A “Catch 22” to be delivered from Durban?

One of the key potential deliverables from Durban is an operational Green Climate Fund (GCF). This is one of the important components of the pledge to channel up to $100 billion per annum by 2020 to developing countries for mitigation and adaptation projects. But whether the final decision is made here or at a future UNFCCC session, the current proposals may represent an investment Catch 22 that results in little or no direct use of the fund by the private sector. At a roundtable I attended in Durban over the weekend, GCF national negotiators discussed aspects of the proposed fund with the private sector. The fund does have a means for direct private sector access, which is good news, but therein lies the Catch 22. The issue that was discussed at the roundtable was the question of incentive for the private sector to actually use this instrument.

5.3.2 Private Sector
41. The Fund will have a private sector facility that enables it to directly and indirectly finance private sector mitigation and adaptation activities at the national, regional and international levels.

There are two aspects to the fund which are important in this regard. The first which was mentioned by one of the roundtable participants was that the project must be additional. This means it is a project that wouldn’t have occurred anyway, in other words it is dependent on access to the GCF for it to happen. For climate mitigation projects this implies that the project actually requires a price on carbon emissions, such as in a project under the Clean Development Mechanism (CDM) of the Kyoto Protocol. A second issue is that, at least in the case of direct private sector access, the GCF is unlikely to operate as a grant instrument but more probably as a source of loans for the project, perhaps underwriting performance aspects such as country risk. This was also discussed at the roundtable.

The problem here is that a project in a developing country which claims additionality effectively needs a grant of the carbon price. This is how the CDM works. Although there is no “grant” in the traditional sense, the fact that the CERs are awarded / granted to the project and can be monetized in a carbon market such as the EU-ETS in effect grants money to the project, albeit after the project has commenced operation rather than before. But if a grant to the private sector is unlikely, then only non-additional projects will be put forward, which in turn aren’t eligible to use the GCF.

Wikipedia defines a Catch 22 as follows:

A logical paradox arising from a situation in which an individual needs something that can only be acquired with an action that will lead him to that very situation he is already in; therefore, the acquisition of this thing becomes logically impossible.

The paradox here comes about if I have the opportunity to pursue an emissions mitigation project in a developing country. The only approach left standing which offers any scale is the GCF (CDM is rapidly being marginalized), but as it may not function as a grant mechanism for the private sector, I can’t actually monetize the carbon emissions to underpin the project economics. If I attempt the project in a way that doesn’t need carbon price monetization then it won’t be additional, in which case it isn’t applicable under the GCF, so I am left without any course of action to take forward even though the GCF has been set up with a private sector facility for me to use. It means that a CCS project, for example, would never be done under the GCF, at least not as a pure private sector project. This isn’t the complete end of the story. A private entity may be able to work in partnership with government to access the GCF in grant form.

This may not be quite a pure Catch 22, but it’s pretty close, at least based on the conversations heard over the weekend. There is still much water to pass under the bridge before the GCF is finalized, so hopefully these early bugs will be ironed out as time passes.