Loans or grants for climate finance?

Confusion reigns over the right format for cash to tackle climate impacts. Resolve this quickly or the UN-backed Green Climate Fund will falter

A family using solar energy in generating power in Tarialan soum, Uvs Aimag (Uvs Province). In remote soums many people live without electricity due to remoteness, vast distances and scattered nomadic way of life. These photographs depict the families working in the sea buckthorn field and shows their living conditions in a ger (Mongolian traditional tent).

A family uses solar energy to generate power in Mongolia. Climate finance funds clean projects in the developing world (credit: UN photo)

By Saleemul Huq

As we approach the Paris climate summit in December the topic of climate finance is becoming more pressing.

It was a major topic of the recent IMF meeting in Lima, Peru and will require the involvement of ministers of finance rather than environment to make decisions.

The good news is that a political commitment of $100 billion per year starting from 2020 has already been pledged by rich countries.

This will help towards supporting actions to tackle climate change in poorer countries and the Green Climate Fund (GCF) has been established to be a channel for the funds. The next meeting of the GCF Board in November is expected to approve the first set of funded projects.

However, the devil as always, is in the details of how the funds are to be channelled.

Who is going to get it? What will be the relative proportion for mitigation and adaptation?

Will the funds be given as loans or grants? How will private sector finance be mobilised and counted?

Fundamental confusion

One of the key questions is the allocation of grants versus loans and the level of funding for mitigation versus adaptation.

The $100bn is meant to provide support for mitigation and adaptation.

The GCF Board has already adopted a decision to allocate its funds equally between the two and also to prioritise the most vulnerable countries, such as the Least Developed Countries (LDCs) and Small Island Developing States (SIDS) for adaptation funding.

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While these are indeed commendable decisions when it comes to providing funding for adaptation to the LDCs and SIDS the GCF secretariat is said to be offering low interest loans rather than grants.

This is due to a fundamental confusion between a development bank (which is where the officials of the GCF secretariat have come from) and a fund.

Bankers are in the business of giving loans that need to be repaid (even if the interest is low) while the LDCs and SIDS have an expectation that climate change finance from rich countries (who are mainly responsible for historic emissions) is to enable them to adapt to the adverse impacts of human induced climate change (for which they have very to cause) must be provided in the form of grants.

If this confusion between loans vs grants for adaptation is not resolved quickly it is unlikely that the GCF will be able to deliver the adaptation funding to the most vulnerable countries effectively.

Idle billions

For the LDCs there is an additional paradox in that while the GCF is sitting on billions of dollars and has not yet disbursed anything, there are over thirty shovel-ready adaptation projects approved by the LDC Fund requiring around $250m but there is no money in the Fund.

The rich countries seem to have forgotten their commitment to the LDC Fund and have instead put all their adaptation funds in the GCF where it is sitting idle for now.

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If the rich countries genuinely wish to support immediate adaptation actions in the most vulnerable countries then they should seriously consider allocating their next few tranches of climate adaptation finance to the LDC Fund where they can be provided as grants, rather than through the GCF who are offering them as loans rather than grants.

That would be a more effective way to support adaptation in the most vulnerable countries, at least for the next few years, while the GCF gets its act together on supporting adaptation in the most vulnerable countries.

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