Last week, the UN Climate Summit in Lima, Peru, kicked off amid controversy with news that Japan had counted loans for coal projects in Indonesia as international climate finance. (Climate finance is the money developed countries owe to developing countries for climate mitigation and adaptation.)
This news was triply damning. First, Japan claimed that coal was climate-friendly. Second, Japan counted money lent to its own multinational corporations as climate finance. And third, far from improving livelihoods, the coal projects negatively impacted local communities.
It was as if a doctor, who was paid by the tobacco industry, prescribed cigarettes to cure cancer.
If the rules for what counts as climate finance are not quickly set right, the Green Climate Fund could also end up supporting climate polluting projects masquerading as climate finance
But, technically, Japan did nothing wrong. Why? Because, under the UN Framework Convention on Climate Change, countries have not agreed to any rules for what may, or may not, count as climate finance. It's a free-for-all, with every country deciding for itself what gets deemed climate finance – much to the chagrin of many developing countries and, more generally, anyone concerned with averting climate catastrophe.
And if the rules for what counts as climate finance are not quickly set right, the new Green Climate Fund, the world's premier multilateral climate institution, could also end up supporting climate polluting projects masquerading as climate finance. To prevent such a travesty from occurring, Southern movements and organisations have taken the lead in calling for dirty energy to be specifically excluded from the GCF. A letter sent to the GCF board from several hundred of them, plus supporters in the North, states:
We urge you to make it an explicit policy…that GCF funds will not be used directly or indirectly for financing fossil fuel and other harmful energy projects or programs. We note with grave concern and alarm how other international financial institutions include these types of projects in their climate and energy financing, under the logic of "lower carbon" energy and switching to "lower emissions" fuels. Financing any fossil fuels and harmful energy through the Green Climate Fund is unacceptable.
But there are already danger signs ahead. Japan, for instance, has spoken out at the GCF board in favour of a fund that is "technology neutral" – ie. able to support fossil fuels – as have China and Denmark.
If Japan's "climate finance" for Mitsui and Tokyo Electric Power Company is upheld as legitimate, there is a real risk that the GCF could turn into a "Greedy Corporate Fund," as activists have deemed such an outcome – built to serve the needs of General Electric, BNP Paribas and Goldman Sachs rather than small-scale farmers, waste-pickers and other ordinary folks in developing countries.
There is a real risk that the GCF could turn into a "Greedy Corporate Fund"
That risk stems in part from the temptation to ensure that the GCF focuses on leveraging private finance. An over-emphasis on engaging the private sector could pervert the GCF in dangerous ways. First, it would give short shrift to adaptation, which is likely to offer few commercially profitable opportunities. Second, it would tend to bypass low and lower-middle income countries, as well as marginalised communities in all developing countries.
Finally, Japan's allowance of its purported "climate finance" to support socially and environmentally harmful projects could be something we see repeated at the GCF. At least at the beginning, the GCF is likely to rely heavily on financial intermediaries to disburse funding and uphold environmental and social safeguards.
But if those partner institutions have neither the ability, nor the willingness or clear incentives to uphold high environmental and social standards, we could see a repeat of what has happened at the International Finance Corporation. A damning internal audit found that in most cases when the IFC uses financial intermediaries to disburse funds, recipient corporations simply carry on with business as usual, rather than improving their sustainability practices. Worryingly, the US has proposed to "fast track" Equator Principles banks as accredited GCF intermediaries – even though the EPs have practically no eligibility requirements for signing up, and no process for delisting if banks fail to implement them.
Fortunately, given that the Fund is still in the design stage, there is still time to get the GCF rules right. But time is tight. If the GCF is allowed to support projects that increase fossil fuel dependency, prioritise the needs of Wall Street and multinational corporations, or harm people and ecosystems, it will be a huge blow to the world's newest, arguably most important climate fund. As one of the first points of order at its first meeting of 2015, the GCF board should adopt an exclusion list that forbids any financing of fossil fuels. Full stop.
Karen Orenstein is a policy analyst at the NGO Friends of the Earth US and an observer at the Green Climate Fund