The Paris Agreement was formed under the United Nations Framework Convention on Climate Change in 2015. The objective was to unite the world to undertake ambitious efforts to mitigate massive climate change effects. This agreement was signed by the European Union and 174 other countries to provide a sustainable future to upcoming generations.

The crucial need for such measures can be observed from the disastrous effects in developing countries. For instance, the recent flood in Pakistan affected 33 million people, with around 1,300 people losing their lives. The cost of general damages amounts to $ 14.9 billion and loss of economic activity constitutes $15.9bn, making it a total loss of $30bn.

The flood brings about a 2.2 per cent decline in GDP. About 45pc of its crops have been washed away in the floods, making the agricultural sector dead (one must remember that Pakistan is an agro-based economy). It will cost the country around $16bn to rebuild and rehabilitate the flood victims.

The Paris Agreement is focused on overall climate change, whereas Green Climate Fund (GCF) is concerned with the management of funds available to implement the objectives set by the Paris Agreement.

The challenge is to develop a system where resources are consumed transparently with accountability in a cost-effective way

To support global climate funds World Bank played a crucial role in bridging the gaps in finance by establishing Climate Investment Fund (CIF) in 2008.

Later GCF also introduced Country Coordinating Mechanism, which aims to approve grant applications, nominate grant recipients and oversee implementations. These funds help different countries establish capacity and enhance their involvement in all sustainable activities.

Over time GCF believes that civil society participation plays a vital role as they are “voices of weak and powerless” hence without the direct participation of the public, governments cannot operate at a massive level.

However, the major challenge that the GCF faces is the management of the relationship between donor countries and donee countries. In this whole scenario, the climate finance donors are regarded as principals, which means that they are looking forward to implementing climate damage mitigating measures at the lowest possible cost, whereas the agents (donees) undertake the task of implementing principals’ objectives using compensation, cost of efforts and other external factors.

As both parties are benefitting, the question is how to measure their output. How to ensure that each gets what it deserves?

According to the Monitoring and Evaluation System (MES), the agent (donee) has to report the progress to recover their compensation, but these are really expensive and technical to be installed.

The other approach to enhance accountability is the penalties which means agents will be penalised by imposing huge fines for failure to implement their proposals. The problem with penalties is that grantees will only be willing to accept such proposals if they are compensated highly.

Imposing higher bottlenecks in the form of penalties and strict scrutiny might add more pressure on the agents (donees); therefore, they might decide not to apply for such projects. Agents (donees) will certainly face extra pressure to reduce their costs, but the reduction in cost may add to the project’s failure.

The other way could be performance-related pay, where an agent would only be paid if they meet the objectives of their proposals. Nonetheless, the accountability of the donor and donees remains a challenge.

To deal with the challenge of accountability, different techniques have been adopted by the GCF. One such strategy is to collect data related to climate finance, for instance, through documents and interviewing the representatives of developing countries.

Once the data has been compiled through various resources, GCF’s board can examine it to ensure compliance with the Accreditation Master Agreement. Compliance with Accreditation Master Agreement means that donees have signed the agreement to be accountable for not meeting the proposal objectives.

The writer is a research assistant at the Lahore University of Management Sciences

Published in Dawn, The Business and Finance Weekly, February 27th, 2023