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Concept note: Climate Envelope 2015. Programme Committee, 19 February 2015 Introduction and strategic questions The Danish Government has allocated DKK 500 million to the Climate Envelope in 2015 with the threefold aim of 1) assisting developing countries to adapt to climate changes, 2) assisting developing countries with the transition to low carbon economies and 3) preparing the developing countries to enter into a new global climate agreement at COP21 in Paris in December 2015. The budget is equally divided between the Poverty Frame and the Global Frame, under which an outline of 10 different interventions have been approved by the Government’s Coordination Committee on 17 September 2014, subject to final approval by the appropriating authorities. Considering the different nature of the projects in the Climate Envelope, this presentation focuses on the overall purpose and strategic guidance of the different projects. Hence, this concept note does not follow the common structure, and the detailed descriptions of programme activities, including results frameworks, the mandatory screening notes and risk assessment matrices will be included in the subsequent programme documentation. The contribution to the Green Climate Fund is covered by the interim organisation strategy. The bilateral programmes under the Poverty Frame in Bangladesh and Kenya are included in/coordinated with the respective Country Programmes. Hence, these programmes will only be mentioned briefly in this concept note. Approximately 194 million DKK (39%) is allocated for adaptation and approximately 281 million DKK is allocated for mitigation (56%)1. DKK 25 million is allocated for administration (5%). 18% of the funds are allocated to bilateral activities. Strategic questions: - Does the draft Theory of Change adequately explain the overall strategic purpose, intervention logic and expected results, impacts and goals? Are the suggested assumptions relevant for the implementation of the different projects? Suggestions for addressing these assumptions during the formulation and implementation phase of the projects under the Poverty frame and the Global frame? - It is expected to re-formulate the Climate Envelope as part of the Finance Bill process for 2016 and in follow-up to the thematic evaluation of the Climate Envelope. It will be explored to base the future Climate Envelope on multi-year commitments in order to ensure more predictable funding and to make the administration more efficient. Recommendations for the re-formulation process? How should the current mix of interventions (a balance between adaptation and mitigation through bi- and multilateral instruments) be balanced against the ambition of strengthened strategic focus? 1 See annex 1: Process Action Plan for the appropriation process and a tentative overview of funds allocated for mitigation and adaptation 1 Background, purpose and procedures Climate change is widely seen as one of the most serious challenges in the 21st century, and it is clearly linked to security, poverty reduction, access to natural resources, human rights and sustainable development. The international efforts to mitigate and adapt to climate changes therefore requires a multi-sectorial approach. At the Copenhagen Climate Summit in 2009, COP15, a non-binding agreement was reached which included provisions for further “accelerated” financing for both mitigation and adaptation to climate change. The Copenhagen Accord states that “Scaled up, new and additional, predictable and adequate funding as well as improved access shall be provided to developing countries, in accordance with the relevant provisions of the Convention, to enable and support enhanced action on mitigation, including substantial finance to reduce emissions from deforestation and forest degradation (REDD+), adaptation, technology development and transfer and capacity-building”. In the short-term (2010-12), developed countries were committed to provide a total of USD 30 billion as “Fast Start Finance” (FSF), and the Climate Envelope 2010-2012 represents the Danish Government’s contribution to this commitment. In Cancun in 2010 at COP16 this commitment was further operationalized. In the broad context of long-term financial support, industrialized countries committed to provide funds rising to USD 100 billion per year by 2020 to support concrete mitigation and adaptation actions by developing countries that are implemented in a transparent way. These funds would be raised from a mix of public and private sources. At COP2016 it was agreed to establish a Green Climate Fund intended to be the main fund for global climate change finance in the context of mobilizing USD 100 billion by 2020. At the subsequent climate conference meetings (COPs), these commitments were reconfirmed. At COP19 in Warsaw in 2013 and at COP20 in Lima in 2014 there was a strong pressure from developing countries for a COP decision of a midterm target of new commitments from the developed countries to demonstrate their dedication to scale up climate finance to the USD 100 billion. However, the industrialized countries have not been willing to make any new commitments in this regard, and they generally refer to the agreement at COP19 to make efforts to scale-up climate finance publicly known on a biennial basis from 2014 to 2020. Technical workshops on best ways of scaling up finance and efforts to improve the monitoring, reporting and verification of climate finance would also be held. At COP20 in Lima the progress and the successful resource mobilization process