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Implications for Designing Allocation Mechanisms

Driven by their specific needs and political imperatives, the allocation systems of funds will vary based on the goals they seek to achieve. Therefore, the political mandate, the scope and size, the legal capacity, the financial tools and instruments at its disposal, and other such factors will inform the design of its allocation system. There is no “one-size-fits-all” model for determining funding allocation decisions at any level—across countries, sectors, or activities. Nevertheless, new funds can draw on the lessons learned from the allocation approaches of the 15 funds studied.

Four key lessons emerged from this comparative analysis:

• Identify allocation priorities bottom-up; calibrate for global outcomes top-down. Allocating resources across sectors and activities at the national level contributes to country ownership. At the same time, ensuring progress toward internationally-agreed outcomes requires the Green Climate Fund (GCF) to employ a strong test for the delivery of global climate benefits of its investments, particularly for mitigation. By applying strong tests for climate benefits top-down to meet GCF objectives, bottom-up processes can remain flexible enough to encourage country ownership.

• Prioritize allocations for activities that deliver long-term impacts. As the GCF aspires to achieve a paradigm shift toward low-carbon and climate-resilient development, its allocation approaches will need to prioritize support for activities that deliver long-term impacts. As a result, mitigation activities that contribute to the long-term objective of transitioning to a low-emission economy would take precedence over activities that deliver immediate, low-cost greenhouse gas emissions reductions. Criteria geared to support efforts that enhance enabling environments and promote changes to incentive structures can help alter the trajectory of sectors. These efforts may take a longer time to bear fruit than short term one-off investments, and there will be times when exceptions are needed, such as addressing imminent humanitarian needs arising from climate change impacts. Incorporating different time horizons for actions and results into the allocation approaches will support the kind of transformational impacts to which the GCF aspires.

• Address equity in the allocation outcome; focus on impacts in the allocation approach. Governing bodies must ensure that their funds’ balance of allo¬cations is perceived as fair. Many funds start with an allocation process, such as a formula based on several metrics, and then make ex-post assessments or apply ex-post caps and floors to ensure their allocations are fair. This appears to be a more effective way to ensure equity in the distribution of resources, particularly for low-capacity countries. An ex-post adjustment ensures that groups of countries that meet certain criteria, such as the Least Developed Countries, have adequate access to resources even if they end up with lower rule-based allocations because of their capacity constraints. The rules-based system can be kept fairly simple to ensure that initial allocations are determined to maximize impact, and the allocation outcomes can then be calibrated to ensure a fair distribution.

• Provide flexibility to be responsive, but not at the expense of predictability. Allocation of climate finance must be responsive to the needs of recipients and changing circumstances. Variations in socioeconomic conditions and institutional capacity across (and within) developing countries necessitates a flexible system. Strict rules-based allocation systems can limit the ability of funds to respond to emerging opportunities that might represent a more effective use of resources. At the same time, systems that are too flexible have been found to have their own limitations: they can result in overambitious proposals and may not provide certain activities the long-term certainty of funding flows needed. Finding a balance between predictable flows and a flexible system will be necessary, and the degree of flexibility could be differentiated with more flexibility for mitigation and more predictability for adaptation.