The Political Economy of Climate Finance – A Donor Perspective Malcolm Smart Senior Economic Adviser Department for International Development Governance Challenges in Climate Change Finance – Understanding the Political Economy, 1 Dec 2013, Incheon, Korea

What I will cover What does climate change support look like from the UK’s perspective? –Understanding what we are seeking to achieve –UK objectives and means –The ideal vs what is feasible How has DFID used PE analysis to help shape climate support and inform the choice of CF modality? What factors encourage or discourage the use of country systems? What is needed to move towards more coherence with country systems in the delivery of climate finance? Slide 2

What does climate change support look like from the UK’s perspective? Slide 3 What do we want to achieve? Climate-resilient & Lower Carbon economies Private Sector Communities Households ? Government What is Government’s role? Set Strategic Direction Correct Market Failures Public Goods Asymmetric Information Externalities Market power Behavioural inertias Governance environment Address Inequality

What does CC support look like from the UK perspective? Slide 4 Adaptation UK objectives and means What Not just about finance Clear objectives Policy change Finance characteristics Demand-led – avoid capture by ‘interests’ Benefit vulnerable Inclusive Clearly tracked, transparent, fully accountable, predictable Low Carbon Devt Forests Issues UNFCCC – earmarked Fast Start pressures Strong focus on private sector Emphasis on learning VfM,Results Mainstreaming CC into other DFID programmes International Climate Fund

Good donor coordination Synergistic with actions by private sector and CSOs What does CC support look like from the UK perspective? Slide 5 The ideal vs what is feasible Large Scale Small highly innovative projects Aligned behind clear, costed, widely owned Govt strategy Country portfolios dominated by projects v little through Govt systems Most single-country projects are relatively small Donor coordination?

How has DFID used PE analysis to shape climate support? Slide 6 Asked What alignment of interests? Who engage with? How best engage? Recommendations Go with grain of change underway – don’t attempt to drive an agenda before demand is in place Look for common ground - where different actors have, or may have, a common interest Reinforce changes underway – help strengthen the roles of political stakeholders (e.g. Parliamentary Committees, politicians across wider communities) Look for opportunities to help build leadership – don’t just work at the technical level but target and influence decision makers Recognise that a national climate change strategy provides a framework for co-ordination - diversify from the technocratic and the centre of government, strengthen line ministries and local govt Help deepening of civil society engagement – advocacy role Create an explicit private sector strategy

What factors encourage or discourage the use of country systems? Slide 7 +ve UK Partnership Principles Political Leadership, Commitment, energy Clear Results – national strategy or plan Capacity to deliver Strong enough PFM Ability to track finance -ve ×Lack clarity on priorities × Weak compliance with systems × Corruption, leakage issues × Fiduciary risks × Weak, likely delayed implementation × Poor donor coordination

What is needed to move towards more coherence with country systems in the delivery of climate finance? Slide 8 Political leadership, demonstrated by commitment to a strategic, prioritised national strategy for tackling CC Broad-based ownership in the country – reflects views of vulnerable groups, private sector, etc. Coherence with other policy priorities Clear that govt is managing fiduciary risks to CF Time – to help develop national systems & capacity – for implementation, to track finance, results, provide feedback from M&E Needs to be high likelihood the strategy will be implemented and soon