Do Multilateral Development Bank Trust Funds Allocate Climate Finance Efficiently?

Abstract

The Paris Agreement has been celebrated as a breakthrough for international climate policy. However, relatively scant attention has been given to the emergent ecosystem of climate finance facilities that support it. We provide an overview of the rising number of climate-related trust funds at multilateral development banks (MDBs). These funds can be distinguished into mitigation funds and adaptation funds. Some funds have a focus on capacity building activities. To maximize their effect on sustainable development, the different types of funds should follow different resource allocation criteria: For adaptation funds, vulnerability should represent the primary criterion. For mitigation funds, the main criterion should be the emission reduction potential. Capacity building should primarily focus on countries with weak institutions. Using a novel dataset of disbursements of climate-related trust funds, available for the World Bank, we examine whether fund allocations correspond to these expectations, and compare them with those of bilateral donors. We find that while trust funds with a focus on mitigation generally allocate aid in line with efficiency considerations, trust funds with a focus on adaptation do not seem to prioritize the countries most strongly in need, contrary to bilateral aid. Furthermore, capacity building activities do not seem to focus on countries with weak institutions. These findings have important implications for the effectiveness and legitimacy of climate aid to developing countries.