Baby Steps on Finance

8 October 2009

The US proposal on financial architecture has received considerable interest over the last few days, and with good reason. It is an interesting mix of new and old, good and bad, promising and perverse.

ECO can see movement in two respects.

First, after consistently resisting calls for a new institution, the US has now endorsed the creation of a new fund.

Second, as Article 11 requires, the US has agreed that the fund should be under the guidance of and accountable to the COP; that the COP should determine its policies and priorities; and that it should have balanced and equitable representation of all Parties.

The more cynical among ECO readers may wonder whether restating the provisions of the Convention really counts as progress. But we will take movement wherever we can find it. After all, in the quest for a useful negotiating text, we could do a lot worse than the Convention itself.

It now appears that we have a broader basis for agreement on parts of some critical issues of financial architecture and
governance (we are assuming, of course, that the silence of some other umbrella Parties and the EU can be taken as assent). And it would appear that the US has heard the concerns of developing countries regarding simpler administrative procedures and, perhaps, on direct access to financing.

The proposal may also provide a basis for a deal on another contentious issue – the use of existing institutions. Many Parties have expressed their bitter experience and deep frustration with the procedures and governance of multilateral development banks. And while ECO is not a Party, we cannot see giving a policy-making role to an institution like the World Bank. Its own senior sustainable development economist recently called the Bank’s continued support for coal a moral imperative. Another contentious issue is a reaffirmation and expansion of the role of the GEF, which may provide additional fodder for developing countries to resist this proposal.

But we understand that the US may wish to use existing institutions only for fiduciary oversight and auditing functions, leaving the substantive work to the new mechanism and its technical panels. If this is indeed the US position, they should say so clearly. Nobody wants to see this money squandered, so the need for strong fiduciary oversight should attract broad support.

Unfortunately, the US proposal brings us no closer to agreement on a number of other key issues. All countries except LDCs will be expected to contribute, and there are no guarantees that the funds that are made available will be new and additional to existing ODA.  And assessed contributions are off the table. Instead, the fund is to be replenished on a voluntary basis. Periodic pledge parties, rather than a common understanding of historic responsibility and capacity, will determine contributions. This ECO is told will maximise contributions and provide predictability.

Other issues remain to be resolved. Key among these are the specific makeup of the board, how it will be appointed, and whether there will be separate thematic windows.  But for the US, these issues can be negotiated. The key point is that it provides sufficient fiduciary assurances that donors will put money into it.

Of course, fiduciary oversight is only an issue if there is actually money to safeguard. Now let us see some movement on scale. ECO has previously stated that US$150 billion of public financing is required to deal with climate change in developing countries.

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