In order to be effective, a post-2012 climate agreement will need to motivate extensive changes in investment flows and government expenditures, it will need to trigger restructuring of important sectors of the economy such as agriculture, forestry, fisheries and manufacturing, and it will need to change national consumption patterns. The new climate agreement will, in short, have to deal with a whole range of economic activities.

Climate negotiators, however, are being instructed by their finance ministries, their trade ministries and their central banks to keep away from hard economic issues unless there is a chance that dealing with them will bring new cash into the country. These instructions severely restrict the range of economic options that can be incorporated in the post-2012 climate agreement and therefore severely restrict the possibilities of the negotiators to produce an effective and viable post-2012 climate agreement.

This lack of coordination between the economic and environmental communities is not new. The Indonesian Government recognized this problem in 2007 and brought together, just after the December 2007 Bali Conference of the Parties, the ministers of trade  to discuss linkages between trade and climate. Separately but similarly, the Indonesian government hosted a meeting for the ministers of finance to launch the discussion on linkages between finance and climate, which  began a discussion that has continued through informal talks among finance ministers during the bi-annual meetings of the World Bank and the IMF.

The meetings in Indonesia and subsequent informal discussions in the Bank and the IMF have, however, not been sufficient to ensure effective implementation of the Bali Action Plan by trade and environment ministries around the globe. Links between climate and finance are unambiguous in the text of the Bali Action Plan – all four pillars of the plan have a clear financial component – but they have failed to inspire trade, finance and economic ministries to take adequate action. To the contrary, some ministries have ignored the Bali consensus and continue with business-as-usual practices that are likely to make the transition to a less carbon intensive economy more difficult. By constrast, ministries that do acknowledge the existence of the agreement try to find ways to use it to support their prior on-going directions.

Meanwhile, comparable and related processes take place at the multilateral level where most of the financial and economic institutions largely ignore the consensus text. Because the text has been adopted by the parties to the UNFCCC and not by their own governing bodies, the international financial institutions largely continue to operate and take funding decisions without adequate consideration of the consequences for global climate change. The effect of this “ignore-it-and-continue-with-business-as-usual approach” by international financial institutions is that climate negotiators and economic officials in developing countries have received contradictory messages from the international system. The international financial institutions, which deal principally with ministries of finance, trade, development and domestic central banks, have maintained their pre-Bali directions of decision-making, signalling that climate change and the economic consequences of climate change are not a central  concern, whereas the text of the Bali Action Plan calls for action in the fields for which these organisations are responsible.²

This article will present four examples of policy areas – reporting on capital flows, the lack of greenhouse gas assessments in project proposals, the effect of climate events on pre-existing loans and funding of adaptation costs – in which the policies and practices of the international financial institutions potentially hinder the negotiation of an effective new climate agreement.

1. There is no requirement for reporting and documentation on climate-related capital flows. The Bali Action Plan calls for “measurable, reportable and verifiable” results but the international financial system, working through the IMF, the World Bank, the regional development banks and the Basel Committees, does not require reporting of climate related capital flows.  The new World Bank Group Strategic Framework on Climate Change does not address climate-related measurement, nor do the Basel II Framework for international capital standards and the IMF rules for the reporting of international financial flows. 

2. There is no requirement for greenhouse gas footprint assessments in project plans. The world’s development organizations and aid agencies do not require greenhouse gas footprint forecasts as a part of requests for funding of future projects. In fact, the project papers for the World Bank Group, the regional development banks and the DAC countries do not have a separate component for the climate-change assessments or for energy efficiency decision-making. There is no clear procedure for due diligence for the likely climate-related impacts of a given project.          

3. Pre-existing international loan agreements have not been revised to consider the costs of climate change. Developing countries and the institutions of the international financial system signed agreements long before there was widespread recognition of the impacts of climate change.  The repayment provisions of these loans therefore do not take into account likely ecologically-induced economic changes. This situation is problematic because, as the Intergovernmental Panel on Climate Change (IPCC) indicates, it is reasonable to expect extreme weather-induced changes with significant economic effects in the coming decades. Financial officials in developing countries are therefore not likely to be supportive of their environmental ministry or foreign affairs ministry colleagues if these colleagues negotiate a post-2012 agreement that does not recognize the new climate-change related burdens of old debts.

4. It is the general case that financial institutions push for loans instead of grants to finance adaptation. The first pillar of the Bali consensus text addressed the reality that certain expenditures are necessary to adapt to changes in local climate that have already occurred. Developing country climate negotiators have been arguing for an adaptation fund that would be funded by obligatory resources from UNFCCC transactions. However, some bilateral aid agencies and the international financial institutions have approached the development and finance ministries in developing countries with proposals that they should accept loans instead of grants to cover these adaptation expenditures. In India, Indonesia and Bangladesh, the dispute between the environmental ministries and the finance ministers over this matter has been so significant that their national media have carried press reports of the conflict. 

These four examples illustrate that certain sectors in developing countries are receiving the message from international financial institutions that climate change is not a priority. This message reinforces the trade and finance ministries’ inclination to not support a climate agreement with serious economic underpinnings, and it potentially limits the effectiveness the post-2012 regime.