Interview – Climate Finance: Mechanisms and Options

Updated: Sep 20



 

Interviewee: Maxensius Tri Sambodo

Energy Review, Vol 4. Issue 7. 2022


Energy Review: Given that around two-thirds of the international climate finance focus on mitigation, what kind of alternative financial mechanisms can the developing economies pursue to address this issue of imbalance between mitigation and adaptation funds?


Dr. Max: Mitigation and adaptation are two important things to do to reduce the impact of climate change which has an impact on economic, social, and environmental aspects. The following three cases based on study can serve as examples to show how climate change has impacted the agricultural, industrial, and service sectors in Indonesia. On the other hand, it appears that the community's efforts are limited to be able to cope with the impacts of climate change.


The first case is coffee farmers in the North Tugu Village, Puncak Bogor, West Java, Indonesia. Most of the people work in tea plantations, and efforts to control landslides are carried out by growing coffee under the shade. Then the coffee that is planted is called conservation coffee. Gradually, the community's economic condition began to improve by planting coffee and developing eco-based tourism.


However, coffee productivity continues to decline due to increasingly erratic weather conditions. As a result, coffee productivity will decrease, and their income will decrease. Learning from this condition, adaptation financing also needs to be directed to support research funding so that economic losses can be minimized. With the support of adequate research, superior varieties of coffee seeds can be found more quickly, and this can reduce pressure on environmental damage.


In the second case, it happened to fishermen who had to face increasingly uncertain weather conditions. In many places, there has been a diversification of fishing businesses that do not only catch fish but also bring tourists. However, erratic weather conditions and high waves that can last for several weeks, have disrupted their income. Forcing to go to sea in these conditions not only requires a large amount of fuel but also a high risk of the ship sinking. Thus, how to provide business opportunities to small fishermen so that they are still able to earn income when they cannot go to sea. Thus, how to provide business opportunities to small fishermen so that they are still able to earn income when they cannot go to sea. Likewise, climate adaptation financing can help in fishing boat and machinery insurance programs.


The third case, rising sea levels, and exacerbated by extreme weather conditions, affected many people living in coastal areas with heavy losses. Disruption of economic activity has an impact not only on the decline in income but also on additional costs to reduce larger losses. The greater the escalation of this disaster, of course, the economic, social, and environmental losses will also be higher.


Considering the high costs and risks of overcoming the impacts of climate change, especially in providing support from the adaptation side, various strategies are needed for financing adaptation programs. Sources of financing from development funds (state budget) which are distributed to the village or village level, can be used as seed funding to encourage private sector participation in blended finance financing schemes.


The current challenge is how development funds can be used to 'rebalance the risk' so that the private sector will see adaptation programs or projects as being more bankable. Coordination and dialogue between the government, the private sector, and the community (public, private, and community) need to be the basis for optimizing the potential of blended finance. The potential for blended finance is quite large and has the prospect of solving financing problems in the three cases.


In the first case, blended finance can be started by conducting research funding to find superior coffee varieties. In the second case, insurance or direct cash assistance for fishermen can be given when an early warning not to go to sea is given by the authorities. In the third case, the government can undertake the relocation of industrial areas and provide basic infrastructure, and the private sector can develop the new areas.


ER: Even when the Glasgow Climate Pact welcomed newer climate pledges for adaptation finance, the mobilization of financial resources has always been an implementation issue for many developing economies. In this context, how do the recognized principles of locally-led adaptation (LLA) help in enabling local-level access and agency towards climate finance?


Dr. Max: Locally led adaptation is very important as a form of recognition of local wisdom to solve development problems. Adaptation to climate change is difficult to succeed if it is carried out with a one fit for all strategy formula. Locally led adaptation will be useful to increase program ownership by the community. LLA is carried out by providing opportunities for the community to propose adaptation efforts that can be carried out with the resources and capabilities they have. While locally led adaptation looks promising, it is important to be aware of some of the risks that come with it.


The role of local champions, the solidity of social capital, and the capability of social innovation are important factors for the success of locally-led adaptation. On the other hand, it is also found that weak governance at the local level causes deviations in the use of the climate change budget, such as corruption or improper use of funds according to the priority scale. Weak local leadership, authoritarian leadership style, as well as decision-making controlled by a handful of local elites, will hinder the effectiveness of locally-led adaptation.


Another note in many places in Indonesia there is wisdom to protect natural resources, for example in Papua there is the term ‘sasih’ in the local language, or in Sumatra, there is the term ‘lubuk larangan’. The local wisdom is a form of protection for resources such as forests, sea, lakes and others. This local wisdom is sometimes much more effective than formal rules because of severe customary sanctions that must be accepted by those who violate it.


