DG Development European Commission Update on the Global Climate Change Alliance (GCCA) Update on work on the Global Climate Financing Mechanism (GCFM) Marco Morettini Policy Officer, Climate Change

European Commission DG Development Global Climate Change Alliance – Objective and Scope  Through effective dialogue and cooperation, the Alliance will help poor developing countries:  To adapt to the effects of climate change, in support of the achievement of the MDGs  To participate in the global mitigation effort, where this benefits their poverty reduction efforts  The Alliance is targeted at poor developing countries most vulnerable to climate change, in particular the LDCs and SIDS  Added value  European dimension  Political dimension  Using established channels

European Commission DG Development Global Climate Change Alliance – Effective Cooperation  Focus on five areas: ►adaptation ►disaster risk reduction ►reducing emissions from deforestation ►participation in the Clean Development Mechanism (CDM) ►integration of climate change into poverty reduction strategies  EC: € 60 million of additional funds to kick-start Alliance plus contributions from geographical programmes; € 5.5 million from Sweden  Priority adaptation, DRR and climate change integration  Preferred aid modality: budget support (but project support also possible)

DG Development European Commission Global Climate Financing Mechanism (GCFM)

European Commission DG Development International Finance Facility concept  IFF proposed by Gordon Brown in 2003 to increase support to achieve MDGs by borrowing on the capital market Basic idea to frontload support Overcome fiscal constraint on ODA increase  Justified when needs are urgent, short-term funds are restricted and long-term funds are possible  Commitments are not reflected in fiscal accounts (or deficit calculation), or as ODA, until actual payments are made according to an agreed schedule  An IFF is to be established as triple-A rated financial institution benefiting from high market confidence and low cost.

European Commission DG Development Using an IFF for climate finance  Some parallels between health and climate change: both are linked to MDGs and both are Global Public Goods  Postponing adaptation action could imply greatly increased costs (e.g. when investments to counteract climate related disasters are not undertaken)  Available ODA is not sufficient to deal adequately with climate adaptation  Innovative funding and financing mechanisms are desirable  Possibilities for innovative funding exist linked to the future CO ² market (e.g. a share of the revenue from auctioning emission rights)

European Commission DG Development Attractiveness to investors of a climate IFF  Investors care not only about financial returns, but also about the social and environmental effects  Investing funds to help countries adapt to climate change and to help reducing greenhouse gas emissions will appeal  There is increased attention for « ethical investments »

European Commission DG Development Relation with other financial instruments  GCFM is designed to be a frontloading mechanism and not a new fund  GCFM funds should be channelled to existing initiatives and funds (the shares can evolve over time):  Global Climate Change Alliance  Adaptation Fund  Climate Resilience Pilot Programme

European Commission DG Development Conditions for a climate IFF to be successful  Frontloading must be solidly justified (the cost of setting up the financial mechanism must be justified)  International financial markets must be ready to buy the climate bond  There should be fundable adaptation and mitigation plans that fit the development (poverty reduction) strategy (budget support is desirable)  A group of donors should be ready to enter into legally binding irrevocable payment obligations  A reasonable magnitude should be between € 500 million and € 1 billion per year:  Example € 1 billion per year for 5 years starting in 2010 would require annual repayments of € 380 million for 20 years

European Commission DG Development Further work required  Which financial institution should issue the climate bond?  What governance structure: representation of donors and recipients  An EU initiative linked to GCCA or an initiative that would make a wider appeal to other DAC members or even OPEC members?