of the Green Climate Fund, which led to a mobilization of USD 10,2 billion was welcomed. During the negotiations developing countries recognized the need to scale-up the involvement of the private sector to mobilize the needed climate finance for mitigation and adaptation. Despite these positive steps, the major issues on climate finance were left unresolved, which makes climate finance a challenge for the negotiations of a global climate agreement at COP21 in Paris in December 2015. In this context, the Climate Envelope is an important landmark of dedicated Danish climate finance, which is further supplemented by other bilateral and multilateral ODA contributions that can be defined as relevant to adaptation and mitigation efforts. According to OECD-DAC, 2 the total Danish climate related aid amounted to 405 million USD in 2013, which is an increase from 283 million USD in 20112. There is no formal definition of a “climate relevant activity”, but it is in general accepted to use the OECD Rio markers3 as a basis. As a preparation for COP21 in Paris in December 2015, the MFA is preparing an internal strategy note to identify and prioritize actions within climate finance and climate diplomacy. The aim of this note is to identify activities where Denmark can contribute to constructive negotiations up to COP21. When negotiating the Government Finance Act for 2015, it was decided to continue the Climate Envelope on DKK 500 million. As in previous years, the Climate Envelope is being administered as an integral part of the Danish ODA in the Ministry of Foreign Affairs. The Climate Envelope is equally divided between a Poverty Frame (PF) and a Global Frame (GF). Activities financed from PF are primarily aimed at initiatives in low income countries and follow the income limits stipulated by the Danida guidelines. These activities are prepared by the Ministry of Foreign Affairs. Activities financed from the GF are targeted at mitigating activities, mainly in fast-growing, emerging economies as the marginal return in terms of CO2 reductions is higher in middle income countries than in low income countries. These activities can be implemented in all countries on the OECD-DAC list, and they are proposed by the Ministry of Climate, Energy and Building. The Ministry of Finance and the Prime Minister’s Office need to approve the list of activities proposed through an endorsement by the Government’s Coordination Committee. Preparation, appraisal and appropriation of each activity follow Danida guidelines. Projects financed by the Climate Envelope are based on the Strategic Framework for Natural Resources, Environment and Climate Change (2013) as well as the Strategy for Denmark’s Development Cooperation, The Right to a Better Life (2012). Strategic guidance for the selection of activities At the Grant Committee meeting in May 2014 it was concluded that: “Recognizing that the international climate architecture is still unfolding and the need to test different mechanisms and approaches, the Committee recommended that the concerned Ministries take steps to prepare a strategy/strategic framework which could guide the use of the Climate Envelope, including guidance on e.g. focus, modalities, etc.”. As a follow-up, steps have been taken to strengthen the guiding principles for the use of the Climate Envelope: A paper to the External Grant Committee was prepared on the Climate Envelope in September 2014: “Climate Envelope: Strategic focus and long term planning”. It was suggested to continue using the guiding principles of selection of activities, including the aim to have a balance between adaptation and mitigation, while there should also be a 2 On basis of the DAC Rio markers. See figures from 2011 – 2013 at : http://www.oecd.org/dac/stats/ These climate markers indicate donors’ policy objectives in relation to each aid activity. A principal objective (mitigation or adaptation) score is given when promoting the objectives of the UNFCCC is stated in the activity documentation to be one of the principal reasons for undertaking the activity. In other words, the activity would not have been funded but for that objective. Activities marked “significant” have other prime objectives, but have been formulated or adjusted to help meet climate concerns (source: OECD, September 2011, http://www.oecd.org/dac/stats/48785310.pdf). 3 3 balance between bilateral and multilateral activities as well as a geographical balance. It was also suggested to adapt a longer-term planning horizon with multi-annual planning in the Danish Finance Act and an adjustment to the administrative preparation procedures to make it more effective. The Ministry of Climate, Energy and Building has elaborated guidelines for screening and selection of projects under the Global Frame. The main criterion is the potential impact on emission reductions in the energy sector. The projects are screened to assess the relevance in relation to promoting an enabling environment and the mobilization of climate finance within renewable energy and energy efficiency – areas where Denmark has relevant experience and added value. The identification of activities for the Climate Envelope 2015 was completed in September 2014. This is five months earlier than for the identification of activities to be funded by the Climate Envelope 2014. This will allow for a more thorough preparation process of the identified activities, and it is de facto in line with the suggestions of the t paper sent to the External Grant Committee in September 2014. To the extent possible activities for the Climate Envelope 2015 has been identified