Countries will decide next month how much they will pledge to the Green Climate Fund (GCF). The summit in Bonn, Germany could determine billions of dollars of financial support from rich polluting countries to developing nations – those which have contributed little to the causes of climate change yet will suffer the most from its impacts.
Australia, despite having backed out of the Fund in 2018, now has a chance to play a crucial part.
Operationalised in 2015, the GCF has become the world’s largest multilateral climate fund, with a project portfolio of more than $12 billion. It relies on periodic financial replenishments from donors to sustain its operations. Delegates in Bonn will be looking to donor governments not only to renew but increase their financial support.
A new Lowy Institute policy brief emphasises the important role the GCF can play in supporting global climate solidarity between developed and developing nations. The world must tackle climate change collectively and cannot afford the costs of continued division. We also identify several areas for reform of the GCF that are critical to fulfilling its potential.
Most importantly, the GCF needs to define a clear role for itself within what is becoming an increasingly crowded global climate finance landscape. The GCF’s unique features – anchored in the Paris Agreement, with a governance structure that empowers developing countries, and a grant-based replenishment model – mean that the Fund’s comparative advantage lies in serving the needs of the most climate vulnerable countries, especially in terms of adaptation. Conversely, the GCF cannot compete with the financial firepower of the multilateral development banks or bilateral climate finance in supporting faster decarbonisation in large emerging economies.
Grant-based climate finance is key. Although the GCF is a small player in terms of global climate finance, it is a major source of grants to the most vulnerable countries, second only to the World Bank. Grants, rather than loans, are critical for these countries given their economic vulnerability and as the adaptation projects they require typically do not generate a financial return. If the GCF focused more of its resources on grants to vulnerable countries, it could potentially close the gap with the World Bank in this space – giving the Fund a truly pivotal global role.
The GCF also needs to get much better at directing its funding to where it is needed most. The GCF does not currently target its funding effectively based on either country climate vulnerability or emissions. To resolve this, the GCF should adopt country allocations following a prescribed formula, similar to other multilateral institutions such as the Global Environment Facility and the multilateral development banks.
Access to GCF funding must also be greatly enhanced. The ability for nationally based organisations to receive financial support directly from the GCF – rather than going through an international intermediary such as the United Nations Development Program – is supposed to be a key feature of the GCF. It is meant to foster country ownership and ensure that projects work in their respective contexts.
This has not played out well so far. Obtaining accreditation for direct access remains a long and onerous process and a major obstacle for capacity-constrained developing countries. There is no easy fix here. But more ambitious reforms are clearly needed, to cut administrative burdens, provide enhanced technical support, reduce risk aversion, and shift more ambitiously towards sustained financing programs rather than relying on one-off standalone projects with high transaction costs.
Where does this leave donors? Donors should continue their support, including through the upcoming replenishment, while being prepared to scale this up in line with these recommended reforms.
And Australia, for its part, should rejoin the GCF as part of supporting its own strategic climate objectives.
The government is looking to rebuild Australia’s global climate reputation and bidding to co-host the COP31 summit in 2026 alongside Pacific Island nations. Yet Australia is presently the only major donor outside the GCF, the world’s most important multilateral climate fund.
More importantly, rejoining the GCF would allow Australia to work from the inside to ensure more global funding for neighbouring Pacific Island countries, which remain amongst the world’s most vulnerable countries to climate change.
Despite much frustration in the region with the GCF – which is seen as overly slow and burdensome – our analysis shows that the Fund is now the second-largest source of climate-dedicated finance in the Pacific Islands. Australia’s previous active involvement in the GCF was however critical to both improving the Fund’s performance in these countries and unlocking large amounts of additional global financing for the region. We estimate that in the past, each dollar Australia contributed to the GCF until 2018 may have helped to unlock an additional $1.60 in global climate financing for the Pacific Islands beyond Australia’s own contribution.
Australia’s role in the Pacific Islands gives it the requisite interest, relationships, and experience to advocate forcefully as a donor for reforms to the GCF that can help ensure a key part of the global climate finance architecture works well for the world’s most vulnerable countries. That would be good for Australia, the Pacific Islands, and the GCF itself.
