Trends in Financial Flows and Technology Transfer

Daniele Violetti Programme Officer, Technology Climate Change Secretariat (UNFCCC)

UNFCCC Workshop on Innovative Options for Financing the Development and Transfer of Technologies Montreal, 27-29 September 2004

Outline of the presentation

I. Previous work of the UNFCCC II.

Financial flows in the UNFCCC process III.

IV.

V.

Financial flows outside the UNFCCC Outlook on financial flows Conclusions

Technology Transfer and Financial Flows

Greenhouse gas emissions in developing countries Need for environmentally sound technologies & technology transfer Problem : Financing

Previous work of the UNFCCC

• First technical paper on terms of transfer of technology and know-how in 1997 (FCCC/TP/1997/1), with a focus on multilateral lending institutions – Problem of quantification and measurement of technology transfer (especially know-how transfer) • Because of their strong linkage to technology, financial flows are often used as a proxy for technology transfer • Problem: data on climate-relevant financial flows are normally not collected separately (esp. in private sector)

Financial Flows in the UNFCCC process

• Information provided by Annex II Parties in their third National Communications

Financial flows from OECD countries

Climate change-related ODA by sector from 1998 to 2000 (US$ million)

Other 13% Transport 30% General environment protection 17% Forestry 4% Agriculture 2%

Source: OECD DAC

Energy 34% • A DAC study shows that $2.7 billion annually are spent for climate change-related aid – representing 7.2 percent of ODA commitments

Financial Flows in the UNFCCC process

• The Global Environment Facility in the period 1995-2003 provided around USD 1.35 billion in grants to climate change activities and another 6.2 billion has been leveraged • The Special Climate Change Fund will finance projects relating to technology transfer • Financial flows generated by JI/CDM projects (How much? When?)

Loans

bilateral/ multilateral

Definition of financial flows

Financial flows to low and middle income countries Official flows Private flows Grants

bilateral/ multilateral

Debt flows FDI/ Portfolio equity flows

Trends in financial flows

Table 1: Aggregate resource flows to developing countries Type of flow (US$ billion) 1995 1996 1997 1998 1999 2000 2001 2002 2003e Aggregate net resource flow

Official development finance

Grants Loans Bilateral Multilateral

Total private flows

Debt flows Commercial banks (M-L term) Bonds (M-L term) Others Foreign direct investment Portfolio equity flows

Source: Global Development Finance, 2004. World Bank.

237.2 284.6 324.2 266.4 236.7 193.7 206.1 190.6 228.2

53.0

32.6

20.4

9.4

11.1

40.8

31.3

9.5

-5.6

15.0

38.4

25.3

13.2

-6.6

19.8

60.9

26.7

34.2

-3.2

37.4

42.2

28.5

13.7

-2.2

15.9

22.8

28.7

-5.9

-6.8

0.9

54.8

27.9

26.9

-7.7 -10.6

34.6

35.3

31.2

4.1

14.7

28.0

34.3

-6.3

-12.8

6.5

184.2 243.8 285.8 205.5 194.5 170.9 151.3 155.3 200.2

56.6

88.6

92.2

23.4

26.5 34.2 43.9 52.4

0.1

-5.1

-3.9 -28.1

-5.8 -10.2

3.2

-3.9

50.6

-6.6

28.5

1.7

46.1

8.3

38.2

39.7

29.8

16.5

12.2

10.0 -68.7 -24.6 -14.6 -30.2

12.7

-5.6

33.1

24.1

95.5 109.5 171.1 175.6 181.7 162.2 175.0 147.1 135.2

32.1

45.7

22.6

6.6

12.6

12.6

4.4

4.9

14.3

Trends in financial flows

• Financial flows have decreased for five consecutive year after a historical peak in 1997 ($324 billion) due to global economic downturn and low FDI • Flows increased for the first time again between 2002 and 2003 from $197 to 228 billion – but they remain 30 percent below their peak level of 1997 • Official flows have decreased by 25 percent since 1990 • FDI has become the main source of financial transfers, representing between 60 to 80 percent of total flows in recent years (up from 25 percent in 1990) • Countries replace official flows with FDI as they become more developed – but aid remains important as a buffer during economic downturns and crisis • Still 87 percent of FDI goes to Japan, USA and Western Europe (2002)

Trends in financial flows

Aggregate financial flows from 1990 to 2003

US$ billion 350 300 250 200 150 100 50 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003e Official development finance

Source: Global Development Finance 2004. World Bank.

Total private flows

Trends in financial flows

Net foreign direct investment (FDI) by region (2003)

Latin America and Caribbean 27% Middle East and North Africa Sub-Saharan Africa 1% 6% Europe and Central Asia 19% South Asia 4%

Source: Global Development Finance 2004. World Bank.

East Asia and the Pacific 43%

Outlook on Financial Flows

• Total FDI is expected to pick up again in 2005 due to recovery from global downturn • The share of FDI to developing countries is expected to rise • Further stagnation of FDI expected in Latin America and Caribbean as privatizations approach their end • Strong growth of FDI expected in East Asia and the Pacific – especially due to growth in China

Conclusions

• Private sector involvement is still low in developing countries - only 13 percent of FDI goes to developing countries • The involvement of the private sector in the technology transfer process is crucial for achieving the objectives of the UNFCCC • The challenge for addressing transfer of ESTs rests primarily with the public sector by: – Provide funding – Creating favorable market conditions – Raising awareness • This workshop, within the CC process, has the opportunity of starting to bridge the gap between governments and the private sector in order to benefit from the innovative options for financing the development and transfer of technologies already available

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