with a view to continue on-going or previously Danish funded activities and/or with an existing implementing agency. Seven of the ten suggested activities follow this guiding principle. This is expected to contribute to making administration of the Climate Envelope more lean and effective. Particular attention was paid to local demands and local climate change strategies/plans in the bilateral programmes. As part of the on-going evaluation of the Climate Envelope, which is scheduled to deliver a final report in May/June 2015, efforts have been made to elaborate a “Theory of Change” (ToC), which will provide guidance during the formulation and implementation phases of the 2015 activities with regard to the intervention logic and expected results. Theory of Change The structure of the ToC aims to bring together an integrated approach within Danish climate assistance (see Annex 2). Rather than developing separate theories of change for the global and poverty frames, a generic draft ToC structure has been developed that can capture both, but which can also be used to present each frame individually. This has been done by recognising that, while the overall impacts for each frame are different (mitigation vs. adaptation/resilience), the pathways to delivering these impacts at programme outcome and output level are broadly similar. Project level activities (and associated outputs) remain specific to the individual frame. However, most assumptions related to the interventions from inputs to activities, outputs and outcomes are relevant for both frames. It is hoped that the proposed an overarching long term goal of “low carbon, climate resilient and socially inclusive green growth” in developing countries can act as a unifying element for the two impacts. It draws upon emerging concepts of green growth (both in Danish policy and 4 the wider literature) which seek to integrate mitigation, resilience, social inclusion and economic development. The global and the poverty frame support four different set of climate relevant activities: a) support to national governments (e.g. capacity development, policy development, financial management and tracking systems and development of National Appropriate Mitigation Actions (NAMAs) and National Adaptation Plans of Action (NAPAs); b) scaling up clean, resilient technology (e.g. support national R&D strategies, promote private sector markets within renewable energy and energy efficiency, facilitate access to finance; c) promoting community resilience and social equity (e.g. promote inclusive green growth, community forest programmes and support to local resilience plans) and d) building international policy architecture (e.g. promote private sector partnerships, facilitate international access to finance and support the harmonization of the international climate finance architecture). Through different outputs, these activities are expected to contribute to specific outcomes: Strengthened national and subnational climate change policies and enabling frameworks for private investments Development, deployment and scale-up of climate-relevant technologies and infrastructure Adoption of more socially inclusive approaches to climate change More robust international political and financial architecture. The expected impacts are: Greenhouse gas emissions are reduced to ensure global warming is kept below 2°C threshold (global frame) Increased climate resilience for communities at risk, particularly vulnerable and marginalized groups. During the 1st quarter of 2015 the Department for Green Growth will develop a monitoring framework for the on-going activities under the climate envelope and efforts will be made to align the different results framework of the new activities in 2015 with the proposed ToC. Activities to be financed from the Climate Envelope 2015 The activities to be financed from the Climate Envelope 2015 were endorsed by the Government in written procedure on 17 September 2014. The list includes 10 activities, of which one is financed from both the PF and the GF, four activities from the PF, and the remaining five activities from the GF. Jointly financed from Poverty Frame and Global Frame 1. The Green Climate Fund (GCF) (DKK 200 million): The purpose of the GCF is to make a significant and ambitious contribution to the global efforts combat climate change (mitigation and adaptation) in accordance with the UNFCCC 5 Conventions and COP-decisions. A GCF Board has been established comprising 12 members from developing countries and 12 members from developed countries. Representatives from the private sector and civil society participate in board meetings as observers. Hence, the GCF has a high degree of legitimacy. Denmark is an active member of the GCF Board in collaboration with the Netherlands. A number of issues have been identified and pursued in the GCF Board. Denmark and the Netherlands have put particular emphasis on the following priorities: Maximization of the GCF’s mitigation and adaptation impact; Enhancement of enabling environments, including regulatory frameworks and policies; Establishment of the Private Sector Facility (PSF), including use of innovative financial instruments; Gender mainstreaming; Transparent and cost-efficient administrative policies. The Green Climate Fund is expected to start disbursing funds to adaptation and mitigation projects prior to COP21 in December 2015. Reference is made to the interim organization strategy for the Green Climate Fund, which was endorsed by the Council for Development Policy and subsequently approved by the minister for Trade and Development on 10 