Climate Action Network Canada Policy Brief: Canada, International Climate Finance, and Cooperative Market Mechanisms

Canada has to do much more to provide climate finance to developing countries. In the short term, this should be ramped up to an annual level of $4billion by 2020, equally split between mitigation and adaptation, of new and additional, climate-specific public finance.
General rationale: No county can save its own climate – climate change can only be addressed effectively with a very high degree of international cooperation. Most of the mitigation needed in the 21st century has to happen in economically poorer countries and we cannot expect it to happen without seriously engaging in deep cooperation, including substantial financial support. Besides being the right thing to do, it is in our own self-interest to make sure this mitigation happens. Likewise, adaptation in poorer countries is needed to help alleviate the destabilizing potential of climate impacts, and their knock-on effects on refugees, international security, etc.
Pre-2020 rationale: Canada cannot meet our Cancun target of -17% below 2005 levels by 2020 with domestic mitigation. While increasingly an accepted truth in Canada, the world community is only starting to realize this. Canada should acknowledge and take responsibility for the shortfall by heavily investing in short-term mitigation abroad (in additional to ramping up shortterm domestic ambition).
Post-2020 rationale: Canada’s current 2030 target of reducing emissions 30% below 2005 levels should should be achieved with domestic emissions reductions only. Canada’s current domestic target is not compatible with Canada’s fair share of the required global effort (or the remaining carbon budget) even under the most generous interpretations of equity. Canada must deepen its target and engage in international mitigation cooperation to compensate for domestic shortfalls.
$4 billion/year by 2020: It is estimated, using various metrics, that Canada’s fair share of the $100 billion annual financial commitment for 2020 made in Copenhagen is $4 billion . These 1 estimates assume that Canada will fulfill our domestic mitigation commitment. Absent this, Canada should make new and additional contributions above and beyond its portion of the $100 billion commitment. After 2020, our contribution should continue to ramp up in line with need.
Mitigation – adaptation split: The Copenhagen pledge envisions balance between mitigation and adaptation but thus far, adaptation finance has been vastly under-delivered. Predictable adaptation finance will be essential for developing countries to deal with the unavoidable impacts of climate change, for which they generally bear the least historically responsibility.
New and additional: The UNFCCC in Art 4.3 and 4.4 is clear that the finance to be provided by developed countries must be new and additional. In our view, this means that it must be on top of any other commitments we have made, especially those relating to official development assistance (ODA). Currently, most climate finance is also classified as ODA which results in double counting (once as ODA and once as climate finance).
Climate specific: Much of the finance currently reported as climate finance has other development objectives as its main purpose. While it is important to climate-proof all development programmes, only programmes and projects that have climate-specific interventions as their principal objective should count as climate finance. Otherwise, climate finance risks losing credibility.
Public finance: It is important that Canada, and other developed countries, only include public finance when reporting how they stand vis-à-vis their commitment (e.g. the $100 billion Copenhagen commitment or the commitments under Art 9.1 of the Paris Agreement). While leveraged private finance can be helpful in meeting developing countries’ finance needs, predictability is key and climate finance provided by developed countries must actually represent a net support for the developing country. Private finance often does not fulfil this criteria (e.g. Foreign Direct Investment enabled through export credits, or private capital leveraged within the host country) and is unpredictable for planning (real-life leverage ratios are typically lower than often used in climate finance reporting).

