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Climate Finance Study Group Promoting efficient and transparent provision and mobilization of climate finance to enhance ambition of mitigation and adaptation actions Toolkit prepared by invited IOs June, 2016 Disclaimer This technical document consists in different sections prepared by several International Organizations for the G20 Climate Finance Study Group: Administrative Unit of the Climate Investment Funds - CIF, Secretariat of the Green Climate Fund – GCF, Secretariat of the Global Environment Facility – GEF, Inter-American Development Bank – IDB, Organisation for Economic Co-operation and Development – OECD, United Nations Development Programme – UNDP, and the World Bank Group. This document does not express the views of the G20 member countries. The International Organizations mentioned above assume no liability or responsibility whatsoever for the use of the data or analyses contained in this document, and nothing herein shall be construed as interpreting or modifying any legal obligations under any intergovernmental agreement, treaty, law or other text, or as expressing any legal opinion or as having probative legal value in any proceeding. This document included herein is also without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area. 2 LIST OF CONTENTS List of Contents ................................................................................................................................. 3 Introduction...................................................................................................................................... 4 Alignment of policies to achieve climate change mitigation and adaptation - OECD ........................... 5 Tools for climate change expenditure analysis at national level - IDB ............................................... 13 Using GCF for the provision of financial resources from developed to developing countries – GCF Secretariat ...................................................................................................................................... 19 GEF’s Business Model and Experience on Provision of Financial Resources to Address Climate Change – GEF Secretariat ............................................................................................................................. 25 The Role of the Climate Investment Funds in Supporting the Deployment and Mobilization of Climate Finance – CIF Administrative Unit .................................................................................................... 32 National Climate Funds: Key Considerations for the Design and Establishment of National Level Funds to Achieve Climate Change Priorities - UNDP ................................................................................... 38 GHG Emissions Pricing and the Private Sector – World Bank Group .................................................. 46 Leveraging private finance with public funds – World Bank Group ................................................... 53 Access to Climate Change Information to Enhance Adaptation – GEF Secretariat ............................. 62 Capacity Building to Support Climate Finance and Technology – GEF Secretariat .............................. 66 Institutional arrangements: four key elements for national bodies to support effective flow of finance to achieve climate change priorities - UNDP .................................................................................... 72 3 INTRODUCTION The G20 Climate Finance Study Group – CFSG decided in 2016 to share experiences on the topic of Promoting efficient and transparent provision and mobilization of climate finance to enhance ambition of mitigation and adaptation actions. In this context, the Group invited international organizations to present their work and experience on key subjects, with a special focus on tools, instruments and enabling environments that could be used for the provision, mobilization and utilization of climate finance. The inputs from the invited IOs were collected and are presented in this Toolkit. The CFSG notes with appreciation the support of the organizations that contributed to this Toolkit: Administrative Unit of the Climate Investment Funds - CIF, Secretariat of the Green Climate Fund – GCF, Secretariat of the Global Environment Facility – GEF, Inter-American Development Bank – IDB, Organisation for Economic Cooperation and Development – OECD, United Nations Development Programme – UNDP, and the World Bank Group. It should be noted that this Toolkit simply provide examples of policies, approaches and instruments with the potential to contribute to enhancing the provision, mobilization, utilization and effectiveness of climate finance, for respective governments to consider in light of their national circumstances, in accordance with the objectives, provisions and principles of the UNFCCC. This document represents the views of IO authors’ views only and does not express the views of the G20 member countries. 4 ALIGNMENT OF POLICIES TO ACHIEVE CLIMATE CHANGE MITIGATION AND ADAPTATION ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT - OECD CONTEXT Climate change is a global environmental externality that if unchecked will increase the likelihood of severe, pervasive and irreversible impacts for people and ecosystems (IPCC, 2014). 1 To limit climate risks and impacts, action on both mitigation and adaptation is required: significant reductions in greenhouse gas emissions need to be complemented with actions to prepare for the impacts of a changing climate. Given the multi-decadal timescales required to transform our economies and infrastructures to meet this challenge, coherent action is needed now to limit the rise of greenhouse gas (GHG) emissions globally and then to reduce them rapidly. Policy instruments will be most effective when underpinned by a clear, long-term commitment by governments, providing private-sector and civil-society stakeholders with the confidence they need to take long-term decisions. Effectively addressing the social implications of the low-carbon transition is also essential for reform, taking into account potential labour market, household and industry impacts.2 Achieving the aims of the Paris Agreement will require structural change to overcome the carbon-dependence of economies, systems and behaviours; a challenge that is both urgent and wide-ranging (OECD, 2016a).3 Beyond implementing core climate policy instruments, governments must ensure that policies are aligned across a diverse range of non-climate areas (e.g. tax, investment, electricity markets, land-use and innovation) to support the transition to a low-carbon and climate-resilient economy, to help advance reform and reduce costs associated with the transition. As policies interact across the economy, the economic signals they create can result in frictions, unintended consequences or even policy objectives and signals that are in conflict with climate action. Numerous misalignments arise from existing cross-cutting and activity-specific policies and frameworks and their interactions (OECD-IEA-ITF-NEA, 2015; Harding, 2014; Roy, 2014).4 Action is needed to address the barriers to 1 IPCC (2014), “Summary for Policy Makers, Climate Change 2014, Impacts, Adaptation and Vulnerability, Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change”, Cambridge University Press, Cambridge, United Kingdom. 2 The OECD 2014 Green Growth and Sustainable Development Forum has looked into the labour market aspects of the lowcarbon transition by looking into the distributional implications of pricing in the energy and water sectors. 3 OECD (2016a), “The OECD Supporting Action on Climate Change”, OECD Publishing, Paris. 4 OECD-IEA-ITF-NEA (2015), “Aligning Policies for the Transition to a Low Carbon Economy”, OECD Publishing, Paris. For example, OECD countries spend between 19 and 34 billion euros in income tax breaks for company car users (Harding, M., 2014: “Personal Tax Treatment of Company Cars and Commuting Expenses: Estimating the Fiscal and Environmental Costs”; OECD Publishing, Paris.), which entails various social costs of even much larger magnitudes (Roy, R., 2014: “Environmental and Related Social Costs of the Tax Treatment of Company Cars and Commuting Expenses”; OECD Publishing, Paris.). These schemes are often combined with unjustified tax breaks for diesel – a more polluting fuel on all counts. Diesel emits more local pollutants, and is also more CO2 intensive than petrol, per litre or per unit of energy. Yet, 33 out of 34 OECD countries 5 scaling-up investment in climate infrastructure, including: regulations related to long-term investment; corporate disclosures on climate risks; public procurement; and the allocation and delivery of development finance. Wellchosen indicators can support policies, the monitoring of progress made, and the information available to citizens (OECD, 2014a).5 This chapter focuses on the contribution that well-aligned national policies can make to the achievement of the aims of the Paris Agreement concluded at COP21. MITIGATION An explicit carbon price is the central policy tool for achieving a cost-effective transition to a low-carbon economy.6 An explicit price on GHG emissions (hereafter “carbon pricing”) aims to reflect the social costs from GHG emissions in the prices of goods and services, thereby providing economic incentives that will influence production, consumption and investment decisions. A rising price over time would provide incentives for immediate emissions reductions where they are cost-effective across the economy, encourage investment and innovation in low-carbon technologies to reduce the costs of future mitigation and avoid locking in any specific abatement options. Other policy instruments also effectively put a price on GHG emissions, most notably energy taxes. While one of the main motivations for such measures may be to raise tax revenue, they are also one of the most cost-effective ways to curb negative externalities associated with energy use, such as air pollution. Unlike explicit carbon pricing mechanisms (specific carbon taxes and tradable permit prices), energy taxes are already deployed in most countries. However, the tax rates are uneven and often very low. While some carbon taxes can be regressive, most often they are not.7 Any undesirable impact on equity can often be compensated using part of the revenues raised, which is preferable over keeping prices low (for all) to mitigate adverse equity impacts (on some). In certain cases, however, higher energy prices can drive consumers to more polluting fuels (e.g. firewood and dung cakes), in which case the price increase may be counterproductive. The OECD has calculated the combined price signal on CO2 emissions from energy use, resulting from explicit carbon taxes, tradable permit prices and specific taxes on energy use; the ‘effective carbon rate’. Across 41 OECD and G20 countries (covering 80% of global energy use and of CO2 emissions from energy use), the effective carbon rate (that includes both excise tax rates and price signals from emission trading systems) for emissions from nonroad transport energy use equals zero for 70% of these emissions and is above EUR 30 per tonne for just 4% of these emissions. For road transport emissions, the effective carbon rate is above EUR 30 for 48% of emissions, tax diesel fuel for road use less heavily than petrol (OECD, 2015a: Taxing Energy Use 2015 – OECD and Selected Partner Economies, OECD Publishing, Paris.). 5 OECD (2014a), “Green Growth Indicators 2014”, OECD Publishing, Paris. See also international work on climate change related statistics and indicators (CCRSI) under the lead of UNECE: http://www.unece.org/stats/climate.html. 6 See Carbon Pricing Leadership Coalition, www.carbonpricingleadership.org/. 7 Flues,F. and A. Thomas (2015), "The distributional effects of energy taxes", OECD Taxation Working Papers, No. 23, OECD Publishing, Paris. DOI: http://dx.doi.org/10.1787/5js1qwkqqrbv-en 6 and zero for only 2% of emissions (OECD, 2016b; OECD, 2015a). 