged to help capitalize it, the U.S. Congress declined to appropriate the first U.S. payment of $400 million requested by the Administration for FY2009, and is far short of the $2 billion aggregated pledge the Bush Administration made for the period 2008-2012. Further, recent appropriations fall well below what many countries envisage for the U.S. share of the $30 billion UNFCCC "fast start" pledge. 

section_title: FY2011 Enacted Budget Authority and the FY2012 Budget Request
paragraphs: Based on provisions in H.R. 1473 , most FY2011 enacted funding for international climate programs at the Department of State, the Department of the Treasury, and USAID (Function 150) are drawn from larger line item agency categories. Allocations for these programs are at the discretion of the agency, in relation to its other programming, and have yet to be reported. 

The Obama Administration's FY2012 budget request for international climate programs at the Department of State, the Department of the Treasury, and USAID (Function 150) would fund near-term climate financing of slightly over $1.3 billion across three areas: (1) clean energy ($652 million, up from $531 million enacted for FY2010) to reduce net GHG emissions from the energy sector, industry, and urban areas; (2) sustainable landscapes ($421 million, up from $169 million enacted for FY2010) to assist reduction of GHG emissions from deforestation and land degradation; and (3) adaptation ($256 million, up from $246 million enacted for FY2010) to focus on helping countries manage climate and weather-related risks and build resilience. 

 Table 4 outlines recent U.S. budget authority and Administration requests for international climate change assistance programs by agency. For a more detailed description of the Obama Administration's Global Climate Change Initiative, its agencies, programs, funding, and purposes, please refer to Appendix C .

Appendix A. Glossary of Options for Generating and Disbursing Financing to Address Climate Change

Appendix B. Comparison of Sources of Climate Change Financing

Appendix C. U.S. Global Climate Change Initiative

"Adaptation" ($256 million FY2012 request, up from $246 million in FY2010)

Assisting countries manage climate and weather-related risks and build climate resilience. 

"Clean Energy" ($652 million FY2012 request, up from $531 million in FY2010)

Mitigating net greenhouse gas emissions from energy sectors using energy efficiency and low-emission technologies. 

"Sustainable Landscapes" ($421 million FY2012 request, up from $169 million)

Reducing greenhouse gas emissions from deforestation and land degradation.


Question-summary annotations: questions: question: What is the main debate in international financing for climate change?
answer: The fundamental dispute concerning international financing for climate change centers upon who should pay for it and how.
child_questions: question: What has been one of the largest economic considerations?
answer: The debate has been dominated by economic assessments of market-based 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).

question: What will impact the future of emissions?
answer: Many agree that private sector investment will likely have a significant role to play in any low-emissions future, and that establishing a price on GHG emissions will likely have a part in any effective policy agenda.
child_questions: question: What are concerns about the effect of these supposed shifts?
answer: 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.
child_questions: question: What does this perspective mean about the impact of different types of funding?
answer: 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.

questions: question: What financing for climate change currently exists?
answer: Many methods for disbursing international climate change financing currently exist.
child_questions: question: What effect on change do these current methods have?
answer: All have a role in catalyzing climate action.

question: What kinds of private sector funding exist?
answer: 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.

question: How is the current opinion on climate change financing?
answer: Many contend that the financial architecture is underfunded, unnecessarily complex, and lacks both strategic mandate and adequate coordination.
child_questions: question: What are some of the issues related to employing funding?
answer: 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.