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Survey Papers 13-03 Nov. 01, 2013
- Research Topic Corporate Finance
- Page 108
The Green Climate Fund(GCF) will officially launch on December 4, 2013 to support developing countries coping with climate change. The GCF secretariat will be located in Songdo, Korea. As the host country, Korea must help to develop GCF. Accordingly, Korea’s financial organizations and other relevant institutions should find ways to support GCF.
In this report, we look at the background behind GCF's establishment, and review existing global climate funds to find key characteristics of GCF. The cost of combating climate change is astronomical, and developing countries cannot tackle the issue of climate change with the public fund support from developed countries alone. GCF plans to establish a private sector facility(PSF) within GCF so that as many private funds as possible can participate in developing countries' climate change projects. This study analyzes the existing co-financing model and seeks implications for GCF. Lastly, the report suggests ways to develop and utilize GCF from Korea’s perspective, which will be also helpful to GCF.
Climate change has constantly threatened the earth's sustainability and is expected to cause significant economic loss.
Although tackling climate change requires global-level actions, industrialized countries and developing countries do not have the same stance. This is why Article 3, Section 1 of UNFCCC stipulates that we share “common but differentiated responsibilities.”
Despite the existence of Global Environment Fund(GEF) and other international climate funds, their limited fund size, investment targets, and responsibilities, etc., triggered discussions for the need of another climate fund. As a result, GCF was founded. In 2009, the Copenhagen Climate Change Conference of Parties(COP) initiated the discussion to put together a new climate fund. The discussion was substantiated at the 2010 Cancun Climate Change COP, which decided long-term financing of $100 billion per year to GCF until 2020. At Durban's 2011 COP, the final report by the Transitional Committee on the establishment of the GCF was adopted and GCF was finally established. In December 2012, the COP at Doha designated Korea as the host country of the GCF secretariat. Subsequently, GCF will be officially launched in Songdo, Korea on December 4, 2013.
Major multilateral environmental resources include trust funds under the Global Environment Fund(GEF), the Least Developed Countries Fund(LDCF), the Special Climate Change Fund(SCCF), the World Bank's Climate Investment Fund(CIF), and the Adaption Fund(AF). All of these funds are not enough to limit global warming of two degrees Celsius due to their size and investment targets.
According to the IEA(2012), the energy industry alone needs $36 trillion which is around $1 trillion per year in order to control temperature rises within 2 degrees Celsius from 2012 to 2050. However, the CPI(2012) estimates 2010/2011 world climate funds’ annual average size to be approximately $364 billion. Therefore, the private sector’s active participation is needed to alleviate public funds’ limitations.
The new climate fund, GCF, was launched to actively support developing countries' emission cuts and adaptation to climate change. Through this fund, long-term funds worth of $100 billion per year will be raised until 2020. For more smooth collaboration with the private sector, discussions are under way to set up a private sector facility(PSF), and its future goals, outcomes, utilization, performance index, and implementation procedures.
Reflecting on existing world climate funds and discussions up to this point, GCF can be summarized by the following characteristics.
First, it has the potential to advance and become the world’s largest comprehensive climate change specialized fund.
Second, it can effectively intervene in climate change-related negotiations between developing and developed countries.
Third, it can provide support for recipient countries to devise their development strategies.
Fourth, private sector engagement can be catalyzed through PSF.
Fifth, the scale and scope of funding will be enlarged greatly. Henceforth, this will transform the financing concept of the climate change industry from public support-based to private participation-oriented.
For the successful GCF, one of the most important objectives is to orchestrate fund raising. This is being discussed by the GCF board. The issue is to reach an agreement between developed and developing countries on a long lasting allotment standard for developed countries. Other contribution to reduce emission needs to be considered. For example, suggestions can be made to alleviate funding obligations to countries that already have emission rights trade laws.
Various ways are being discussed at GCF to increase private sector engagement through PSF’s engagement. There is a strong need to implement a structure to attract private financing as much as possible.
There are various private-public co-financing investment models for areas that have high investment demand but insufficient public supply. The feasibility of using PSFl for these areas should be examined. In this report, we review Korea’s fund of fund model, Israel’s Yozma fund model, the US’ SBA model, and the UK’s SIB model in order to seek how to develop GCF.
We believe that the SIB model can be usefully applicable in the future.
For example, GCF can apply the post-support structure where support is provided after developing countries show progress in its climate change project. In terms of both efficiency and effectiveness, it is highly recommended to apply this model.
We also need to find ways to encourage domestic institutions to participate more and develop GCF hosted in Korea. Here are a few suggestions.
First, new business opportunities should be created for Korea’s financial institutions and service industry. Especially, Korean financial institutions should search for opportunities to enter developing countries and discover new business opportunities there together with GCF. Also necessary is to develop and advance legal, accounting, and other consulting services for GCF.
Second, it is desirable to build with GCF an industrial district to develop low-emission technologies, and provide those new technologies to help developing countries.
Third, GCF can get some contributions from emission trading system. In order to expand the trading, incentives should be provided to countries that operate carbon emission rights trade markets for emission cuts. For example, those countries could enjoy lower tariffs.
Fourth, a long-term plan to develop GCF into an environmental World Bank such as the International Green Bank (IGB) needs to reviewed. It is necessary to continue to study which structure and characteristics are suitable for international private financing.
Fifth, more people in Korea should be encouraged to work at GCF and nurtured as climate change professionals. Also, GCF should prioritize least developed countries. We should seek ways to utilize GCF for a climate change project for North Korea.