8 There is a considerable scope for improving the effectiveness of carbon pricing mechanisms. Systematically aligning price signals with the carbon content of energy, taking account of any other policy objectives, is a potentially important way towards cost-effective mitigation of GHG emissions. Shifting the balance of incentives towards lower-carbon products and practices also means eliminating subsidies for environmentally harmful resource use. Fossil fuel subsidies encourage the production or the use of fossil fuels, for example by distorting markets and harming the competitiveness of renewables and energy efficient technologies. The “OECD Inventory of Support Measures for Fossil Fuels 2015” puts the spotlight on almost 800 spending programmes and tax breaks: for 34 OECD members and Key Partners, the total support is estimates at USD 160-200 billion a year over the period 2010-14. The IEA provides complementary estimates of fossil-fuel consumer subsidies of around USD 490 billion globally in 2014 (OECD, 2015b; IEA, 2015).9 Another instrument available to help drive emissions reductions is regulation. Regulatory measures include emissions performance standards, “best-available” technology requirements, and measures to encourage efficient use of resources. If designed well, the regulatory measures can be important to advance reform where price signals are less effective due to persistent market barriers or transaction costs and where the uptake of explicit pricing mechanisms is challenging. Though generally less cost-effective than market-based instruments, regulation may be more feasible in some contexts or jurisdictions, providing an avenue to advance climate change mitigation efforts while governments address political and other challenges associated with explicit pricing mechanisms. The economic efficiency of climate mitigation policy packages may need to be balanced with political and social sustainability of reform. Where regulations have not caught up with the pace of technological development, this can hinder innovation, particularly with respect to resource efficiency (OECD, 2016c).10 Caution also needs to be exerted when combining regulations and economic instruments as the former may limit the effect of the latter, recognising that certain combinations can be more efficient than pricing alone (Acemoglu et al., 2012). 11 Environmental policy can result in higher productivity through innovation, but certain policy designs can have the opposite effect and hinder 8 OECD (2016b), “Effective Carbon Rates in the OECD and Selected Partner Economies”: 60% of greenhouse gas emissions of OECD and partner economies are not priced at all, for 41 OECD and G20 countries which together use 80% of global emissions. OECD (2015a), “Taxing Energy Use 2015”: taxes on some of the most polluting uses of fossil fuels, such as coal combustion, are often taxed at some of the lowest rates. A USD 10/tCO2 tax is roughly equivalent to 2.2 cents per litre of gasoline and 2.5 cents per litre of diesel. 9 OECD (2015b), OECD Companion to the Inventory of Support Measures for Fossil Fuels 2015, OECD Publishing, Paris; IEA (2015), “World Energy Outlook 2015”, OECD Publishing, Paris. Complementary to the IEA estimates, the OECD Inventory covers a broader range of measures than the IEA estimates, based on a broad concept of support that encompasses direct budgetary transfers and tax expenditures that provide a benefit or preference for fossil-fuel production or consumption, either in absolute terms or relative to other activities or products. 10 OECD (2016c), “Policy Guidance on Resource Efficiency”, OECD Publishing, Paris. 11 Acemoglu, D. et al. (2012), “The environment and directed technical change”, American Economic Review, American Economic Association, Vol. 102, No. 1, February. Braathen, N.A. (2011), “Interactions between Emissions Trading Systems and Other Overlapping Policy Instruments”, OECD Publishing, Paris. 7 competition by favouring incumbents (OECD, 2014b; Albrizio et al., 2014). 12 Public procurement is one instrument at disposal of countries to engage private stakeholders in forging large-scale practical partnerships and alliances to bring low-carbon solutions to market, including through the use of “shadow carbon prices” in the assessment of bids, or existing performance standards. In addition, it can create lead markets where government demand is significant. The engagement of Small and Medium Enterprises (SMEs) can be particularly interesting in new business areas, and governments have tools they can use for that purpose – examples include access to finance for SMEs to limit R&D risks, breaking contracts into smaller lots, and awarding the intellectual property right to the supplier (OECD, 2016d).13 Complementary to carbon pricing and regulation, a range of policies designed to support the development and deployment of technologies can help to break the path dependence effect by reducing the competitiveness gap of immature but potentially transformative technologies. Provided that government promises are clear and perceived as credible, targeted and time-limited, public support can help to accelerate technological improvements, drive costs down, and support private investment at all stages of the development chain of lowcarbon technologies. One class of technology important for climate change mitigation is renewable electricity generation. Globally, total spending on renewable energy R&D remained steady at USD 9.1 billion in 2015 compared to 2014, although 23% lower than its 2013 peak of USD 11.7 billion that was driven by higher investment in solar R&D in Europe (FS-UNEP and BNEF, 2016). 14 On the deployment side, however, global investment in renewable power capacity has increased rapidly, reaching about USD 266 billion in 2015, more than double the allocation to new coal and gas generation, estimated at USD 130 billion in 2015 (FS-UNEP and BNEF, 2016).15 This has in part been driven by significant support for technology deployment through targeted incentives, such as fixed prices and guaranteed purchase for renewable electricity (OECD, 2016e; OECD, 2016f). 16 New electricity market arrangements are needed to ensure competitive investment in low-carbon capacity, and to ensure that renewable electricity is generated when it is of most value to the overall system. Support measures tied to localcontent requirements may reduce their potential to attract investment (OECD, 2015c).17 Beyond addressing the technical barriers to greater renewable deployment, governments can help to mobilise private investment through reinforced domestic framework conditions for investment in renewable energy. Green bonds and other types of bonds have the potential to provide low-cost and long-term sources of debt capital that is needed for infrastructure projects. For example, the issuances of green bonds trebled in 2014 to around USD 37 billion and grew further in 2015 to USD 42 billion. In areas where domestic capital markets are underdeveloped, actions taken to develop green bond markets can be synchronised with broader Local Currency 12 OECD (2014), “Green Growth: Environmental Policies and Productivity Can Work Together”, OECD Policy Brief, Paris; Albrizio, S. et al. (2014), “Do Environmental Policies Matter for Productivity Growth? Insights from New Cross-Country Measures of Environmental Policies”, OECD Publishing, Paris. 13 OECD (2016d), “The Role of Public Procurement in Low-carbon Innovation”, OECD Publishing, Paris. 14 Government R&D was 3% lower than in 2014 at USD 4.4 billion, but the fall was just offset by a 3% rise in corporate R&D to USD 4.7 billion (BNEF, 2016). 15 FS-UNEP and BNEF (2016), “Global Trends in Renewable Energy Investment 2016”, Frankfurt School-UNEP Centre/BNEF. 2016. 16 OECD (2016e - forthcoming), “Competition, state-owned enterprises and investment in the low-carbon transition”; OECD (2016f - forthcoming), “Investment Reform for Low-Carbon Investment and Innovation”, OECD Publishing, Paris. 17 OECD (2015c), “Overcoming Barriers to International Investment in Clean Energy”, OECD Publishing, Paris. 8 Bond Market18 development agendas. Institutional investors see particular value in national infrastructure road maps and associated project pipelines as it gives them the confidence that bankable and investable deals will be forthcoming and therein provides a rationale for building up in-house capabilities and the knowledge base needed to invest in green infrastructure (OECD, 2016g; OECD, 2016h).19 Mainstreaming climate change goals in public finance - domestically and internationally is a powerful tool to move towards a low-carbon economy. Domestically, public investment was on average 3% of GDP in 2012 in developed economies, 6-7% of GDP in emerging markets (IMF, 2015).20 Internationally, public finance and guarantees from bilateral providers, multilateral institutions and export credit agencies have the potential to shape developing countries’ emissions pathways. Tools and instruments to do so include strengthening the climate mandate of public finance institutions, creating green investment banks and making use of green public procurement and expenditure at all levels of governments. Recent work (OECD, 2015d; AFD-IADB-OECD, 2015)21 has identified ways to mobilise private investment in clean energy and other green infrastructure, in developed and developing countries by: Planning investment in the context of integrated infrastructure and land-use planning at the national and sub-national level; Using development finance to strengthen local financial expertise and institutions, including by capacity building and supportive mechanisms for sustainable infrastructure investment (e.g. as part of blended finance solutions, using public finance to de-risk green infrastructure investments and making them more attractive for private investors); Promoting investment policy principles, such as non-discrimination, transparency and investor protection, while lifting outstanding FDI restrictions and offering predictable policy frameworks; Creating suitable debt and equity investment vehicles of sufficient size and liquidity; and enabling or activating other channels sought by institutional investors, such as direct investment in projects through the use of risk mitigants and transaction enablers (OECD, 2015i)22; Improving co-ordination among multiple levels of governance, particularly with regard to grid development, renewable-energy-based electricity generation plans and relevant energy market institutions. 18 On behalf of the G20 the IMF, the World Bank, the EBRD, and the OECD developed a diagnostic framework (DF) to identify general preconditions, key components, and constraints for successful LCBM development. See: https://www.oecd.org/g20/topics/financing-for-investment/local-currency-bond-markets.htm 19 OECD (2016g), “Green Investment Banks: Scaling up Private Investment in Low-carbon, Climate-resilient Infrastructure”; OECD (2016h), “Mobilising the Debt Capital Markets for a Low-carbon Transition”; See also: OECD web-portal on “Institutional Investors and Long-term Investment”. 20 IMF (2015), “Making public investment more efficient”. 21 OECD (2015d), “Policy Guidance for Investment in Clean Energy Infrastructure”, OECD Publishing, Paris; AFD, IADB and OECD (2015), “Local Financial Institutions and Green Finance – Finding ways to share knowledge and experience”. Workshop report. https://www.oecd.org/dac/environment-development/AFD-IDBOECD%20workshop%20on%20LFIs%20and%20Green%20Finance_WorkshopSummary.pdf 22 OECD (2015e), “Mapping Channels to Mobilise Institutional Investment in Sustainable Energy”, OECD Publishing, Paris. 9 ADAPTATION Increased action on adaptation is required to protect communities, businesses and natural assets against climate risks. Iterative, risk-based approaches to adaptation can support effective responses to the broad range of potential impacts arising from climate change, which at this stage are imperfectly understood and will depend on mitigation policy choices. The aim should not therefore be to predict, but to build in flexibility and resilience to a range of potential future climate outcomes. This entails cycles of adaptation planning, support for implementation and effective monitoring and evaluation. Including relevant stakeholders in the planning process, including local communities and the private sector, can ensure that the planning process is useful and targeted. Countries are increasingly developing strategic approaches to preparing for climate change, with 52 developing countries having submitted or developing national adaptation plans (UNFCCC, 2015) 23 . The quantitative evidence base used to inform this process is improving, but major gaps – including impacts on businesses and ecosystems – remain. The uncertainties and the long time frames associated with climate change further add to the difficulty of producing reliable information. It is also vital to consider the distributional impacts already during the planning process, as poor and vulnerable groups are often most exposed to climate risks (OECD, 2015f).24 Implementation of adaptation plans requires sufficient capacity, finance and a suitable regulatory framework. Risk screening, regulatory reforms and increased transparency can be used to ensure that infrastructure is resilient to climate change. This is particularly urgent given the volume of infrastructure that is due to be built in the coming years. Progress to date, remaining opportunities and constraints vary at the sectoral level. Water is a key sector for adaptation. Countries’ efforts to date have largely focussed on information provision, but there is growing use of economic instruments (such as water tariffs) to facilitate adaptation (OECD, 2013). 