Climate financing is one of the key elements of the international discussions addressing climate change in the medium and long term. The scale and size of the challenge that is associated with sustained reductions of greenhouse gas (GHG) emissions on a global scale requires rigorous solutions and robust financing mechanisms that will be needed to develop and deploy mitigation technologies and to adapt to the impacts of climate change. In particular, significant financial and human resources will be required to ensure that developing countries are able to meet the challenge of climate change while growing their own economies in a sustainable manner.

Background


According to the United Nations Framework Convention on Climate Change (UNFCCC), the current levels of funding available for climate change-related initiatives will be insufficient to address the future financial flows estimated to be required for adaptation and mitigation measures under a strengthened future climate change agreement, post-2012 . Developing countries currently receive only 20 to 25 per cent of the investment they need for climate change mitigation and adaptation, which only represents approximately 46 per cent of the total that will be required by 2030.


While a few States have been able to undertake initial actions to combat climate change using their own financial resources (as a result of their own economic growth), the energy demand in developing countries is projected to increase immensely, which will require additional resources. Nonetheless, the resulting emissions reductions expected to be achieved by developing States by 2030 is estimated to be about 68% of global emission reductions.

 

Figure 1: Additional investment needs in developing countries, by 2030
(World Bank presentation at the ICAO Colloquium on Aviation and Climate Change,
Montreal, May 2010).

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Climate Change Financing Mechanisms


Several financial mechanisms to address climate change are currently in place, including the following:


Global Environment Facility (GEF) was established by UNFCCC to operate the financial mechanism under the Convention on an on-going basis, subject to review every four years to provide funds to developing countries.


Special Climate Change Fund (SCCF) was created in 2001 to complement other funding mechanisms to finance projects relating to:

  • capacity-building;
     
  • adaptation (for more information on adaption please see Part 6 of the report);
     
  • technology transfer;
     
  • climate change mitigation and economic diversification for countries highly dependent on income from fossil fuels.

Least Developed Countries Fund (LDCF) is intended to support a special work programme to assist the LDCs.


Clean Development Mechanism (CDM) allows a developed country with an emission-reduction or emission-limitation commitment under the Kyoto Protocol to implement an emission-reduction project in developing countries. Such projects can earn saleable certified emission reduction (CER) credits, each equivalent to one tonne of CO2, which can be counted towards meeting Kyoto targets.


Adaptation Fund became operational with the first commitment period of the Kyoto Protocol in 2008 to finance practical adaptation projects and programmes in developing countries and support capacity-building activities. It is funded from an adaptation levy of 2% on Clean Development Mechanism (CDM) projects.


Climate Investment Fund (CIF) was established in 2008 by several multilateral development banks. The CIF has balanced and equitable governance with equal representation from developed and developing countries. The objective is to influence climate investments in the following areas:

 

  • Clean Technology Fund: Finances demonstration, deployment, and transfer of low carbon technologies.
     
  • Strategic Climate Fund: Targeted programs to pilot new approaches and improvements.

Community Development Carbon Fund provides carbon reduction financing to small scale projects in the poorer rural areas of the developing world. The Fund, a public/private initiative designed in cooperation with the International Emissions Trading Association and the UNFCCC, became operational in March 2003.


The World Bank and the International Finance Corporation have also developed carbon funds with (co-)funding by States. Similar carbon-financing initiatives are currently being developed by various other international financial institutions. The World Bank and regional development banks provide financing for investment in mitigation and adaptation measures to developing countries. This includes loans to support projects and initiatives in the transport sector.


A number of nationally-based financing instruments also exist, including: the Carbon Trust in United Kingdom, the Green Financing in the Netherlands, and the Energy for Rural Transformation in Uganda. It is notable that the World Bank Group has developed various instruments to trade greenhouse gas (GHG) emission rights among States. These financing models and financing instruments have been specifically designed for climate change projects. Other funds are also available or currently under development. For instance, the United Nations Environment Programme (UNEP) is working to create a policy and economic framework in which sustainable energy can increasingly meet the global energy challenge.


Recently, the Secretary General of the United Nations established the High-Level Advisory Group on Climate Change Finance (AGF) to study potential sources of revenue for financing mitigation and adaptation activities in developing countries. This funding is expected to tap into a wide variety of sources. In relation to international aviation, the AGF will also consider options relating to fiscal instruments that could apply to this sector.

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Financing Mechanisms for Aviation


International aviation currently has no dedicated financial mechanism related to climate change. Because international aviation is not covered by the Kyoto Protocol, it has no access to any of the Kyoto flexible financing instruments such as CIF or CDM. The absence of a structured mechanism does not mean that there are no initiatives or specific examples of financial contributions to support aviation climate change actions.


In the context of the current debate on the possible inclusion of international aviation in a future UNFCCC international agreement, ICAO is actively investigating the appropriate market-based measures and hence mechanisms to meet the goals associated with the aviation sector.


Although international aviation is prepared to implement measures for reducing its climate change impact, it should not be singled out or treated in a discriminatory manner. Any aviation financing mechanism should primarily serve the interests of the sector. This would ensure equity and non-discrimination since international aviation would be responsible for its real impact on climate change.


The ICAO High Level Meeting (see HLM-ENV/09) in October 2009 agreed on, “further elaboration on measures to assist developing States and to facilitate access to financial resources, technology transfer and capacity building”. ICAO is the appropriate institution to deal with aviation financing, as it can adapt the financial instruments to aviation specific goals and at the same time assist developing countries, not only financially, but also through technology transfer and capacity building.

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