December 2014. As one of the first countries, Denmark announced a significant contribution of DKK 400 million to the Green Climate Fund at the UN Secretary General’s Climate Summit in September 2014. The commitment of DKK 200 million from the Climate Envelope in 2015 adds to the contribution of DKK 50 million (“other environmental contributions”) in 2015 and the previous contributions in 2014 of DKK 150 million (DKK 100 million from the Climate Envelope and DKK 50 million from (“other environmental contributions”). Financed from Poverty Frame 2. Bilateral support to climate change activities in Kenya (DKK 70 million) The Danida Climate Change Programme (DCCP) in Kenya provides targeted assistance to private sector across Kenya and to communities in the drylands of Northern Kenya. The programme has two components: 1) support to energy audits and related energy and resource efficiency measures for the private sector in Kenya to be achieved through support to the Kenya Association of Manufactures and 2) support to rangeland management in Northern Kenya to enhance climate resilience and reduce natural resource related conflicts to be achieved through support to the Northern Rangeland Trust. The DCCP is a continuation and further development of the Fast Start Climate Change Programme (FSCCP) 2011-2014. The programme will have a budget of DKK 70 million for a five year period of which approximately 47% is allocated for mitigation and 52% for adaptation and 1% on programme management. The DCCP is formulated in parallel with the Kenya 6 Country Programme, and it will be implemented over the same time-period and in synergy with the forthcoming thematic Programme on Green Growth and Employment. The first component is expected to expand the level of energy services provided by The Centre for Energy Efficiency and Conservation and deliver results at national level. This includes mainly mitigation of longer climate change impacts, i.e. promotion of a low carbon growth path through energy conservation and efficiency. This component will be relevant for the current process for developing nationally appropriate mitigation actions (NAMAs). NAMAs are being identified and will be implemented in the context of the country’s wider sustainable development strategy, and with the aim of moving the economy onto a low-carbon path. The second component is expected to enhance resilience among pastoralist in Northern Kenya to cope with more severe and prolonged drought events through rangeland management. In addition, there are several indirect benefits from this intervention such as that of peaceful, cohesive communities as conflicts caused by over grazing of land and over utilisation of water is minimized through land use that is planned, developed and managed by the communities. This component is relevant for the development of the national green growth strategy, which includes resilience building and disaster risk reduction. 3. Bilateral support to climate change activities in Bangladesh (DKK 20 million) The objective of the Climate Change Adaptation and Mitigation Programme (CCAMP) is to support the Bangladesh Climate Change Strategy and Action Plan through the introduction of climate proofing and green growth initiatives that empower vulnerable communities, capacitate the private sector and make better use of natural resources. By extending the support it will be possible to integrate the activities as an engagement in the Country Programme for 2016-2021 (DKK 50 million from the Climate Envelope 2014 was approved in 2014 for the period 20142016). The engagement is a continuation of an existing partnership with the Local Government Engineering Department. The additional funds will be directed towards adaptation activities, which include construction of climate resilient rural infrastructure in Southern Bangladesh. The expected outcome is to reduce the vulnerability to climate change induced hazards and to empower and increase the income of the targeted poor coastal communities. 4. Mangrove rehabilitation through the International Union for Conservation of Nature (DKK 35 million) The Mangroves for the Future (MFF) programme emerged from the major efforts to rebuild and restore livelihoods after the devastating Indian Ocean tsunami in December 2004. In 2006 the International Union for the Conservation of Nature (IUCN) and the United Nations Development Programme (UNDP) organized consultations on regional needs in relation to improved coastal zone management, during which the importance of mangrove forests both as protective “buffers” in the face of storms and extreme events as well as a significant sources of livelihoods for millions of people living in fishing and coastal communities were recognized. The MFF coordination operates from the Asian regional office of the IUCN in Bangkok and Norwegian (Norad) grants have also funded the activities since 2008. 