25 Sub-national centres of governance and decision-making are relevant for land use planning and zoning. There are increasing numbers of tangible and innovative adaptation responses at the local level. For example, Copenhagen has created new green spaces and waterways to reduce the risk of flooding, while avoiding costly upgrades of the drainage system (City of Copenhagen, 2012).26 Even where suitable data are available and political interest to get adaptation onto the policy agenda, there remains the need to translate it into policy action. Expertise in government at the right levels and funding of ongoing planning processes remains a challenge. The system for monitoring and evaluation should be developed at the outset of the adaptation planning process. The complexity of the system should be proportionate and avoid putting undue pressure on administrative capacity. The results from this system should be used to inform subsequent cycles of that national adaptation planning and associated actions. 23 UNFCCC (2015), “Progress in the process to formulate and implement national adaptation plans”, Information Paper: FCCC/SBI/2015/INF.11. 24 OECD (2015f),”Climate Change Risks and Adaptation: Linking Policies and Economics”, OECD Publishing, Paris. 25 OECD (2013), “Water and Climate Change Adaptation”, OECD Publishing, Paris. 26 City of Copenhagen (2012), Cloudburst Management Plan. http://en.klimatilpasning.dk/media/665626/cph__cloudburst_management_plan.pdf 10 The OECD’s work on climate change risks and adaptation shows how four tools can be used to support learning and provide accountability (OECD, 2015g):27 Climate change risk and vulnerability assessments can provide a baseline of domestic vulnerabilities to climate change against which progress on adaptation can be reviewed. If repeated, such assessments can also demonstrate how risks and vulnerabilities are changing over time. Indicators (such as process-based indicators in the French National Adaptation Plan, 2011-15) facilitate an assessment of progress made in addressing adaptation priorities. Reporting on, and using indicators, is resource intensive. Indicators must be carefully defined, and when possible, draw on existing data sources. Project and programme evaluations can help to identify what approaches to adaptation are effective in achieving agreed adaptation objectives and to understand what some of their enabling factors for success may be. National audits and climate expenditure reviews can examine if resources allocated for adaptation are appropriately targeted and allocated cost-effectively. This information may be particularly useful when resources are specifically earmarked for adaptation. The impacts of climate change are already being felt, particularly by the developing countries that are most vulnerable to the adverse effects of climate change, including Low Income Developing Countries (LIDCs), Small Island Developing States (SIDS) and African states. Effective adaptation and climate-resilient development in these countries requires access to financial, technological and human resources, including from external sources (IPCC, 2014). 28 Analysis by the United Nations Environment Programme shows that adaptation needs will likely be significant in least developed countries (LDCs) and SIDS and the failure to implement early adaptation in such countries will have disproportionate impacts on their vulnerability in the period after 2020 (UNEP, 2014).29 The Toolkit to Enhance Access to Adaptation Finance outlines a range of measures that could help countries to navigate the evolving architecture of climate finance and seize opportunities for accessing finance for adaptation (OECD, 2015h). 30 The tools are not prescriptive, intrusive or exhaustive, but provide practical and technical solutions, including to: identify and support adaptation as a national priority; design fundable projects and programmes; better link with available funding; and enhance in-country capacities and enabling environments to attract investments from a wide variety of sources. Improving developing countries’ access to adaptation finance is a vital component of the broader effort required to ensure that finance flows support low-carbon and climate resilient development. Public finance currently accounts for the bulk of the climate change adaptation finance. This is in part because many adaptation projects, while avoiding longer-term costs, do not generate a revenue 27 OECD (2015g). “National Climate Change Adaptation: Emerging Practices in Monitoring and Evaluation”, OECD Publishing, Paris 28 IPCCC (2014), “Climate Change 2014: Impacts, Adaptation and Vulnerability”, Summary for Policymakers, WGII AR5. 29 UNEP (2014), “The UNEP Adaptation Gap Report 2014”, United Nations Environment Programme, Nairobi, www.unep.org/climatechange/adaptation/gapreport2014/. 30 OECD (2015h), “Toolkit to Enhance Access to Adaptation Finance for Developing Countries that are Vulnerable to Adverse Effects of Climate Change, including LIDCs, SIDS and African States”, a report to the G20 Climate Finance Study Group by the OECD in collaboration with the GEF. 11 stream and thus may not be an economically attractive investment for the private sector. It may in part also relate to difficulties in tracking adaptation finance, which can be difficult to separate out from development activities. It is also a concept that is not commonly used by private actors, who tend to consider climate resilience as part of their broader risk management processes.31 31 Agrawala S et al. 2011. “Private Sector Engagement in Adaptation to Climate Change: Approaches to Managing Climate Risks”. Paris: OECD. DOI:http://dx.doi.org/10.1787/5kg221jkf1g7-en 12 TOOLS FOR CLIMATE CHANGE EXPENDITURE ANALYSIS AT NATIONAL LEVEL INTER-AMERICAN DEVELOPMENT BANK32 IDB’S EXPERIENCE AND BACKGROUND The Inter-American Development Bank has been working with ministries of finance and budget planning in LatinAmerica and the Caribbean (LAC) since 2008. It became evident that in order to promote low GHG emission growth and resilient transformational investments Ministries of Finance needed to understand and integrate climate change into their agendas. Using the Regional Policy Dialogue as a starting point for the work in the region, the IDB designed a series of technical assistances that foster increasing capacity to identify opportunities and attract international climate funds, use modeling to assess the impacts of climate events on public finances, including the calculation of potential costs and fiscal liabilities, as well as methodologies to quantify current expenditures to respond to fiscal impacts of future climate crises. As a result of this work, the Ministries of Finance in Guatemala, El Salvador, Nicaragua and Peru, to name a few, have created a designated unit within their structures to incorporate considerations about climate impacts in their budgets, evaluate mechanisms to include climate issues into national public investment systems, as well as identify potential international climate financing that could be directed to their countries. In Colombia, the Ministry of Finance and the National Planning Department are working jointly as part of their national climate system –SISCLIMA– to adopt fiscal and financial instruments to better adapt to climate impacts while reducing greenhouse gas (GHG) emissions from deforestation and land degradation, among other initiatives. In Brazil, 600 finance and budget planning officials at the federal, state and municipal levels were trained on the potential impacts of climate change in a first of its kind course, which will be replicated in other countries of the LAC region. Consequently, it is expected that governments at the sub-national levels adopt innovative concepts related to the link between climate impacts and budgeting. In general, IDB is designing new and adapting existent tools and methodologies to support finance and budget planning ministries in LAC to deal with the challenges and opportunities that arise from climate change effects. 32 As per the invitation of G20 Secretariat, the IDB’s team developed this paper to support the discussion on the climate change and public expenditure analysis during 2016. The IDB’s Climate Change and Sustainability Division (CCS) expresses its gratitude to its internal members Thiago De Araujo Mendes, Hilen Meirovich, Jennifer Doherty-Bigara, Andreza Leodido, Juan Carlos Gomez and Catalina Aguiar for contributing with the preparation of this paper. Likewise, CCS would also like to thank the following external experts: Rafael Rodrigues, Monica Conceição, Sol Garson, Marcelo Rocha e Alexandre Castro. 13 IDB’S CLIMATE CHANGE CONCEPTUAL APPROACH Since the 2010 Copenhagen Accord’s commitment by developed countries to jointly mobilize US$100 billion of climate finance per year by 2020,33 Parties to the UNFCCC have focused attention on how to measure flows of climate finance from developed to developing countries. However, in order for those funds to be channeled to national governments, countries in the region must determine its budgetary capacity absorb and utilize those resources through their ministries of finance and/or planning. In cases like Mexico or Brazil, these entities either assign resources to specific ‘technical ministries’ that execute the projects, or they execute the resources themselves with the assistance of the ‘technical ministries’. Traditionally, it has been difficult for national finance and budget planning institutions to prioritize climate change spending, as it has traditionally taken a secondary role in comparison with other pressing social sector priorities, especially during times of recession.34 As a result, countries might lose opportunities to attract international funds to respond to the impacts of climate change and promote low GHG emission development, if these key stakeholders are not part of the national climate finance agenda. A broad knowledge of fiscal policies and budgeting processes, and their relationship to climate policy implementation has been largely overlooked. The IDB recognized early on that these two aspects are vital tools that can facilitate the flow of financial resources towards climate adaptation and mitigation actions including climate finance. Also, the IDB realized that the availability of international funds for transformational action and their implementation relies heavily on budgetary allocations, investment decisions and the tracking of national resources, which in turn, are factors that depend on the involvement of ministries of finance and national planning. The IDB’s Climate Change and Sustainability Division has worked with the region’s ministries of finance to overcome this barrier, and has designed unique methodologies, training materials and learning tools to strengthen their capacity to manage risks associated to climate change. Figure 1 below presents graphically the conceptual approach used to mainstream climate change in ministries of finance and budget planning in LAC. Figure 1 shows the tools and methods the IDB has utilized to support national institutions in dealing with their management, planning and capacity strengthening needs and challenges in a cyclical manner. These three major areas are integrated in a cycle that provides tools such as: (i) Cost-Benefit Analysis (CBA) to adaptation planning; (ii) modeling climate impacts on fiscal deficits; and (iii) methodologies to assess the quality of the public expenditure in regards to their mitigation and results. These tools also interact with each other to provide different management solutions such as Climate Classifier for Budgets and the establishment of Technical Units in ministries to identify opportunities for climate finance (including both sources and instruments). 33 Copenhagen Accord of 18 December 2009. Ministries of finance and planning usually include climate change spending as various single line items in their budgets under the sector that the expense is related to (i.e. energy, agriculture, transport, etc.). 