Benito Müller, Samuel Fankhauser and Maya Forstater report on a new CDKN research project that could help steer the Green Climate Fund as it allocates resources in the future.

The tricky issue of how to allocate scarce financial resources is likely to take centre stage in the global climate finance debate as the ground rules for the Green Climate Fund (GCF) are being established. The Fund, which is likely to begin operating in 2014, aims to make a “significant and ambitious contribution to the global efforts towards attaining the goals set by the international community to combat climate change.”

A new CDKN-funded research project aims to support the 24-member GCF Board, by analysing how best to allocate resources among countries. The GCF is designed to channel sums in tens of US$ billions per year, in pledges from developed to developing nations. Options on how to do that range from country caps, limiting the amount of money available for funded activities in the countries concerned, to lump sums made available via enhanced access through National Funding Entities.

Distributing funds among sovereign entities has been undertaken for a very long time, not only among nation states but also between sub-national governments by means of fiscal transfers. There are therefore valuable lessons to be learned from the different fiscal transfer methods in use. The project will research and present four case studies of how federal or central government money is presently distributed to sub-national entities. Chosen for the diversity in their underlying political systems, these are: China, India, Switzerland and the USA.

Paragraph 51 of the GCF Instrument states that a “results-based approach will be an important criterion for allocating resources”. Accordingly, the project will focus on the methods employed by key international climate change and development bodies, namely:

• the International Development Association (IDA) Performance-Based Allocation System;
• the Global Environment Facility (GEF) Resource Allocation Framework (2005–10); and
• the GEF’s System for Transparent Allocation of Resources.

As an alternative to the traditional performance-based approaches outlined above, the project will also consider the possibility of using Quantity Performance Instruments (QPIs) as employed by the private sector for allocating mitigation resources. QPIs provide ex post (based on actual results rather than forecasts) financial support based on Verified (or Voluntary) Emissions Reductions (VERs). VER credits are derived from projects using a wide variety of technologies and approaches to reduce greenhouse emissions.

The QPIs have the potential to allocate public funds cost-effectively, as they provide incentives for eligible recipients of funds to generate as many VER credits as possible. Some of the funding earmarked for the GCF mitigation window could be used to purchase emission reductions  on a “pay-for-performance” basis, to increase the effectiveness of the funds and facilitate a devolution of decision making to the national level.

The principal aim of the project is to inform the Board of the Green Climate Fund ahead of its taking forthcoming decisions on the methods the GCF will use to allocate resources. Therefore, the project findings will be of primary interest to GCF Board members and their advisers, but will also be of value to the scientific community.

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