7 Starting in the countries most affected by the tsunami - India, Indonesia, the Maldives, the Seychelles, Sri Lanka and Thailand - the MFF has gradually expanded to include others, notably Bangladesh, Pakistan and Vietnam (which joined during the second phase of the SIDA funding). Cambodia, Myanmar and Timor Leste participate as “outreach” countries. There are three main objectives of the MFF: i) to improve, share and apply knowledge about mangroves and coastal zone management; ii) to strengthen coastal management institutions and empower civil society; and, iii) to enhance coastal governance at all levels (inter alia through encouraging sustainable business practices in coastal zones). A series of “programmes of work” are undertaken in the MFF countries, guided by “national coordinating bodies” and the regional steering committee which brings together all the different partners, including the IUCN, the UNDP, UNEP, the FAO, Care International and Wetlands International. In 2012 a 25 million DKK grant from the Climate Envelope for the MFF was approved. The overall objective of this new “mangroves and climate change” (MCC) component of the MFF is to ensure that adaptation and mitigation benefits and other potential environmental services from mangroves and coastal vegetation are realized in the MFF countries. Specifically, the grant was used for small and medium sized demonstration projects in Bangladesh, Indonesia and Vietnam. During the last phase until 2020 the experiences from the climate-related activities supported previously by Denmark will be mainstreamed in the entire programme. The new Danish grant of DKK 35 million will cover the period 2015-2019. An appraisal will be made in April to follow-up on the review from 2013. 5. Green Mini-Grids Development Facility (DKK 12,5 million) Globally, over 1.2 billion people are still without access to electricity - with half of them in SubSaharan Africa – affecting economic development and quality of life. The Sustainable Energy for All initiative (SE4ALL) was launched in 2011 to help achieve universal energy access in addition to doubling the share of renewable energy and gains in energy efficiency by 2030. A considerable proportion of this access, up to 40%, is projected to be achieved through minigrids (IEA, World Energy Outlook 2012), with grid extension and off-grid systems being the other options. Mini-grids (also referred to as micro-grids in case of smaller sized systems) are village or district level energy distribution networks that can serve remote and dispersed communities, which are away from the grid. Mini-grids can also lend themselves well to supply energy to small communities such as in Small Island Development States (SIDS). Even in areas where the grid is expected to reach in the medium term, mini-grids could be effective pre- grid electrification options. Green Mini-grids (GMGs) are those built with fully renewable and/or hybrid power sources, which in addition to helping expand energy access, provide global and local environmental benefits. However, in spite of their obvious advantages, the scaling up of installation of GMGs is impeded by a number of critical barriers: Policy uncertainty and inadequate regulation; fragmented early stage markets with little cross-fertilization of knowledge among different stakeholders; capacity issues including in project preparation; lack of proven business models; 8 and, lack of access to affordable and long term finance. The overall global experience is diverse in scale and scope, and there is a need to consolidate the learnings and determine how they can be put to use in specific country contexts. The purpose of the Green Mini-Grids Development Facility under the the World Bank’s Energy Sector Management Assistance Program (ESMAP) is to support the acceleration and scale-up of GMGs by addressing policy barriers, and by identifying and assisting new GMG projects. The overall budget estimated for 5 years is USD 20 million. The main focus areas and activities are categorized into two broad components: 1) Action Learning and Evidence Generation (USD 10 million) and 2) Technical Assistance at Country Level (USD 10million). The Facility will have its secretariat in ESMAP, and will work closely with World Bank’s regional teams as well as International Finance Corporation (IFC), and will build upon the ongoing activities. Where feasible, partnerships will be developed with other international/regional agencies for mutual leverage. Financed from Global Frame 6. Financing of NAMAs through the German/UK NAMA Facility (DKK 78 million): National Appropriate Mitigation Actions (NAMAs) are strongly embedded in the UNFCCC and negotiations for a new climate agreement. The concept of NAMAs was developed in the UNFCCC negotiation processes, and NAMAs now constitute developing countries national contributions to the global efforts needed to attain the internationally agreed goal to keep global warming below two degrees Celsius compared with pre-industrial levels. NAMAs are mitigation actions, which are nationally determined and voluntary taken by a developing country to deviate from its “business as usual emissions” and shift to low carbon development path. Hence, NAMAs vary in scope, nature and in supportive or underlying interventions. Furthermore, they can range from national economy-wide, sector or sub-sector goals and policies to a selection of specific activities, which may again range from regulatory interventions over financing mechanisms to intervention programmes or single interventions. In order to make a significant contribution to global mitigation efforts, NAMAs will be dependent on the availability of financing, technology and capacity development. This is particular true for NAMAs having high ambitions with regard to transformation potential towards a low carbon trajectory path. This means that implementation of NAMAs is currently only supported from a few financial sources and mainly through the NAMA Facility. Thus, the NAMA Facility is at present the predominant mechanism for supporting NAMA implementation, in particular as the Green Climate Fund is not yet operational. The NAMA Facility selects through a competitive bidding process “NAMA Support Projects” by providing financial support and technical cooperation instruments to support governments in