Climate finance must: speed up the global transition away from fossil fuels; include environmental and social safeguards; use sound, transparent and honest accounting methods; be efficient. Climate finance must not: result in double counting; constitute our “buying our way out” of ambitious domestic mitigation actions.
Types of programmes: Climate finance should not be used to fund programmes that delay the transition away from fossil fuels. For example, funding for fossil fuel electricity generation that is marginally less GHG intensive than alternatives but still perpetuates a fossil fuel dependent future cannot be considered climate finance. Negative lists of excluded project types can be useful; precedents exist with negative-list style exclusions, for example when the European Union banned credits from large hydro and hydrofluorocarbons (HFCs) from its emissions trading scheme. On the other hand, Canada can make the most beneficial impact if it actively seeks to contribute to “shifting the trillions,” that is to identify projects and programmes where Canadian support (which might, in addition to finance, also include capacity building and technology support) can assist in ensuring that any investments in energy infrastructure that countries would be making anyway (those investments are by all accounts expected to be multiple trillions over the next decade), are directed exclusively into modern renewables.
Environmental and social safeguards: Currently, a share of climate finance is spent on projects with limited benefit for climate change but high social and environmental costs, e.g. coal projects that pollute water and air for local communities, or large dams that are a threat to biodiversity, unfairly displace communities, and are often associated with human rights abuses. Likewise, in the context of reducing emissions from deforestation and forest degradation (REDD+) financing, displacement of Indigenous Peoples and other forest-dwelling or traditional communities has been reported. In designing its climate cooperation, Canada must ensure that the “do-no-harm” principle is applied in all programmes that we fund. Furthermore, all programmes that receive Canadian funding should be required to obtain free, prior and informed consent of any indigenous populations affected by the programme.
No double counting: There are a number of ways in which double counting can occur, each of which must be avoided (including per the stipulations of Article 4.13 and 6.2 of the Paris Agreement). First, the outcomes of mitigation cooperation might be counted in both donor and host country; second, donor countries might count mitigation finance as both contributing to their finance commitments as well as their mitigation commitments; and, third, donor countries might count finance toward both their finance commitments under the UNFCCC as well as finance commitments under other international agreements, e.g. relating to ODA levels.
Efficiency: Past experiences with international mitigation finance through market mechanisms has shown that sometimes the least efficient mechanisms prevail, for example using the clean development mechanism (CDM) to fund HFC-23 and N2O destruction projects which could have been implemented for a fraction of the cost through direct grants.
Honest accounting: Currently, climate finance accounting is plagued by a number of issues, including the ODA-climate finance double counting as well as the inclusion of non-climatespecific finance, both mentioned above. In addition, finance delivered through other means than grants (concessional and non-concessional loans, equity, export credits, foreign direct investments, etc.) is often counted at face value. Such practices inflate the amount of finance that has been provided as a net support to developing countries. As such, only the grant equivalent amounts (using plausible values) should be reported as climate finance; not the face value. In the case of export credits, non-concessional loans and equity investments, this should be considered to be zero. For information-only purposes, the face value of these flows can be reported. Furthermore, only finance that constitutes direct assistance to developing countries should be counted; for instance, the current practice of including contributions to the core budget of Intergovernmental Panel on Climate Change (IPCC) and UNFCCC is inflating the reported totals.
Not buying our way out: For the pre-2020 period, a substantial increase above and beyond our fair share of the $100 billion should be understood as Canada acknowledging our failure to meet our internationally agreed mitigation target by using additional international mitigation cooperation to minimize the harm of this failure. However, this argument cannot be plausibly used for the post-2020 period. Canada’s 2030 target, in addition to having to be strengthened, must be considered a purely domestic reduction target. If Canada wishes to use international mitigation cooperation for flexibility in how to implement its mitigation target, it would have to increase its overall target by the same amount it intends to allow for flexibility. For example, in the illustrative case of a Canadian domestic target of 30% by 2030, Canada could decide to increase this target to 45% with international credits eligible to be used for up to one-third of that (or 15 percentage points).

In the short term, Canada should work with developing country partners on the most transformative projects in the NAMA database, or identify short-term transformational projects through other means (e.g. conditional components of Intended Nationally Determined Contributions (INDCs) to the Paris Agreement). Ensuring that high-impact projects can be implemented with Canadian cooperation in the short time still available before 2020 can enable institution-building, trustbuilding and mutual learning, as well as help to bend the emissions curve downward.
Canada’s looming failure to meet our 2020 emissions reductions commitment means that time to act on addressing this shortfall is running out. Perhaps the strongest contribution that Canada can make to the pre-2020 period is to turn this failure into an opportunity by fully embracing the shortfall and engaging in international mitigation cooperation.
The UNFCCC’s Nationally Appropriate Mitigation Action (NAMA) registry, where numerous developing countries have deposited over 100 programmes which are in various stages of readiness for implementation, is an obvious place to go for identifying transformational projects in developing countries in need of financial or other support. Many of the projects represent preliminary phases of larger project and are therefore especially suitable for making a long term impacts beyond 2020. Engaging projects from the NAMA registry for funding also has the advantage of contributing directly and effectively to trust-building within the UNFCCC as the NAMA registry was set up with the promise of developed countries to fund the projects submitted to it, but most projects remain unfunded.
Another source of potential cooperation are the conditional aspects of the INDCs. While generally speaking for the post 2020 period, many conditional actions in INDCs would benefit from earlier implementation start.

While bilateral cooperation (e.g. by funding NAMAs) is very important, the provision of financial support through multilateral channels is equally crucial, especially for adaptation. While other international financial institutions are appropriate channels for general ODA purposes, for climatespecific finance, public funds should be channeled through the UNFCCC’s own Green Climate Fund (GCF).

CONTACT:

Christian Holz Climate Equity Reference Project 613 618 4601 cholz@climate.works
Catherine Abreu Executive Director, Climate Action Network – Réseau action climat Canada 902 412 8953 catherineabreu@climateactionnetwork.ca