34 14 Additionally, the capacity strengthening dimension provides teams of finance and budget planning institutions at the national and sub-national levels in the region, with e-learning tools, pilot projects opportunities and training workshops to further enhance their ability to cope with the challenges and opportunities to support mitigation and adaptation actions. The tools and methods were designed and adapted taking into account a country-driven approach, where countries present specific demands based on their needs. Conceptual Approach: Tools and Needs EXAMPLES OF THE WORK DONE WITH THE MINISTRIES OF FINANCE IN THE LAC REGION As a result of the ongoing work with ministries of finance and budget planning, the IDB has been asked to provide further assistance regarding the identification, monitoring and examination of climate related expenditures. This task has been executed in collaboration with the United Nations Development Programme (UNDP), given their experience in South East Asia with the implementation of the Climate Public Expenditures and Institutional Review (CPEIR) methodology. The budget analysis is a useful tool for national planning and budgeting authorities, as it allows for a qualitative and quantitative analysis of a country's public expenditures and its relation to climate actions and finance issues across all ministries. As a result, the ministries are now moving forward towards the design of budget labels for the identification and monitoring of climate expenditures in a systematic way. Ecuador, a front-runner in this area, has adopted a specific climate label in 2014 – the IDB is working on a partnership to 15 scale up this example at the regional level. The involvement of partners like the United Nations Economic Commission for Latin America and the Caribbean will be key as their experience on the topic will foster lessons learned from the Ecuadorian case. Additionally, ministries of finance from Central America have been willing to strengthen their country’s resilience to natural disasters, as they have realized the need to strengthen public finances to be better positioned to plan and respond to emergencies. In 2011, El Salvador partnered with the IDB to implement a series of comprehensive reforms that, for the first time in Latin America and the Caribbean, combined fiscal measures with specific actions to adapt its infrastructure to the consequences of climate change. On the fiscal side, the goal was to increase tax revenue to 17 percent of GDP by 2014, which would constitute an increase of more than five percent over the 2009 level. In addition, the Finance Ministry established a unit dedicated to identifying and mitigating financial and fiscal risks related to natural disasters so the country would have the necessary resources to deal with future unavoidable costs of climate change including potential effects on the GDP. As a result of El Salvador’s experience, other countries in Central America are now pursuing comprehensive approaches to deal with the impacts of natural disasters in their deficits. For instance, in 2014, Costa Rica’s Ministry of Planning requested the IDB to carry out a study on the impacts of climate on its national deficit. The findings point to specific positive correlations between national transfers to specific accounts as well as specific regions of the country as a response to national disasters, thus identifying areas of future work in terms of protecting national infrastructure and national budgets from future impacts of climate related events. Another interesting example in the region was implemented in Brazil, where a methodological approach to assess the quality of public expenditure related to climate change was designed and tested at the sub-national level. The project –a request from the Brazilian Ministry of Finance, aimed at strengthening the capacity of municipal and state institutions to deal with climate change accounting and financing challenges, and the ultimate goal of contributing to the fulfillment of national emissions reduction commitments. Specifically, the project objective was to increase the planning capacity and budgetary management at the state and municipal levels and fiscal policies in the context of climate change, focusing on management by results. In this context, a need for a user friendly methodological approach to classify public expenses in terms mitigation and adaptation was identified. Brazil’s Government was looking for a simplified approach, easy to replicate and to adjust to its diverse local institutional capacity realities.35 This methodological approach adds to the ones in other entities36 and analyzes the allocation and the outcomes of public expenditures. Also, it may cover all of the government’s expenditures or focus on just a few priority sectors. 35 In the case of Brazil, organized under the federative regime, the subnational governments –the states, the Federal District and municipalities, all of federal entities. In this document, we refer to “government” in general. 36 Such as the CPEIR methodology used by the UNDP and the World Bank, which is based on approaches previously developed by the World Bank –the PERs and PEIRs. 16 The approach resulted from a training process which presented climate change challenges and opportunities under a finance and budget planning perspective. The project also generated a series of 8 publications, which were the basis for the development of an on line educational training program37 that encompassed 10 modules attended by 600 public officials –from all levels of government of the 27 Brazilian States, generating, as a result, numerous pilot projects. More than 500 pages of exclusive studies and about 10 hours of instructional videos were produced, from this initiative. The methodology sought to evaluate the inclusion of climate change issues in public policy, development plans, budgets and public spending. The application of the methodological approach involves four steps, and it should be understood as an open-ended conceptual method that seeks to facilitate the addition of new tools (defined by the user) to allow its adaptation to different realities and structures. The first step involved the definition of climate change framework reference point. This step researches and analyzes official documents which have a direct and explicit interface with climate change issues relevant to the level of government assessed. It also includes, among others, legal texts (federal law and state laws in climate change, legislation and land use, water resources, for example) studies, panels and sectorial programs and other documents for the planning and implementation of the public and policy action. Once the framework is done, the second step entails the creation of a list of specific keywords related to the aspects that represent its climate change framework reference point. The list is then used to find specific keywords in budget planning and execution documents that define actions, goals and objectives contained in the framework reference point. Once this identification is done, the climate change list of initiatives, actions, goals and objectives is ready to start its classification process. During the classification, each of these elements is assessed, first according to the interface it shares with the climate change intervention rationale: (i) adaptation; (ii) mitigation; or (iii) both mitigation and adaptation. Then, their polarities are assessed, meaning if they are convergent or divergent to the climate change objectives, for example, the assessment points if the activity or budget initiative represents a positive or negative action towards the intervention rationale (mitigation, adaptation or both). After that, the degree of adherence of the attribute to the subject is checked (e.g. strong, medium and weak), as well as the amplitude (intensity) of its convergence polarity (e.g. very positive, medium positive, very negative, irrelevant). The rationale applied in step two is based on the fact that Brazil legislative branch approves long term budgets first and then the short term ones. This means the analysis was first applied to the multi-term plan, and then to the correspondent lines of the annual budget and in its factual expenditures statements.38 37 The Public Administration School of the Ministry of Planning of Brazil (ENAP) is also replicating the introductory part of the e-learning course to internal and external member. 38 In Brazil, the Budget System entails a multi-year plan –that encompasses programs for the next 4 years, and the Budget Law, which allocates resources to implement those programs every year. The budget is “authoritative”: for items to appear in the yearly plan, they must be allocated in the multi-year plan first, but some items in the yearly plan might not receive funding depending on priorities and resource availability. 17 The third step, seeks to identify products delivered by climate change initiatives and actions39 included in the budget, and then calculate the corresponding expenditures made by a public entity, and assess, where possible, the actual results/products offered to society (e.g. dams built, civil defense actions, etc.) as the result of that spending. This step should generate information to conduct assessments on the quality of public spending in the next step. In step four the resulting data is qualified in terms of their adaptation and mitigation results per unit of resources disbursed. Specific methods are applied to assess, for instance, the amount of GHG emissions reductions achieved with specific disbursements defined in the budget as mitigation. Spreadsheets and other tools were designed by the IDB to support public officials in their decision making when budget cuts took place. In addition, tools to support the mapping and geo-localization of public expenditures are currently being designed via pilot projects to support sub-national governments in dealing with adaptation challenges. The objective is to enhance the development of local metrics to facilitate low cost ways to measure the quality of the public expenditure in terms of the reduction of climate vulnerability in communities and sectors. The methodology drew attention to three interrelated elements of public administration that are the basis for the deepening of the study on climate change in the context of strategic planning and budgeting: (i) public policies that support adaptation and mitigation spending; (ii) the roles of different areas of the government responsible to respond to climate change; and (iii) the systems used to plan and execute expenses related to climate change (in particular, the multi-year planning and government budgets). The construction of a methodology to quantify the expense of national governments related to climate change mitigation and adaptation, described here, is part of an effort to assess the quality of public spending in this area. This tool ultimately seeks to contribute to the efficient and effective use of resources, and to the amplification of the results delivered by the policies implemented by governments. In addition, a regional network of finance ministers has been established to share experiences and discuss new ideas. To have access to additional information please click here. 39 There are some methodological differences in the construction of the Multi-Year Plan between the federal and the municipal governments. Since the presentation of the budgets of three levels follows well-defined rules, this standardizes them. 18 USING GCF FOR THE PROVISION OF FINANCIAL RESOURCES FROM DEVELOPED TO DEVELOPING COUNTRIES GREEN CLIMATE FUND SECRETARIAT INTRODUCTION The Green Climate Fund is an operating entity under the financial mechanism of the United Nations Framework Convention on Climate Change (UNFCCC) and also serves the Paris Agreement. It is the only stand-alone multilateral financing entity whose sole mandate is to support a paradigm shift towards low-carbon and climate resilient development pathways and thus to serve the enhanced implementation of the Convention. Furthermore, it is the only stand-along multilateral financing entity that seeks a balance between funding for mitigation and adaptation. The mandate of GCF is to make a significant and ambitious contribution to the global response to climate change and to become a main global fund for climate finance. With a balanced governance structure of developed and developing countries, it will play a key role in channeling new, additional, adequate and predictable financial resources to developing countries and will catalyze climate finance, both public and private, both at the national, regional and international levels, thereby promoting the paradigm shift towards low-emission and climateresilient development pathways. The GCF is expected to play a significant role in channeling climate finance in the form of grants and concessional lending to developing countries. It is intended to promote the paradigm shift towards low-emission and climateresilient development pathways, a mandate set by the Governing Instrument of the Fund. It is designed to have a risk appetite that is consistent with its mandate of promoting a paradigm shift in the financing of new investments by governments and private sector in developing countries. It also operates in a manner that seeks to ensure that countries have full ownership of the activities supported by the Fund. In particular, the GCF is driven by the need to maximize its impact, and balance support to adaptation and mitigation. It aims to enable the climate change investments with the minimum concessionality needed. The GCF’s direct access modality extends its reach down to the subnational level whilst ensuring robust fiduciary standards are met. 19 GREATER CHOICE OF FINANCIAL INSTRUMENTS GCF is able to use a variety of financial instruments including concessional loans, subordinated debt, equity, guarantees, and grants. These financial tools will allow the Fund the flexibility to tailor its support to the project or programme needs of public, private, and nongovernmental entities. This is particularly useful for those developing countries