Likewise, although LLA in its early stages can succeed more quickly, research experience shows that at a certain conjuncture point, local resources and capabilities will face additional conditions of diminishing returns (law of diminishing returns). Therefore, LLA needs to be connected to a wider arena of resources, for example, to obtain greater funding, technology support, networks, and others. Thus, LLA should not be viewed from an out-of-the-way point of view but needs to be in an outward-looking framework or a growth mindset. With the support of parties who have competence in adaptation and mitigation strategies, LLA will produce better results.


ER: Funding for Loss and Damage (L&D) remains a contentious issue in public climate finance. In that regard, how do you think the Santiago Network established at the COP25 will aid in accelerating L&D finance for the vulnerable countries?


Dr. Max: Loss and Damage (L&D) has had a major impact on human well-being Meanwhile, the cost of recovering the L&D is not cheap. Various financing schemes, both based on the (public) development budget, private sector participation, and non-governmental organizations are very important sources. The current challenge is how to find a more cost-effective way of financing.


Nature (renewable sources) has the power to recover from the damage that occurs, but of course, it requires a process and time. Efforts to utilize nature's regenerative power to carry out recovery can be carried out in a nature-based solution approach. The experience from Arborek Village, in Raja Ampat Regency, West Papua shows how the coral reef rehabilitation efforts initiated by the women with the assistance of the COREMAP program have made the village the best tourist village in Indonesia. Improving L&D does need time and ongoing assistance. But the fruits of success have been felt. The community's economy is moving again, and nowadays people believe that protecting nature will bring economic blessings to their families.

The experience from Arborek Village shows that the recovery process for loss and damage involves the active participation of local communities. However, it is different from stories in other places, for example in Lubuk Bintialo Village, Batanghari Leko District, Musi Banyuasin Regency, South Sumatra Province, community participation in improving the condition of watersheds damaged by illegal and legal logging is not optimal and tends to take advantage of the role of the community corporation. The space for community participation in repairing damaged environmental conditions can build a shared spirit of the importance of protecting the environment from being damaged.


From these two experiences, it appears that improvements made under the umbrella of sustainable programs and involving community participation have a high level of success and satisfaction, compared to those carried out by external parties with minimal involvement of local communities.


ER: In a recent study, you have identified the ‘governance barrier’ as a critical impediment to the implementation of low carbon development projects. Can you please elaborate on the aspects of this barrier and suggest ways to resolve them?


Dr. Max: The governance barrier reflects weak coordination and synergy in mitigating and adapting to climate change. The tendency, each agency operating independently, shows a high sectoral ego. There has not yet been a discussion room to assemble the nodes of activities, programs, and funding. This condition occurs not only at the central government level but also at the provincial and district governments. Another challenge is related to the agency's weak competence in solving climate change problems, and even though capacity building has been carried out, the high turnover of workers poses a threat to the accumulation of knowledge and experience.


The governance side that is also important is related to the lack of proper handover of the locus of authority and responsibility in managing conservation areas. Maintaining conservation areas is certainly the same as efforts to mitigate and reduce adaptation costs from climate change. For example, in the Papua region, there are many areas of mangrove forest, as well as sago trees that function to reduce seawater abrasion and also protect marine life that has been converted into a residential area. As a result, these areas are now frequently flooded.


Likewise, the authority for managing marine areas, which was previously the responsibility of the district government, has been delegated to the provincial government. On the other hand, district governments have a better span of control in supervising. This change in responsibility has an impact on the sustainability of marine area management which also plays an important role as a source of blue carbon. Provincial governments that are directly affected by environmental changes will certainly have a higher passion for environmental conservation. This contrasts with the provincial government which geographically, the span of control of the marine surveillance function is too far.


Thus, there is a lot of environmental damage that can be reduced by consistently implementing good policies. Climate change will further exacerbate the impact of weak spatial and regional management policies. Another aspect of the governance barrier is the allocation of financing. Each region certainly has different challenges and diverse needs for financing adaptation and mitigation of climate change. Thus, policies regarding budget allocation also need to be adjusted and not standardized. The portion of the budget allocation for maintaining climate resilience needs attention, especially in areas experiencing major environmental damage.


(Dr. Maxensius Tri Sambodo is a senior researcher at the National Research and Innovation Agency (BRIN). He is a visiting fellow at Bank Indonesia Institute (BINS) and part of the research team on climate finance at the World Resource Institute – Indonesia. His research interests are in economic development, energy, environment, and natural resources.)