implementing parts of their NAMAs. Financial instruments include grant-based support instruments as well as concessional loans. The Facility also provides technical assistance and capacity building to increase institutional and regulatory capacity with a view to maximize the 9 transformational impact of the NAMA and/or to support partner countries in developing mature, in-depth planned and co-ordinate projects. Following its first call full-fledged projects in Chile, Costa Rica, Colombia, Indonesia and Mexico have been developed. From its second call NAMA outlines in Burkina Faso, Peru, Tajikistan and Thailand were selected and have started the process of appraisal. The NAMA Facility became operative in 2013. The UK and Germany have up until now allocated Euro 119 million and both countries pledged additional funding for 2015/2016 in December 2014 at COP20 in Lima. The Facility is open for other multi- and bilateral donors. Through Climate Envelope 2014 Denmark joined the NAMA Facility as an additional donor providing financing amounting to DKK 73.8 million for a third call announced by the Facility at COP20. The EU Commission also contributed Euro 15 million to the Facility. The funding amount sought for under the Climate Envelope 2014 was primarily a matter of priority between individual engagements put forward under the Global Frame. Moreover, at that time there was less certainty about other donors funding for a fourth call. As a contribution to the continuation and further development of the important work of the NAMA Facility, the Danish support through the Climate Envelope 2015 is expected to provide funding towards a fourth call to be announced in 2015/2016. Through the NAMA Facility, Denmark seeks to attribute to demonstration short-term of successful leverage of finance for implementation of ambitious and transformational NAMAs. Moreover, the NAMA Facility is expected to generate learning towards the Green Climate Fund. The outcomes targeted mid-term is development of a robust financial architecture capable of enabling mitigation efforts needed to attain the 2 degree goal. 7. Center for Clean Air Policy - Mitigation Action Implementation Network II (DKK 10 million): Assistance to identification and preparation of NAMAs are in high demand by developing countries. Also, there is a continuous need for supporting the development of strong pipelines of ambitious NAMAs for climate finance including for the NAMA Facility and the Green Climate Fund both of which Denmark supports. CCAP (Center for Clean Air Policy) is an American based think tank. Through its Mitigation Action Implementation Network (MAIN) network it is well placed for supporting developing countries with NAMA readiness and have previously prepared NAMAs that were selected for financing through the NAMA Facility. CCAP MAIN II is a continuation of a program run by CCAP. The first MAIN was supported by Germany and the Danish Climate Envelope 2012. The funding expired in 2014. MAIN seeks to spur ambitious mitigation actions through peer-to-peer learning among developing countries in Latin America and Asia. MAIN participant countries includes China, Indonesia, Malaysia, Pakistan, the Philippines, Thailand, Vietnam, Argentina, Chile, Colombia, Costa Rica, the Dominican Republic, Panama, Peru and Uruguay. 10 Within the initiative and with support from Denmark a series of regional and global policy dialogues as well as on the ground work with specific NAMAs were undertaken and the most promising NAMAs were put forward to the NAMA Facility seeking funding for implementation. One application was successful and hence the NAMA is currently being supported by the NAMA Facility while others may be re-submitted to the Facility or put forward elsewhere. With Danish support from Climate Envelope 2015, CCAP now seeks to take the MAIN initiative to the next level from NAMA readiness to implementation in order to help building a robust pipeline of transformational NAMAs. Specifically, the Danish support through the Climate Envelope 2015 will contribute to finalizing the 3-4 concrete and finance ready NAMA proposals. This support will complement enabling international climate financing including from the NAMA Facility and/or the Green Climate Fund. Selection criteria for NAMAs to be supported are expected to align with those of the NAMA Facility. The expected outcome is to attribute to building strong pipelines of ambitious and transformative NAMAs. 8. International financing for energy efficiency and renewable energy within the framework of Global Innovation Lab for Climate Finance (DKK 40 million): Mobilizing public and private finance for energy efficiency (EE) is a Danish priority due to the untapped substantial mitigation potential that significantly can contribute meeting the 2 °C target through to 2020, at no net economic cost and with readily available technology solutions. The Danish Government has partnered up with the Global Innovation Lab for Climate Finance (The Lab) and the Inter-American Development Bank (IADB) to develop and pilottest the Energy Savings Insurance (ESI) instrument that aims to overcome key financing barriers encountered by companies when investing in EE measures. Notably barriers that the private sector is unlikely to overcome by itself. Spurring private sector climate finance and unlocking potentials of energy efficiency will benefit developing countries in reducing CO2emissions, save energy, promote economic growth and create local jobs. ESI is part of an innovative business model consisting of a structured set of interventions. A central element hereof is an insurance component that underwrites minimum savings estimated for specifically defined energy efficiency measures. Specifically ESI addresses the following key barriers: 1. Investors’ creditworthiness: the private sector is faced with non-recognition of energy efficiency savings as collateral for investment. This in turn is anchored in local finance institutions lack of familiarity and trust in estimated savings. 