in which climate action requires the full flexibility of financial instruments and counterpart risk-taking, beyond fiscally constrained central governments. This will enable the Fund to adopt a targeted approach to each investment opportunity so as to have the greatest catalytic effect in bringing financial close at the lowest cost to the Fund’s contributors. The Fund’s Board has emphasized in its latest decision on risk policies that the Fund intends to be an institution that takes risks that other institutions or funds are not willing or able to take. In addition to ex-ante financing and other public and private investments in forestry, land use and land use change, the Fund will utilize the results-based finance mechanism on REDD+ to provide incentives to slow, halt and reverse forest cover and carbon loss in developing countries. The results based approach potentially applies to areas beyond REDD+ and assures results on the ground and seeks to achieve increased value for money by aligning incentives to desired outcomes. The Fund also supports the creation and strengthening of enabling environments as they relate to climate action, which can lead to lasting systemic changes. The enabling environment may include laws, regulations, policies, the establishment of institutions, and capacity building in government, business and civil society to ensure they have the knowledge and technical expertise to design, implement and monitor low carbon and climate resilient policies and projects. BALANCED AND INCLUSIVE GOVERNANCE The Green Climate Fund embodies a new and equitable form of global governance to respond to the global challenge of climate change. It was established by 196 sovereign governments party to the UNFCCC and receives guidance from the COP to the Convention. At the Fund’s heart is a balanced governance structure that ensures consensus-based decisions between developed and developing countries. The Fund is governed by a Board of 24 members, equally drawn from developed and developing countries. Representation from developing countries includes representatives of United Nations regional groupings and representatives from LDCs and SIDS. Each Board member has an alternate member. Board members and their alternates are selected by their respective constituency or regional group within a constituency. The Board reaches decisions by consensus and is accountable to the COP. It is led by two Co-Chairs – one from a developed country and one from a developing country. The Board usually meets three times per year. COUNTRY OWNERSHIP STRENGTHENED GCF recognizes the need to ensure that developing country partners exercise ownership of climate change funding and integrate it within their own national action plans. The Governing Instrument of the Fund makes clear that it 20 adopts a country-driven approach and strengthens programme coherence and stakeholder coordination at the national level. That’s why in every developing country there are National Designated Authorities (NDAs) who are the interface between each country and the Fund. These focal points communicate the country’s strategic priorities for financing low-emission and climate-resilient development across its economy through their no-objection procedure and their country programmes, as well as their important role in organizing stakeholder consultations processes. Over 140 countries have selected NDAs to play this role. They are chosen by governments to act as the core interface between a developing country and the Fund. NDAs provide broad strategic oversight of GCF’s activities in a country and serve as the point of communication with the Fund. Funding proposals are submitted through Accredited entities that include a no objection letter from these NDAs, ensuring that investments are aligned with local needs and national climate change planning. A NEW TAKE ON COUNTRY READINESS GCF provides early support for readiness and preparatory activities to enable developing countries to effectively access and deploy resources from the Fund. This “country readiness” funding is a dedicated and cross-cutting programme that maximizes the effectiveness of the Fund by empowering developing countries. These readiness and preparatory support activities are not one-off measures, but are part of an ongoing process to strengthen a country’s engagement with the Fund and include strengthening of the NDA’s capacity, developing country’s strategic frameworks for engagement with the Fund, support for accreditation, support for formulation of National Adaptation Plans (NAPs) and information sharing and learning. GCF focuses its readiness support on particularly vulnerable countries, including LDCs, SIDS, and African States - a minimum of 50% of country readiness funding is targeted at supporting these countries. ACCREDITED ENTITIES: THE ARMS OF GCF GCF works with a network of subnational, national, regional, and international Accredited Entities (AE) to implement its activities in countries. These partners are responsible for deploying the Fund’s resources into climate projects. This is a growing network of well-established, trusted partners working closely with the Fund. AEs can also be public, private, or non-governmental in nature. The key is their ability to effectively and efficiently deploy funding to support the Fund’s objectives. GCF ensures this through a rigorous accreditation system. Recipient countries will determine the mode of access – direct (subnational, national or regional) or international for any given project or programme. Both modalities can be used simultaneously. In the context of direct access, recipient countries will nominate competent subnational, national and regional implementing entities and intermediaries for accreditation. International entities include United Nations agencies, multilateral development banks, international financial institutions and regional institutions. 21 UNLOCKING THE POTENTIAL OF THE PRIVATE SECTOR – THE PRIVATE SECTOR FACILITY One of the most innovative features of the Green Climate Fund is its commitment to combine the power of public and private investments for the climate. The Fund can receive financial inputs from developed country parties to the Convention and may also receive financial inputs from a variety of sources, public and private, including alternative sources. Yet, limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5°C above pre-industrial levels as stated in the Paris Agreement, demands shifting global financial flows more broadly towards climate-compatible, green investments. Hence, it is also essential to shift an estimated USD 200 trillion of global financial assets towards low-emission and climate-resilient development, unlocking the potential of the private sector to drive change. While climate change is a collective global challenge, it is also an opportunity for investors to be first movers in catalyzing sustainable and profitable economic growth in developing countries. The potential return on investment in climate mitigation and adaptation projects is greater in the developing world than anywhere else. There are over USD 2 trillion of essential long-term investments in developing countries that are taking place every year, and one of the first challenges is to ensure that these investments promote low emissions and climate resilience. GCF has set up its Private Sector Facility (PSF) to take on this challenge. The PSF targets international businesses and capital markets. Yet it aims to unleash the potential of local private sectors in developing countries for climaterelated activity, including small- and medium-sized enterprises. The aim of PSF is to catalyze clean and resilient investments, unleashing the innovation that the private sector can deliver. The Fund currently uses public funding to catalyze these funding flows, bringing public and private sources together to maximize their transformative impact. The PSF will scale up investment in low-emission development and also unlock private sector investments in adaptation, taking into account in each case different country needs and capital availability. The PSF can use innovative tools and concessional funding to promote private sector investment by “de-risking” investments, including third-party risks such as risk of default by local institutions and market risks such as foreign exchange risk and; by creating large-scale investment opportunities, for example by aggregating groups of projects into single investment vehicles; and by supporting new climate-related technologies, for example by overcoming scale problems within the supply chain to bring them to market more rapidly and effectively. A CLEAR INDICATOR FOR NEW CLIMATE FINANCE Developing countries need long-term, predictable flows of climate finance to aid their transformation to lowemission and climate-resilient economies in order to successfully implement the Paris Agreement. To respond to this, developed countries have committed to mobilize USD 100 billion in climate financing from a variety of sources per year by 2020. The Green Climate Fund is expected to play a significant role in channeling these climate investments. The Fund’s initial resource mobilization period lasts from 2015 to 2018. By the beginning of 2016, the Fund had raised more 22 than USD 10 billion equivalent in pledges from close to 50 countries and city governments, and further contributions are invited on an ongoing basis. Scale is essential for GCF to deliver on its ambitious mandate, and the Fund expects to draw upon additional resources from public, private, and philanthropic sources. VALUE ADDED The Green Climate Fund stands out from other funds in terms of its recent date of operation (2015), learning from the experience of other funds; its inclusive governance structure; its ability to bear significant climate-related risk; and its wide range of financial products. It is the only multilateral climate finance vehicle to integrate both adaptation and mitigation in a balanced way within the same mechanism; and its ability to engage directly with both the public and private sector in transformational climate-sensitive investments sets it apart from the majority of its peers. The Fund will provide strategic and demonstrable added value within the current climate finance architecture in five key ways, operating in a manner that seeks to ensure that recipient countries are a key partner and have full ownership of activities supported by the Fund: Maximize its impact: The Fund has carefully selected eight strategic result areas to orient its resources in a manner that maximizes its climate change impact. These result areas cover emission reductions from and enhancing resilience of infrastructure including buildings, energy and transport; ecosystems including land, forests and water as well as food, livelihoods and industries. These goals will be consistent with national development priorities of recipient countries. GCF will maximize the ambition of nationally determined contributions (NDCs): The availability of finance and support will help countries maximize the ambition of their nationally determined contributions, and implement proposed actions. The Fund has been structured to provide finance and incentives to help countries realize the full potential to both reduce emissions, and to adapt the impacts of climate change that they may identify. Through its interventions, the Fund will also help countries realize the priorities emerging from their National Adaptation Plans, as well as Nationally Appropriate Mitigation Actions. Balance adaptation and mitigation: The Fund is placing equal emphasis on allocating its resources for reducing emissions and strengthening resilience. It will ensure that at least half its resources for adapting to the impacts of climate change are spent or invested in countries such as the small island developing states (SIDS), the least developed ones (LDCs) and those in Africa that are vulnerable to these impacts. Make best investments viable with minimum concessionality: The Fund will finance public and private sector programmes and projects that best achieve the Fund’s objectives, and carefully tailor the concessionality of its funding to make them viable. It will do so in a manner that minimizes the concessionality provided by the Fund, while maximizing the use of various financial instruments by the institutions that channel its resources. Extending its reach: The Fund will partner closely with developing countries to fulfil its objectives, channeling its resources through a range of sub‐national, national, regional and international institutions that meet its standards. 23 These standards will be designed in a manner that are suitable to the nature and scale of activities supported to allow a wide range of institutions to access the Fund. It will also provide financial support for developing country institutions to reach these standards in order to ensure that developing countries are key partners with the Fund in its operations. Mobilizing private sector investments: The Fund aims to scale up private sector investments in low‐emission, climate‐resilient activities. It will allocate a significant share of its resources to finance private sector activities, and will proactively work with local private sector players. 