The Green Climate Fund (GCF) has big ambitions: It aspires to become the main global fund (PDF) for providing climate change finance, contributing to activities such as the design of resilient cities and the expansion of low-emission power generation.
However, it faces crucial questions about how it will allocate its funds to achieve its many mitigation and adaptation objectives, while avoiding the pitfalls of spreading funding too thinly to achieve impact. The answers to these questions and more will shape to what degree the GCF can catalyze low-carbon, climate-resilient development in developing countries.
The GCF board will make important decisions on how to allocate its resources at its meeting this week in Bali, Indonesia. To inform its decisions, WRI analyzed how 15 other climate and development funds balance trade-offs to achieve their objectives.
Four key insights emerge from this analysis that the GCF board should consider as it decides how to allocate its funds:
1. Identify a range of possibilities to invest in from the ground up. The fund should prioritize support where it can have the most impact in addressing climate change. By allowing local companies and investors — whether they are owned by governments or by the private sector — to present the GCF with a range of investment possibilities, the fund can cast its net wide and identify opportunities that can deliver maximum impact. Moreover, such an approach also helps to foster a stronger ownership of programs and projects by those who will be responsible for taking actions that address climate change. At the same time, to ensure progress toward internationally agreed-upon outcomes, such as limiting global temperature rise to 2 degrees Celsius, the GCF cannot fund whatever comes its way. It will need to screen opportunities to ensure that the projects it selects will deliver maximum benefits, in terms of reducing greenhouse gas emissions and enhancing resilience to the expected impacts of climate change.
2. Prioritize activities that deliver long-term impacts. To focus on the highest-impact investments, the GCF will have to prioritize activities that have the potential to put us on a fundamentally low-emissions, climate-resilient path (what the GCF calls a "paradigm shift"), rather than "quick fixes." As a hypothetical example, while fuel-switching from coal to natural gas might yield cost-effective, short-term emissions reductions, it may not support deeper, long-term emissions reductions in the same way that investments in renewable energy would. Efforts such as renewable energy development may take a longer time to bear fruit than short-term, one-off investments, but are critically important in transitioning to low-carbon economies. And there certainly will be exceptions, such as addressing imminent humanitarian needs arising from climate change impacts. Incorporating different time horizons for actions and results into allocation approaches will support the kind of transformational impacts to which the GCF aspires.
3. Allocations should be driven by potential for impact and calibrated for fairness. The GCF board must ensure that the balance of resources allocated is perceived as fair. Many funds start with an allocation process focused on potential for impact, and only after this initial allocation do they make adjustments or apply caps and floors to ensure fairness. This appears to be a more effective way to ensure equity in the distribution of resources, particularly for low-capacity countries. Such adjustments can ensure that groups of countries that meet certain criteria, such as the least developed countries, have adequate access to resources even if they end up with lower initial allocations because of their capacity constraints.
4. Provide flexibility to be responsive to emerging opportunities, but not at the expense of predictability. The GCF should be empowered with an allocation system that is flexible enough to respond to brief windows of opportunity for low-emission and climate-resilient development. For example, a country recovering from a climate-related disaster might see an opportunity to rebuild in a more climate-resilient way, but would not have been able to foresee this circumstance. Overly rigid allocation systems are ill-suited to respond quickly to such opportunities and are unable to accommodate the wide variety of socio-economic conditions and institutional capacities across (and within) developing countries. At the same time, the GCF needs to provide patient support where needed to enable long-term, systemic change. Finding a balance between predictable flows and a flexible system will be necessary. The degree of flexibility could be differentiated, with more flexibility for mitigation and more predictability for adaptation. Increased predictability in adaptation funding can help countries with a high degree of need but limited capacity to use funds effectively.
While the GCF board should be ambitious and innovative, they can also look to what's been done before. Drawing knowledge from the experiences of other critical climate and development funds is one way to ensure that the GCF succeeds. Getting the allocation system right is a key step in building an effective and fair GCF that can contribute to objectives such as the design of low-emission, climate-resilient cities or the expansion of renewable energy. The insights above can help guide the GCF to focus on opportunities that deliver substantial global benefits, without fragmenting resources in a way that dilutes impact.