Climate Finance – Lessons from Aid Effectiveness

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Today’s post is contributed by Stephen P. Groff, Deputy Director of the OECD Development Co-operation Directorate

Few will argue that we need to mobilize funds to support developing countries in dealing with the effects of climate change.

At COP16 in Cancun, Mexico, world leaders agreed to a set of “new and additional” pledges amounting to $30 billion in Fast Start Finance between 2010 and 2012, and an additional long-term goal of $100 billion per year by 2020.

This is good, of course, but not good enough. As we have learned over the past 50 years of experience with development cooperation, finance alone is not sufficient. Ensuring that funds are used as effectively as possible, and that they provide the best value for money, is essential for both providers and recipients.

So precisely what have we learned from decades of experience of development cooperation? What can we gather from the growing body of knowledge around “South-South cooperation” to inform how we take forward climate financing? A lot.

Of course, there are differences between climate change finance and development cooperation (or “aid”). Without a doubt, external finance for climate change is unique in terms of scale given the size and complexity of the challenge. Dealing with this will call for the transfer of an unprecedented volume of resources. The projected $100 billion per year, while intended to be from both private and public sources, comes near to matching the record level of annual “official development assistance” (ODA) flows: $129 billion in 2010.

But differences aside, the task of financing climate change action is ultimately about transferring large volumes of finance for specific development objectives across national boundaries – something we have been doing since the Marshall Fund was established to help rebuild Europe after the Second World War.

So what should we be thinking about in the run-up to COP 17 in Durban, South Africa? One of the first lessons we draw from the past 50 years is that greater volumes of development finance do not automatically translate into better development results. Externally led activities that do not build national capacity have proved unsustainable and ineffective.

Over the past decade, the principle of locally-led development has been confirmed and endorsed as the lynch-pin for improving impact from aid resources. In 2005, the Paris Declaration secured commitment from developed and developing countries around country ownership, as well as four more basic principles that are central to better results. The Accra Agenda for Action (2008) reaffirmed the centrality of country-owned development, likewise placing emphasis on the value of heterogeneity in development cooperation partnerships, and on the need for mechanisms to monitor and assess whether development finances achieve their objectives.

The Fourth High Level Forum on Aid Effectiveness in Busan, South Korea (29 Nov – 1 Dec 2011) will close a cycle that has largely focused on aid and mark a transition to addressing the challenge of how we apply what we know in order to make development – not just development assistance – work better.

These lessons must inform our efforts as we design instruments for climate change finance. In preparation for COP 17, negotiations are underway on a “Green Climate Fund” and other global instruments. They should ensure that external finance is driven by nationally-owned strategies, and channeled through recipient countries’ own institutions and authorities.

Keeping in mind other development principles endorsed in Paris – such as alignment and harmonization – also offers a real opportunity to avoid wheel reinvention. Climate change financing shares characteristics with vertical funds – and faces many of the same challenges – as it is provided to address a relatively narrowly-defined purpose. As negotiators look to build global instruments that will strengthen and support nationally-owned strategies, they should minimize complexity in funding channels and seek to avoid the undesirable characteristics of vertical funds.

Making harmonization of external flows a pre-condition and avoiding proliferation of sources of climate funding can radically reduce transaction costs that undermine nationally-owned plans.

With that said, a national strategy is not enough. Strategies need to be supported by enabling legislation and action plans that make them real. A recent study In Southeast Asia shows that, even where national climate change strategies are in place, the necessary frameworks are often missing. Weak domestic policy can lead to incoherent outcomes and fragmentation of funding channels – a mix that doesn’t bode well for success.

As we move forward, flexibility will be key in responding to evolving arrangements and contributing to institutional development at the country level. The aid effectiveness principles set out in the Paris Declaration can help us retain this flexibility, while ensuring that the design of new instruments is informed by the lessons we have learned from the past 50 years of development cooperation.

Useful Links

OECD work on climate change

African Climate Change Finance and Development Effectiveness Dialogue

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