2. Transaction costs: loans to individual EE projects are often small compared to the (associated) transaction cost incurred by the banks; setting up an assessment and verification framework requires up-front expenditures. 3. Insufficient marketing: financial decision-makers in companies are often unaware of EE savings potential and thus hesitant to make the investment. Targeted marketing and outreach, building on strong and evidence-based data, is needed to convince businesses of the virtues of EE investments. 11 Addressing these barriers gives reassurance to both the end-user/investor and the bank that energy savings will be sufficient to pay the financing, while also building capacity and credibility of energy service providers. Program experience will allow suppliers to evaluate project opportunities and integrate the reduced costs into their investment project portfolio. Experiences will over time lead to reduced insurance rates and eventually reduce or eliminate the need for subsidies for insurance. The Lab highlights these features in its assessment of ESI’s scaling and impact potentials; both with regard to emission reductions and private investment The main part of the Danish funding for climate financing instruments developed and tested within the framework of the Global Innovation Lab for Climate Finance will support the further and wider implementation of ESI instrument via a new regional facility managed by IADB. This facility will incorporate key learnings from an ongoing ESI pilot program in the Mexican agro-industry supported by the Climate Envelope (2013 budget). IADB’s regional facility will through national development banks introduce the ESI in relation to a growing portfolio of high-impact energy efficiency investment projects across additional sectors in Mexico (e.g. agro-business, commercial buildings and small & medium sized enterprises) and in several new countries in Latin-America. Currently IADB is screening the following countries for up-scaled implementation: Brazil, Columbia, Dominican Republic, Nicaragua and Peru. Funding will be set-aside for a global outreach initiative aiming to engage and introduce the ESI and similar innovative financing instruments developed by the Innovation Lab in financial institutions and multilateral development banks in other regions of the world. Particular attention will be given to introduce the ESI and equally relevant Lab-developed instruments in the ongoing Danish bilateral energy and climate cooperation. Collaboration and co-financing opportunities will be sought via interested partners of The Lab and international financing institutions associated with the SE4All initiative. Part of the outreach and marketing will be targeting technology suppliers, institutional investors and international re-insurance companies. Specification of ToR and deliverables in relation to global outreach of the ESI and new Innovation Lab financing instruments, including prioritization of institutions and fora to engage in, will be undertaken during 2nd and 3rd quarter. 9. The Low Carbon Transition Unit (LCTU) and cooperation with China (DKK 4.5 million): The Low Carbon Transition Unit (LCTU was established by the Ministry of Climate, Energy and Building (located at the Danish Energy Agency) in 2012 financed by the Danish Climate Envelope 2012. The development objective of the support to LCTU is to assist developing countries to adapt to climate change and with transition to low carbon economies and preparing to enter into a new global climate agreement. Thus, the LCTU is an important element in meeting the overall objectives of the Climate Envelope. The outcome of the support to LCTU is defined as: Emerging economies are further enabled to reaching ambitious climate and energy goals through knowledge sharing and support within planning, regulation and implementation of energy efficiency and renewable energy policy in an Agency-to-Agency cooperation. The point of departure is four decades of Danish experience 12 within renewable energy solutions and regulation. Technical support is delivered by LCTU on the basis of expressed demand. The demand driven principle provides higher incentives for and ownership by institutions to implement advice and technical assistance recommendations. Currently energy sector programs are running in South Africa, Vietnam and Mexico. These programs contribute to enable the countries to make credible Green House Gas projections as a basis for Low Emission Development Strategies (LEDS), mobilize climate financing and quantifying emission reduction pledges. LCTU was prolonged in context of Climate Envelope 2014 for a two-year period (2014-2016) covering the bilateral cooperation with China, South Africa, Vietnam and Mexico as well as the cross-cutting and plurilateral efforts focused on emission reductions across emerging economies. Following a request from the Ministry of Finance, the grant was divided into two. The purpose of the funding by the Climate Envelope 2015 is to ensure the same operating costs for the LCTU as the initial two-year funding period for the LCTU. The extension of the LCTU and the Danish-Chinese Energy Cooperation descends from a continued extensive demand for Danish experience in low carbon transition. In addition, a review of LCTU finalized in March 2014 stressed the relevance of LCTU and the energy sector programs. 