Making National Climate Funds More Efficient: From Brazil to India

By Rishikesh Ram Bhandary

In June 2020, a group of political parties filed a lawsuit against the Brazilian government alleging that the national climate change fund – Fundo Clima – had been willfully rendered inactive by the government. Earlier this summer, the Brazilian Supreme Court delivered a verdict, arguing that the Brazilian government had an obligation to allocate funds to Fundo Clima. 

Brazil’s case raises two questions. Are governments making allocations to national climate funds on a regular basis? Second, are national climate funds spending the allocations they receive?

Policy discussions on international climate finance have largely revolved around the commitment of developed countries to mobilize $100 billion a year by 2020. However, international climate finance is only a part of the picture. The latest research from Climate Policy Initiative shows that government budgets supplied around $32 billion in climate finance. Understanding how national climate finance machineries have been responding to the climate crisis is also important.

How governments use the revenue collected to address climate change is becoming more important, given that carbon pricing is becoming a widely prescribed tool. International institutions such as the International Monetary Fund (IMF) have been advocating countries adopt a carbon price. Evidence also suggests that when revenue generated from carbon pricing is not recycled or rechanneled to address distributional concerns, carbon pricing can have regressive effects.

As the newly updated National Climate Funds Tracker shows, 52 countries have set up a total of 73 national climate funds. Others have used pollution pricing instruments, such as carbon pricing, to generate revenue that is used directly through national public expenditure.

Brazil and India have both established national climate funds which are financed through taxes or external contributions that are results-based. As Table 1 below indicates, these funds have generated substantial amounts of revenue. By examining the experiences of these two countries, it is clear that two problems are inhibiting the effective disbursal of investments. For one, national climate funds need to improve their programming so that they are using all allocated funds, while governments must also transfer money to the national climate funds that legislation or other policies authorize them to receive. 

Spending climate finance

Once a government raises revenue it has two options. It can directly allocate the finance to sectoral ministries for implementation, or it can channel the funds through specially designed vehicles such as national climate funds. A national climate fund is a country-driven mechanism that supports the collection, blending, coordination of and accounting for climate finance at the national level. 

While the specific steps vary depending on the national context, a general outline for spending through national climate funds follows the following steps. An enabling legislation or government directive provides the basis for revenue generation and appropriation. The Ministry of Finance sends the money to the fund, in other words, the revenue generated gets allocated to the fund. The fund ‘programs’ its resources by directing the money to the projects it wants to support as per its guidelines. The programmed funding is then spent, which means it gets disbursed. 

Brazil 

Amazon Fund 

Norway pledged to provide $1 billion to Brazil to support efforts to combat deforestation in the Amazon. The Brazilian government decided to create the Amazon Fund as the primary funding vehicle to receive payments from Norway. The funding modality is results-based, that is, if Brazil can show that the deforestation rate in the Amazon has fallen against a pre-agreed baseline, it is eligible to receive payments from Norway. The Brazilian government delegated the Amazon Fund’s management to the Brazilian National Development Bank (BNDES). Based on the recent uptick of deforestation in the Amazon, Brazil is no longer eligible to receive payments. 

In April, 2019, Brazil’s President Bolsanaro suspended the governing bodies of the Amazon Fund. The suspension has rendered the Amazon Fund inactive. The Brazilian government’s move to alter the governance arrangements and reduce activity led to the 2020 lawsuit. 

While Norway was by far the largest supporter of the Amazon Fund, the fund also received finance from two other sources. The 2021 annual report of the Fund notes that 93.8 percent of its donations were received from Norway, while Germany and Petrobras, the oil company, contributed 5.7 percent and 0.5 percent, respectively.  

The Amazon Fund noted that it received a total of $1.2 billion in contributions. The Fund programmed $692 million and has disbursed $568 million. In other words, while the total disbursement rate is high, the Amazon Fund has programmed only slightly more than most of the funds it has received, at 53 percent of the donations, around $596 million dollars.

All three funders of the Amazon Fund – Norway, Germany (KFW) and Petrobras – have paid up their commitments to the fund, meaning, the gap between allocated and programmed funding is not because international climate finance did not arrive. 

Fundo Clima 

As a part of its comprehensive national climate change policy, the Brazilian government established a national climate fund, Fundo Clima, as the financing arm. 

Financing through the Fundo Clima flows through its two windows, a reimbursable loan one and a non-reimbursable grant one. BNDES, the Brazilian national development bank, manages the loan window while the Ministry of Environment and Forests directly manages the grant (non-reimbursable) one. Between 2011-2014, Fundo Clima’s reimbursable transfers were R$1280 million ($597 million in US dollars). Of this, the government transferred R$560 million ($261.57 million) to the fund. BNDES was able to program the entire amount of R$560 million. This changed in 2013 and 2014 when BNDES was not forwarded the remainder amount. Fundo Clima’s experience suggests that equipping a national climate fund with a source of funding is necessary but not sufficient. Governments must also transfer funds owed to the national climate funds. 

India 

National Clean Energy and Environment Fund 

In April 2011, the Government of India created the National Clean Energy Fund through the 2010-2011 Finance Bill. The bill levies a tax on every ton of lignite or coal produced and imported. The Modi government widened the scope of the fund to include environmental activities, prompting the government to change the name to National Clean Energy and Environment Fund. 

Data from the Ministry of Environment and Forests shows that 34 percent of the coal tax revenue was allocated to the National Clean Environment and Energy Fund (NCEEF). Of the tax generated, 18 percent has been programmed, while 53 percent of the allocated finance has been programmed. In other words, there is substantial underspending by both the tax revenue to allocations ratio and the allocation to programming ratio. 

India also has a National Adaptation Fund. The Indian government made an initial allocation of $55.6 million. This fund has not received regular allocations.

From Brazil to India

While the three funds are different in their designs and scope, a consistent theme that emerges is the low programming rate. While the Amazon Fund has a high disbursement rate of 82 percent, it was able to program only 53 percent of the funds it had received. Since the Amazon Fund is a results-based fund, it is not possible to compare what percentage was transferred to it by the government against what the total available resources really were. Fundo Clima programmed 43 percent of what it raised but was able to disburse its entire allocation. For NCEEF, the fund received 19 percent of what was raised. The fund programmed 53 percent of the revenue it received. 

Table 1: Revenue allocation and programming for selected national climate funds  

Source: Amazon Fund, Fundo Clima, Ministry of Environment, Forest and Climate Change (India) and author calculations.

These cases show that governments do not always forward the transfers that these funds are eligible to receive. These funds have been empowered with the necessary legal and administrative frameworks to receive revenue raised from measures such as taxes or levies. However, finance ministries have forwarded only a fraction of the money owed to the funds. The national climate funds have not fully programmed their resources either, and have been slow to use the government transfers.

Why are finance ministries hesitant to forward transfers to the fund? And why are funds not able to spend the transfers they receive from the government? It appears that political will has to match the spending authority but that operational improvements must also take place to ensure that funds are able to spend the money they receive. 

As more and more countries contemplate using a carbon price to encourage a move away from carbon-intensive modes of production and consumption, it will be crucial to put in place revenue management mechanisms so that governments are able to spend the raised revenue to achieve national climate goals. Carbon taxes are often regressive. By not spending the revenue generated from the carbon tax, governments are not only delaying climate investments they need to be making but they are also not correcting the regressive nature of these taxes. 

The experiences of funds in Brazil and India show how a focus around raising revenue alone is not sufficient. Governments must make the allocations to spend the money wisely, and the entity charged with programming how to spend it, needs to make the investments. 

*

Never miss an update: Subscribe to the Global Economic Governance Newsletter.