24 GEF’S BUSINESS MODEL AND EXPERIENCE ON PROVISION OF FINANCIAL RESOURCES TO ADDRESS CLIMATE CHANGE GEF SECRETARIAT GEF’S MANDATE IN CLIMATE FINANCE The twenty-first Conference of the Parties (COP 21) to the United Nations Framework Convention on Climate Change (UNFCCC) decided that ‘the Green Climate Fund and the Global Environment Facility, the entities entrusted with the operation of the Financial Mechanism of the Convention, as well as the Least Developed Countries Fund and the Special Climate Change Fund, administered by the Global Environment Facility, shall serve the [Paris] Agreement.’ However, dedicated climate funds contribute only a small fraction towards the broader landscape of climate flows. In 2014, global public climate finance amounted to an approximate $148 billion, including from governments, bilateral agencies, climate funds and development finance institutions; the majority of this amount, mostly in the form of concessional lending, stems from national and multilateral development finance institutions ($113 billion), with dedicated climate funds contributing an estimated $2 billion only.40 It is therefore an imperative to utilize scarce climate finance in a way that leverages an integration of climate adaptation and mitigation considerations into public and private investment decisions. While the GEF has piloted and demonstrated low-emission and climate-resilient development since its inception in 1991, the Climate Investment Funds and, most recently, the Green Climate Fund, have added on and complemented GEF financing to transform markets. The landscape of climate finance has evolved and expanded over time, yet the financial needs to transform markets towards low-carbon and climate-resilient development remains significant. 40 Buchner, B., Trabacchi, C., Mazza, F., Abramskiehn, D. and D. Wang: Global Landscape of Climate Finance 2015. Climate Policy Initiative, November 16, 2015. 25 COMBINING CLIMATE FINANCE INSTRUMENTS TO MAXIMIZE IMPACT EXPERIENCE OF THE GEF The sixth replenishment of the GEF Trust Fund (GEF-6), together with GEF’s dedicated climate adaptation funds, the Least Developed Countries Fund (LDCF) and the Special Climate Change Fund (SCCF), is expected to enable the GEF to make about $3 billion available for climate finance during GEF-6 (2014-2018), with an expected $30 billion being leveraged from other sources. GEF climate finance can be utilized together with other climate finance instruments in complementary and mutually-reinforcing ways to achieve maximum possible market transformation, leverage private sector investments and produce much higher impacts. The GEF plays a unique role in climate finance by targeting the most relevant gaps and barriers to mitigation and adaptation in five different areas: Early policy lock-in and regulatory reform to support governments in catalyzing partners to invest in lowemission, climate-resilient technologies; Demonstrating innovative technologies and business models, with a view to unlock the market for lowemission, climate-resilient technologies or enable partners to conduct large-scale replication; Strengthening institutional capacity and decision-making processes at the sub-national, national and regional level to improve information, participation, and accountability in public and private decisions that enable partners to design and implement low-emission, climate-resilient plans and policies; Building multi-stakeholder alliances to develop and implement sustainable practices to pursue integrated approaches that further the global commons through the promotion of synergies amongst sectors and the delivery of multiple benefits; and De-risking partner investments by applying guarantees and equity instruments to re-direct private sector investments into low-emission, climate-resilient business models. EARLY POLICY LOCK-IN AND REGULATORY REFORM Early policy lock-in and regulatory reform are key ingredients to successfully supporting governments in catalyzing partners, including the private sector, to invest in low-emission and climate-resilient technologies. Early lock-in into low-carbon development pathways is needed to avoid being stuck with high-emission technologies later. For instance, early investments in low-carbon public transportation can impact cities’ emission trajectories for decades to come. In addition to the technology itself, the accompanying policy and regulatory environment has proven to be crucial in achieving system-wide, long-term transformation, based on country’s specific circumstances and needs. Economically speaking, long-term thinking enables policies to minimize costs and maximize mitigation and development benefits resulting from low-emission technologies and growth patterns. To prepare and promote such low-carbon policies and technologies, it has been the experience of the GEF that grants or highly concessional finance are needed since limited or no return on the initial investment is possible. The GEF continues to support the transformation of policy and regulatory environments. For instance, the ‘Climate friendly transportation project in Mexico’, implemented by the World Bank, used a $5.8 million GEF grant to 26 attract more than $2.7 billion in loans and private sector financing, resulting in urban level policy reforms and incentives for transport, including the first city-wide climate change strategy in Latin America. DEMONSTRATING INNOVATIVE TECHNOLOGIES AND BUSINESS MODELS Demonstrating innovative technologies and business models is an essential step towards unlocking markets for low-emission, climate-resilient technologies or enable partners to conduct large-scale replication. Providing highly concessional finance, including mostly grants, towards innovating and demonstrating high-impact approaches has been at the core of GEF’s mission. For instance, the GEF supported an Integrated Solar Combined Cycle (ISCC) technology, the Ain Beni Mathar ISCC power plant, in Morocco. At the time of the development, investments in concentrated solar plants (CSP) and thermal solar plants were considered to be highly risky. Initial efforts were supported by a $43 million GEF grant in partnership with the World Bank, complemented by significant additional government, African Development Bank, and private sector funding. The project was primarily designed to demonstrate the operational viability of hybrid solar thermal power generation technology and contribute to its replication in Morocco and worldwide through the learning effect provided by its construction and operation. GEF’s support added credibility and helped the further promotion and adoption of solar technology across the globe. The GEF had identified solar thermal power technology as one of its priorities because of the technology’s significant cost reduction potential. The GEF, in partnership with the World Bank, further built a portfolio of four demonstration projects to facilitate the commercialization of solar thermal technology to promote the demonstration, deployment, and transfer of innovative low-carbon technologies. The GEF pipeline of CSP projects consisted of a project in India from 1996 (later dropped), the Morocco-Ain Beni Mathar, and Mexico-Agua Prieta from 1999 and the Egypt-Kureimat project from 2004. Following these pioneering investments, the CSP sector began to blossom around the world. In 2014, the GEF partnered with the International Finance Corporation (IFC) and invested $10 million in concessional finance to help catalyze support for Noor-Ouarzazate (Noor I), part of a three-phase expansion that is attracting more than $1 billion capital investment in CSP technologies to Morocco from the World Bank, Climate Investment Funds and others. STRENGTHENING INSTITUTIONAL CAPACITY The GEF is also helping countries to strengthen their institutional capacity and decision-making processes at the sub-national, national and regional level to improve information, participation, and accountability in public and private decisions that enable partners to design and implement low-emission, climate-resilient plans and polices. For instance, the GEF, through the LDCF-financed project ‘Climate information for resilient development and adaptation to climate change in Africa (CIRDA)’ is supporting 11 countries in their efforts to better collect, analyze and disseminate climate information, with major benefits to private sector partners in agriculture, transportation and insurance. In total, the GEF adaptation program has transferred approximately $314 million to 53 countries to strengthen their hydro-meteorological and climate information services to date. This allows national and local 27 governments, private enterprises and individuals to integrate climate change risks and adaptation into their decision-making processes, and will help scale up access to improved climate information services in climatesensitive sectors such as agriculture, natural resources and water management, coastal protection and disaster risk reduction. Another example is the ‘China utility-based energy efficiency finance program (CHUEE)’, which received $16.5 million in GEF funding and leveraged $199 million in co-financing, to create effective, commercially sustainable delivery mechanisms for systematically developing, implementing and financing energy efficiency projects, via partnerships with private sector energy utilities, financial institutions, energy efficiency suppliers and end-users. CHUEE supported services such as marketing, project development, and equipment financing for energy users in the commercial, industrial, institutional and multi-family residential sectors. The program also provided technical advisory services related to marketing, engineering, project development, and equipment financing services to banks, projects developers, and suppliers of energy efficiency and renewable energy products and services. The program brought together financial institutions, utility companies, and suppliers of energy efficiency equipment to create a new financing model for the promotion of energy efficiency. As of December 2015, the CHUEE program has facilitated financing worth over $523 million. These investments are estimated to reduce over 3.4 million tons of carbon dioxide emissions equivalent (CO 2eq) every year (IFC 2016). The GEF also supports the strengthening of reporting capabilities in many developing countries. Due to lack of institutional capacity, developing countries for instance faced policy, technical, and organizational challenges to make their contributions for the Paris Agreement. The GEF has made resources available for 46 countries to prepare their intended nationally determined contributions (INDCs) ahead of COP 21, as a foundation for the Paris Agreement. The GEF also supports countries towards UNFCCC-related reporting and assessments such as national communications and biennial update reports, and has been supporting a variety of information and planning processes to help ensure that countries can track their progress in meeting climate change goals. Many developing countries still lack the capacity to effectively monitor and report their progress vis-à-vis national greenhouse gas emission reduction, and track progress made in the implementation of their commitments under the Paris Agreement. They may also face challenges in getting credible information on adaptation and resilience to cope with the effects of climate change. In this respect, the GEF established a Capacity-building Initiative for Transparency (CBIT) to help developing countries strengthen their institutional and technical reporting capacities, allowing them to fully participate in the Paris Agreement. BUILDING MULTI-STAKEHOLDER ALLIANCES Promoting and convening multi-stakeholder alliances are key to develop, harmonize, and implement sustainable practices to pursue integrated approaches that further the global commons through the promotion of synergies amongst sectors. The ‘Sahel and West Africa Program in Support of the Great Green Wall Initiative’, implemented by the World Bank, is one example. The GEF provided $80 million through its main trust fund, $14.8 million through the LDCF and $4.6 million through the SCCF, to create a regional program that targets nationally prioritized challenges of desertification and climate vulnerability in 12 countries, responding to the mandate of several multi-lateral, 28 environmental agreements in a cost-effective and integrated manner. The project leverages over $1.7 billion in loans from multilateral development banks. The GEF is increasingly making use of its convening power to bring together a range of stakeholders, GEF Partner Agencies, private sector companies and industry groups, local communities, civil society, consumers and