10. Targeted support for activities during the climate negotiation in 2015 (DKK 5 million): The objective is to support relevant activities during the climate negotiations in 2015 that can contribute to achievement of a new global climate agreement in 2015 to be adopted at COP21 in December 2015. Possible activities include: - - Activities related to the Cartagena Dialogue, the Green Climate Fund, IPCC as well as the work of the Major Economies Forum (MEF) and the Clean Energy Ministerial (CEM) related to emerging economies. Activities enabling concrete results from UN Secretary General's Climate Summit in New York in September 2014 towards COP21 for the purpose of raising the level of ambition within central focus areas. 28 January 2015 Ministry of Foreign Affairs /Department for Green Growth and Ministry of Energy, Climate and Building 13 Annex 1: Process Action Plan for the individual activities financed under the Climate envelope 2015 Appropriation limits: Amou nt (mio. DKK) Koncept note/ Projectdocumen t **) Danida internal Program me Committ ee Below 5 mio. kr. – Head of Department Above 5 mio. kr. – Internal Grant Committee Above 35 mio. kr. – External Grant Committee and Parliamentary Finance Committee Projectdocumen tation complete Request for appraisal, incl. toR Appraisal proces Appraisal: Incl. mission report with recomendati nos Joint Climate Envelope 2015 CGF (15) 200+ 27/01 50 19/02 Programme documents revised Deadline for documen ts to the grant committe e Last quality assuranc e check . Programme approval process. Danida grant committees Date for meeting Head of dep < 5 mio. DKK To be defined External or internal grant committee (IGC/EGC) or Council for Developme nt Policy (UPR) n/a Deadl ine for Aktstykke til UM Amount for adaptation (a), mitigation (m) and others (o) Responsa bility A: 50% UM/ KEBMIN Parlia ment ary Finan ce Com mitte e FiU* Marc h M: 50% Poverty Frame 2015 Kenya 70 27/01 19/02 Marts/April 19/5 9/6 (EBK) + A: 52% Amb. Nairob M: 48% Bangladesh 20 Mangrove 35 rehabilitering (IUCN) Green Mini12,5 Grids Global Frame 2015 CCAP MAIN 10 27/01 19/02 January 19/5 9/6 (EBK) + A: 100% 27/01 19/02 April 19/5 9/6 (EBK) Juni A: 100% Amb. Dhaka GRV 27/01 19/02 13/5 3/6 (IBK) M: 100% GRV 27/01 19/02 M: 100% KEBMIN February/ 31/3 22/4l - II UNFCCC negotiations etc. Low Carbon Transition Unit (LCTU)e NAMA International finance initiatives to renewables and energy efficiency (IADB) March 5 27/01 19/02 4,5 27/01 19/02 78 27/01 19/02 40 27/01 19/02 (IBK) Okt Okt 15 ? April/ May 1/10-14 (UM) 1/10-14 (UM) 19/5 9/6 (EBK) April 19/5 June 10/9 9/6 (EBK) 29/9 (EBK) Aug Sept Okt Okt A: 50% KEBMIN M: 50% M: 100% KEBMIN M: 100% M: 100% KEBMIN KEBMIN *) Dates for the Parliamentary Finance Committee are not yet available for second semester 2015 **) The presentation to Danidas internal programme committee will cover the entire climate envelope. The bilateral activities will be included with a brief description. However, substantive descriptions will be included in the country programmes. ***) Review appraisal 15 Annex 2: Summary of the key elements of the proposed Theory of Change4 4 From the inception report “Evaluation of Denmark’s Climate Change Funding to Developing Countries”, 14 November 2014 16 Box 1. ToC assumptions From inputs to activities Danish climate assistance: Provides a clear and coherent strategic framework that allows for smart partner selection and activity programming • Promotes activities that have a clear demand among partners and end beneficiaries, based on consultation, co-development • Targets its funds at activities that support the international agenda on climate change, whilst ensuring that they are new and additional • Has effective procurement and programming processes that result in efficient transition from design to implementation • Uses its institutional and budget structures to disburse funds and technical assistance in a timely manner From activities to outputs • Danish climate assistance: Ensures that its portfolio is structured, managed and resourced in an efficient way Uses logframes, indicators, targets and results frameworks to monitor and manage project outputs • Builds relationships with relevant stakeholders to facilitate project implementation and uptake • Effectively exploits synergies with other Danish structures and programmes (e.g. global/poverty frame, country programmes) From outputs to outcomes • • Danish climate assistance: • • Successfully mobilises external finance, technology and expertise to support delivery (both Danish and non-Danish)? Supports wider Danish development assistance aims, and seeks to find synergies with 17 relevant programmes and structures • Selects the most effective interventions to achieve outcomes, using theory of change processes and feedback loops • Delivers outcomes that can be attributed to Danish inputs at a level higher than its prorata share of finance From outcomes to impacts Danish climate assistance: • • • • • Is able to achieve transformative change that delivers longer term outcomes once project funding is disbursed Uses diplomacy to influence the wider policy and financing debate among donors, IFIs and national governments Builds the evidence base for demonstrating the potential for effective action Impacts the lives of beneficiaries beyond those directly engaged by the programme portfolio Uses ex-post monitoring and on-going situational analysis to assess wider macro impacts 18