As part of a  CDKN project supporting the Government of Pakistan, John Ward and Philip Gradwell from Vivid Economics, outline the key considerations and options for the country’s future climate finance architecture.

Pakistan’s National Climate Change Policy sets out the vision and the necessary reforms to achieve a resilient and low-carbon growth pathway. However, to be implemented the Government needs to mobilize climate finance from various sources, such as the Green Climate Fund and the Adaptation Fund.

The Government has recognised that to turn policy into action it must establish a robust national financial architecture to attract and use climate finance. Current flows of international mitigation and adaptation finance to Pakistan have been less than US$ 500 million to date (including bilateral flows).  This is compared with average per year adaptation needs of US$ 7-14 billion over the period to 2050.

Vivid Economics with CDKN support are providing advice to the Ministry of Climate Change (MoCC) to assess the different options for a new institutional arrangement for climate finance.  Some of the key things we have to consider are   global developments and the experience of other countries, as well as developments within Pakistan.

a)         Global Developments

Developed countries have committed to jointly mobilizing USD 100 billion dollars a year by 2020 to address the climate change needs of developing countries, including from public and private, bilateral and multilateral sources.  This presents opportunities for Pakistan, however – since the amounts involved fall short of what is needed – there will be competition for these resources.

Current international flows of climate finance are extremely fragmented. Although accurate data is a challenge, it appears that climate funds account for just 4% of the total climate relevant flows from developed to developing countries, but there is a huge multiplicity of these.  It is estimated that 95% support mitigation and around two-thirds is coming from the private sector, including the domestic private sector in developing countries.  Public sector financial intermediaries are also playing an increasing role in distributing climate finance.

Set up in reaction to the current fragmentation, the Green Climate Fund (GCF) aims to become the main global fund for climate finance.  It intends to place strong emphasis on country-led approaches and emphasises the need for a balance between funding for mitigation and adaptation. However, while the GCF is making progress, levels of resourcing remain uncertain.

There is also a growth in direct access to climate finance.  Usually funding decisions and implementation are undertaken by international bodies, with only project execution at the country level, but direct access gives the implementation role to national bodies.  This provides greater country ownership and legitimacy on resource flows, and could lower transaction costs.  Enhanced direct access goes one step further by placing funding decisions at the national level.

b)         Experience of Other Countries

National climate funds (dedicated entities focussing on allocating financial resources to climate change) are becoming increasingly popular with 30 in operation or planned.  Alternatives include using existing government processes e.g. budgetary allocations (supported by budgetary support by development partners), or using projects and programmes led by international development partners. These differ in terms of whether they allow access to a wide range of funding sources, if they promote transparency etc.

The advantages of national climate funds are that they can allow for greater specialisation and focus, and greater opportunities for alignment with national priorities.  The risks, which can be mitigated by careful design) are that they may discourage mainstreaming of climate finance, and could deter development partners unwilling to use a pooled funding vehicle.

For Pakistan, the experience of countries such as Bangladesh and Indonesia offers relevant lessons.  Key among these is that a separate climate change fund needs to be designed carefully if it is to result in climate change being mainstreamed, rather than silo-ed.  To convince donors to commit to basket funds, the government will have to articulate a strong vision of what the fund is designed to achieve, closely linked to a climate change action plan.  Any fund design also needs to take account of existing responsibilities for distributing finance within a country (or explicitly accept that the fund will act in a different way).

d)         Pakistan’s Current Climate Finance Needs and Architecture

For Pakistan, the priority is definitely adaptation.  Much of the country’s current climate policy is focused on adaptation, which can enhance development in general and protects against a loss of development as a result of climate change impacts.  However some adaptation measures do not have development co-benefits, while adaptation in general increases the cost of development, potentially of the order of several billions of dollars a year – although benefits are likely to outweigh the costs.  Pakistan also has a challenge of meeting its energy needs at a low cost without rapidly increasing its emissions?

The low level of climate finance received by Pakistan is partly because the actual sources of international climate finance are limited, and that the National Climate Change Policy is only recently published.  Pakistan has received slightly less than a proportional share of adaptation funds, though absolute levels of funding are very low, but a disproportionately low share of global mitigation funds.

The National Climate Change Policy outlines a number of institutional mechanisms that are relevant to enabling climate finance.  These include setting up climate change cells in sectoral federal and provincial ministries; setting up a National Climate Change Commission to coordinate all climate change activities at national and international level; ensuring the integration of climate change and overall developmental imperatives; and creating national and provincial implementing entities.

e)         Pakistan’s Future Climate Finance Architecture

In deciding on Pakistan’s future climate finance architecture, there are a number of strengths that can be built upon such as a well-established and respected process for disbursing resources from development partners and the National Climate Change Policy.  There are also a number of institutions operating in the country (e.g. the Poverty Alleviation Fund) whose arrangements could provide a template.

However, there are also challenges: climate change is not always perceived to be a priority among other ministries; weak governance; a lack of climate change programmes in Pakistan by development partners; the National Climate Policy has yet to develop implementation plans for projects and programmes; limited understanding of the role of the private sector; and limited learning from completed projects and programmes. Furthermore, while the established process of disbursing resources is a strength, it also places some constraints on how the climate finance architecture can be designed.

So what next? 

We have identified two models that could leverage international climate finance in Pakistan: setting up a climate change fund and setting up a climate change facility. The fund would pool international and domestic public resources for disbursal to climate change projects/programmes consistent with national development goals.  A facility would work in conjunction with development of NAMAs and NAP to match identified projects/programmes with international and domestic sources of finance.

There are advantages and disadvantages to each.  A fund gives Pakistan greater control over climate finance, and there is some experience of funds in the Pakistan context.  The disadvantage is that development partners could be reluctant to contribute to a pooled fund.  By contrast, a facility allows development partners to contribute via current modalities and is potentially easier to set-up within the current Pakistan architecture.  The downside is that it provides less ownership over funding decisions; the model is also less tested and less well-known from an international perspective.

These two models – fund and facility – are not mutually exclusive.  What is needed next is to identify the appropriate model for Pakistan and develop a design for this.  It is also important to identify the appropriate roles, constraints, incentives and policies to engage the private sector in climate-compatible development in Pakistan.

Vivid Economics is a leading strategic economics consultancy with global reach. It has a particular expertise in relation to climate finance.  For more information write to: john.ward@vivideconomics.com or philip.gradwell@vivideconomics.com.