national governments to facilitate holistic solution approaches. For instance, the Integrated Approach Pilot on ‘Taking Deforestation out of Commodity Supply Chains’, drawing on $44 million in GEF grants and leveraging over $443 million in co-financing, is aiming to green supply chains for major commodities such as palm oil and advance sustainable forestry management. Financial institutions and production and demand companies are providing equity investments and loans to participate in project activities on the ground, collaborating with industry groups and foundations towards sustainable supply chains. Multifold impact and private sector leverage is expected upon full implementation of the pilot. DE-RISKING PARTNER INVESTMENTS To catalyze and accelerate climate action, the GEF has experimented with blended finance, de-risking partner investments by applying guarantees and equity instruments to re-direct private sector investments into lowemission, climate-resilient business models. Initially, GEF blended finance mostly focused on renewable energy and energy efficiency. As sustainable energy technologies began achieving significant cost reductions and countries put in place enabling policy environments (e.g., feed-in-tariffs, power purchase agreements) the opportunity for private sector investment expanded greatly. The use of GEF funds to support equity investments proved especially attractive for supporting small scale clean energy projects: For instance, the GEF provided $4.5 million to the Africa Renewable Energy Fund (AREF), managed by the African Development Bank (AfDB) in the form of Class A shares. Twenty-five million dollars is provided by AfDB and other donors. By accepting a capped return of 4 per cent, GEF financing expands the range of potentially investable projects and reduces the need for enhanced policy incentives to make projects bankable. At least $150 million from public, institutional, and commercial partners and significant additional private sector finance, primarily debt, for the actual projects are expected, with a pipeline already worth half a billion dollars. A second example is the ‘Equity Fund for the Small Projects Independent Power Producer Procurement Program’, managed by the Development Bank of Southern Africa (DBSA), which will promote renewable energy supply by small and independent power producers in South Africa. Similar to AREF, GEF funds are invested with the expectation of below-market return. DBSA will also create a securitization platform to help resell initial investments after the projects have begun power production. These two interventions help reduce capital costs for small-scale producers and attract private sector capital. The proposed investments will result in installation of close to 100MW of renewable energy, reducing approximately 260,000 tons CO2eq per year, resulting in an estimated 5 million tons CO2eq over an assumed average project lifetime of 20 years. An example of de-risking in climate change adaptation is the ‘Southeastern Europe and Caucasus Risk Insurance Facility’ project, which was supported by the GEF with a $5.5 million grant through the SCCF. The governments of Albania, Former Yugoslav Republic of Macedonia and Serbia established the Europa Reinsurance Facility (Europa 29 Re), with technical assistance from the World Bank. This special catastrophe reinsurance company serves to promote the development of national catastrophe and weather-risk insurance markets in the participating countries, enabling local businesses and populations to purchase affordable catastrophe and weather-risk insurance products that were unavailable in the commercial market. The three participating countries became the first shareholders of Europa Re. To finance the countries’ equity contributions to the company, the World Bank provided individual country loans offering a total of $12 million to finance membership contributions. A $4.5 million grant from the Swiss State Secretariat for Economic Affairs (SECO) and the $5.5 million SCCF grant financed the remaining country-specific technical work required for the launch of Europa Re, including early-stage technical assistance and preparatory work, such as the development of risk models, data acquisition, modern remote sensing-based methods of damage assessment, and important insurance regulatory work. In a second phase, the SCCF is now providing $5 million to expand project coverage to Kazakhstan. Recently, the GEF supported blended finance operations focused on the frontiers of natural resources management and climate. For instance, the GEF is providing a $12 million reimbursable equity investment in support of the ‘Moringa agro-forestry fund for Africa’, managed by the AfDB, to promote sustainable land management in production landscapes. The fund will invest in 5-6 scalable, replicable agro-forestry projects that combine plantation forestry with agricultural elements to capture most of the value chain. The GEF has taken a junior equity position in the fund, helping to lower risks for private sector investors who may be reluctant to consider land management project on purely commercial terms due to for example long payback periods and uncertainty over product prices. The project also targets 79,000 hectares to maintain significant biodiversity and associated ecosystem goods and services, and more than 200,000 hectares of production systems under sustainable land and forest management. The project is expected to yield greenhouse gas emission reductions amounting to approximately 9.5 million tons CO2eq. GEF’S INTEGRATED APPROACH TO CLIMATE AND PROTECTING THE GLOBAL COMMONS The GEF occupies a unique space in the global financing architecture by delivering global environmental benefits across the multilateral environmental agreements. With the adoption of the 2030 Agenda for sustainable development, as embodied in the Sustainable Development Goals (SDGs), countries are also increasingly interested in pursuing integrated, cross-cutting opportunities for sustainable development. Many global environmental challenges are interlinked and share common drivers. Biodiversity loss, climate change, ecosystem degradation, and pollution often share common drivers and may demand coordinated responses. For example, unsustainable agricultural production contributes approximately one-quarter of global greenhouse gas emissions. But it is also a leading cause of hypoxia in aquatic systems, and it can lead to deforestation and habitat destruction, thus promoting further loss of biodiversity. The GEF aims to support climate action in line with development priorities consistent with SDGs and nationally determined contributions (NDCs). The GEF has increasingly worked to facilitate synergies in implementing multilateral environmental agreements towards sustainable development. For instance, under GEF-6, three Integrated Approach Pilots (IAPs) have been developed, including: (i) taking deforestation out of commodity supply chains; (ii) sustainable cities - harnessing local action for global commons; and (iii) fostering sustainability and resilience for food security in sub-Saharan Africa. 30 Each of these pilots fosters multiple environmental and development benefits in an integrated manner. The Commodities IAP is a $44 million initiative estimated to deliver 80 million tons CO 2eq in emissions reductions through advances in sustainable forestry management and greening the supply chain for major commodities, such as palm oil. The Food Security IAP, drawing on $115 million in GEF grants and $805 million in expected cofinancing, is estimated to deliver 10-20 million tons CO2eq in emissions reduction and enhance resiliency by supporting sustainable land management and climate smart agriculture techniques. Finally, the Sustainable Cities IAP draws on $152 million of GEF financing and $1.5 billion in expected co-financing to promote sustainable urban development through better integrated models of urban design, planning, and implementation, delivering an estimated 106 million tons CO2eq emission reduction. GEF attempts to enable lock-in of the participating cities in low-carbon development pathways. CONCLUSION The GEF has piloted and demonstrated low-emission and climate-resilient development since its inception in 1991 and GEF’s mandate in climate finance has been renewed as part of the Paris Agreement. While the landscape of climate finance has evolved and expanded over time, the financial needs to transform markets towards lowcarbon and climate-resilient development remains significant. It is therefore an imperative to utilize scarce climate finance from the GEF and other climate funds in a way that contributes the most to the overall finance landscape and effectively leverages private sector investments for greater, sustained impact. The GEF is the ideal investment partner for integrated, holistic approaches to combat multiple environmental problems in one go, working to further the global commons. The GEF supports climate action in line with development priorities consistent with SDGs and countries’ NDCs under the Paris Agreement. The GEF’s role in climate change, as described in this paper, has been to take on early innovation, piloting and demonstration of technologies and business models, hand-in-hand with supporting policies and regulations that lock recipient populations into low-carbon and climate-resilient development pathways. The GEF has also increasingly been working to share the lessons from its extensive experience and long-standing track record in climate finance, to facilitate successful investments from other climate funds and the private sector. 31 THE ROLE OF THE CLIMATE INVESTMENT FUNDS IN SUPPORTING THE DEPLOYMENT AND MOBILIZATION OF CLIMATE FINANCE CIF ADMINISTRATIVE UNIT Established in 2008, the Climate Investment Funds (CIF) have attracted substantial financial commitments from the international community to support developing and emerging economies in adopting a low carbon and climate resilient development trajectory. The CIF through its four programs – the Clean Technology Fund (CTF), Forest Investment Program (FIP), Pilot Program for Climate Resilience (PPCR), and Scaling up Renewable Energy in Low Income Countries Program (SREP) – has developed a proven track record to deliver investments and results on the ground. Since 2008 the CIF has provided USD 8.3 billion in concessional climate finance and expects to mobilize at least an additional USD 58 billion in co-financing from public and private sources to over 300 projects in 72 developing countries. Table 1 below shows the actual co-financing mobilized by source for the 169 CIF projects under implementation receiving USD 4.98 billion in CIF resources as of 31 March 2016. Table 1. Actual Co-financing for Approved CIF Portfolio (USD millions, as of 31 March 2016) Program Government Private Sector MDB Bilaterals Other Sources TOTAL CTF 4,094.86 10,932.68 10,247.99 3,810.45 4,600.25 33,686.23 FIP 380.98 0.22 372.52 3.20 10.61 767.53 PPCR 373.66 48.18 1,126.31 145.71 107.53 1,801.39 SREP Grand Total 323.89 215.18 411.00 170.89 477.42 1,598.38 5,173.39 11,196.26 12,157.82 4,130.25 5,195.80 37,853.52 Note: The figures in this table reflect only the 169 CIF projects approved by MDB Boards as of 31 March 2016. The CIF was designed to test approaches and learn lessons for delivering climate finance at scale to achieve transformative results in developing countries. Several features of its business model are fundamental to the CIF’s ability to assist recipient countries in deploying and mobilizing climate finance in support of national climate and development objectives. These include: (i) the use of multilateral development banks (MDBs) as implementing partners; (ii) the use of country-led programmatic approaches; and (iii) the flexibility to course-correct, and adapt programs based on experiences and lessons learned. 32 (I) THE USE OF MDBS AS IMPLEMENTING PARTNERS The CIF provides concessional resources for climate action through the MDBs, bringing multiple banks together for coordinated action at both national and global levels. The decision to utilize the MDBs as CIF implementing partners has been significant for recipient countries on many levels: a. The CIF harnesses the varied skillsets and expertise of the MDBs, including their robust safeguards, ability to link policy reforms with investment, and their capacity to execute complex projects, including large-scale infrastructure projects. With support from the CIF, countries have undertaken first-of-a-kind investments, such as utility scale concentrated solar power (CSP) in Chile, Morocco and South Africa, or the first application of climate resilience measures to the hydropower sector in Tajikistan. In turn, the CIF has helped MDBs to test new business models and pilot new products – such as the use of contingent recovery grants to mitigate geothermal exploration risk – thereby strengthening the MDBs’ capacity to further support countries in attaining their low carbon and climate resilient development objectives. b. CIF recipient countries have benefitted from the MDBs’ ability to leverage significant resources from their own balance sheets, as well as through mobilizing other financial actors, including the private sector and national development banks. CIF projects have attracted co-financing in approximately equal amounts from MDBs and the private sector, as well as significant volumes from other development partners and national public sources, as can be seen in Table 1. c. The MDBs reinforce and expand the benefits of scale that the CIF can deliver. When multiple MDBs coordinate their support to specific projects, this enables more resources to flow to transformative programs and projects (e.g., CSP or geothermal power) than if one MDB were investing alone. When MDBs coordinate support to specific technologies or sectors (e.g., energy efficiency and renewable energy through financial intermediaries in Turkey, as described in Box 1), the impact is potentially transformational. d. The additional resources provided by the CIF have enabled MDBs to respond to recipient countries’ climate change priority actions and needs by integrating climate change considerations into projects where this might not have otherwise occurred, which has helped to strengthen the complementarities between climate and development finance. And by working with national development banks to implement early stage climate-smart investments supported by the CIF – as has been the case in several countries Latin America – MDBs are helping to build capacity and knowhow of these institutions to further mainstream low carbon and climate resilient investments within their portfolios. e. The CIF relies on MDBs’ quality control, fiduciary controls, safeguards and other policies and procedures pertaining to the design, implementation, and supervision of projects and includes MDBs in decision-making processes to ensure policies are fit for purpose. This “light touch” administrative approach, which imposes limited additional requirements on MDBs and countries to obtain CIF project funding, has generated efficiencies, reduced bureaucracy, and enables more flexibility and nimbleness in the deployment of CIF resources in comparison to other multilateral 33 funds. By relying on MDBs’ policies, the CIF has been able to maintain a small administrative unit (fewer than 30 full time staff), thus promoting value for money in the delivery of climate finance. Box 1. Transforming the Market for Renewable Energy and Energy Efficiency in Turkey Turkey’s Clean Technology Fund (CTF) investment plan demonstrates how climate finance deployed at scale through coordinated action by multiple MDBs can break down market barriers to achieve transformational impact. Turkey channeled USD 270 million in CTF concessional resources to drive investment in renewable energy and energy efficiency through complementary programs with Turkish financial intermediaries implemented by the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation (IFC), and the World Bank. Each MDB worked with different local institutions (private sector banks, private leasing companies, and national development banks, respectively) to address common barriers to renewable energy and energy efficiency finance. The programs built technical capacity among banks to evaluate energy efficiency and renewable energy projects and assess risks, raised awareness among industry about the benefits of energy efficiency, and provided loans at more favorable terms (lower interest rates and longer tenors) than available in the market. In the programs’ first phase alone (through end 2012), CTF USD 172 million leveraged USD 1.8 billion through 430 sub-projects, saving 902,000 tCO2e and USD 568 million in avoided oil imports per year. The transformational impact continues with EBRD now implementing the third phase of its CTFsupported TurSEFF credit line for a total volume of USD 942 million, including USD 52 million from the CTF. The impact of the CTF on the energy efficiency market has been particularly notable as this market progressed from barely existent to one that could be financed on purely commercial terms. This is significant for Turkey as an impact assessment of the CTF in Turkey found that energy efficiency investments have the greatest impact on Turkey’s energy independence in terms of primary energy savings per dollar invested.41 41 Econoler, 2013. “Impact Assessment Report of Clean Technology Fund in Renewable Energy and Energy Efficiency Market in Turkey.” 34 (II) COUNTRY-LED PROGRAMMATIC APPROACHES The CIF is the only climate fund to date to prioritize a programmatic approach as its primary model of delivery. The CIF approach embeds investments in a country-driven strategic planning process with the objective of linking and leveraging investments with other actions, such as policy and regulatory reform and capacity development, and the activities of other partners to effect systemic impact. The Independent Evaluation of the CIF42 identified programmatic national investment plans as an innovation of the CIF that have largely secured strong government ownership and alignment of CIF plans with existing national strategies and programs. MDBs and governments have collaborated effectively to develop investment plans, and development partners have been engaged in the process in all CIF countries. Many investment plans include private sector participation, and CSOs and other stakeholder groups are consulted in the development of investment plans, and, in a number of countries, remain involved through the programmatic national monitoring and reporting process. The CIF programmatic approach has several notable features that differentiate it from a traditional project-based approach to climate and development finance. These include: Inter-ministerial coordination and policy dialogue at the highest levels to enhance national impacts of climate investment; MDB coordination and collaboration at the planning and project levels; Multi-stakeholder consultation in the design and implementation of investment plans; Predictability of resource availability from the outset43; Linking of public and private sector investments; Programmatic results measurement; and Actions to enhance knowledge and learning, as well as gender and social inclusion across country programs. CIF recipient countries are able to apply the programmatic approach flexibly in accordance with national priorities to achieve specific climate and development impacts. Countries have applied the programmatic approach to target specific technologies through multiple MDBs (e.g., CSP in South Africa), specific communities or vulnerable groups at the national level (e.g., combined FIP actions to support ejidos in Mexico, as described in Box 2), a specific geographic region (e.g., linked FIP investments in Brazil’s Cerrado biome), or by piloting the same development approach through different MDB partners (such as the participatory adaptation programs implemented in Zambia by the AfDB and World Bank). Moreover, the CIF’s approval process (starting with investment plan endorsement, which secures an indicative allocation of resources) provides a level of 42 ICF International, 2014. Until 2014, all countries invited to participate in a CIF program were provided an indication of the amount of CIF resources they would receive to implement investment plans. Since 2014, new countries have been invited to join the FIP, PPCR, and SREP without guarantee of CIF resources for investment plan implementation. 43 35 predictability and certainty to recipients and implementing partners, which has helped to achieve and maintain country buy-in. Box 2. Mexico’s FIP Investment Plan Concentrates Resources and Actions for Greater Impact In Mexico, the FIP investment plan builds on nearly 20 years of World Bank support to forestry and related sectors. The FIP program, which focuses on sustainable land and forest management by ejidos (a collective ownership system), is integrated within a broader suite of World Bank operations using different instruments, including REDD+ readiness support, a sector investment loan, and results-based finance. At the same time, the FIP investment plan draws on the Inter-American Development Bank’s knowledge of and operations in Mexico’s financial sector and its established relationships with local financial institutions including the publicly-owned Financiera Rural and private bank FINDECA. Although FIP USD 60 million resources are relatively minor in the Mexican context, the investment plan aims for significant changes in the way rural development policies are managed and aligned at the level of forest landscapes and creation of innovative credit and financing facilities for REDD projects. (III) FLEXIBILITY TO LEARN AND ADAPT The CIF was established to test and learn about the deployment of climate finance at scale. Consistent with this mandate, the CIF business model embraces learning to improve effectiveness. The flexibility of the CIF design enables the CIF and its partners to learn by doing, course-correct, and adapt programs based on experiences and lessons learned. This flexibility provides the space, freedom, and capacity to test new methods and business models, assess effectiveness, and advance learning. One notable example of how the CIF has adapted in an effort to improve outcomes is through the creation of dedicated funding windows for the private sector under each of the CIF programs. Experience from the CIF’s first few years of operations revealed that government-led investment planning in most countries prioritized public sector over private sector investments, and the length of the investment planning process undermined private sector engagement. To improve private sector participation under the CTF, approximately USD 465 million was allocated to thematically-focused dedicated private sector programs. These programs were designed to complement country CTF investment plans, while providing more agility to respond to market opportunities as they arose. By concentrating resources on specific thematic areas and technologies – such as risk reduction for early stage geothermal development – these programs have also pushed MDBs into new business areas, enhanced learning, and demonstrated the impact that can be achieved through coordinated and scaled-up global action among multiple MDBs, as shown in Box 3. 36 Box 3. Scaling up Support for the Earliest, Riskiest Stages of Geothermal Development The CIF, through the CTF and SREP, is providing USD 810 million for geothermal investments in 15 countries. Over USD 10 billion in co-financing is expected with the potential to lead to the development of 3.5 GW of geothermal capacity, more than one-quarter of current global installed capacity. The CIF is the leading source of international development finance for early-stage geothermal project exploration and development, providing over USD 400 million, or more than half of total public finance currently flowing to these critical stages.44 The CTF dedicated private sector program in particular has pioneered the use of contingent recovery grants to reduce risks associated with geothermal exploratory drilling. This instrument provides a cushion to private sector investors and developers by sharing drilling costs in cases where resources are not proven, thereby mitigating one of the most significant risks that inhibits private sector investment in geothermal development. To date USD 140 million in CTF contingent recovery grants have been deployed in support of geothermal exploration and development in Mexico, Indonesia, Turkey, Colombia and the Eastern Caribbean region. In addition to the CTF dedicated private sector programs, private sector set-asides were created under the FIP, PPCR, and SREP. A total of USD 175 million has been allocated across the three programs in an effort to spur innovation through private sector engagement and flexible delivery. The private sector set asides have yielded some notable successes – including Tajikistan’s CLIMADAPT, a first-of-a-kind financing facility for resilience investments by households and SMEs implemented through the EBRD –but were hampered by structural mismatches with MDB and private sector operations. An independent assessment of the set asides generated a number of recommendations that would enable future private sector windows associated with these programs to better support the market and fill financing gaps should additional financing become available. The CIF’s capacity for organizational learning and adaptive evolution is evident across CIF operations and also includes, but is not limited to, the increase in risk appetite over time, an increased attention to gender in CIF investments, improvements in the investment planning process, and efficiencies in governance and decisionmaking processes. 44 See http://www.climateinvestmentfunds.org/cif/sites/climateinvestmentfunds.org/files/Lessons-on-the-Role-of-PublicFinance-in-Deploying-Geothermal-Energy-in-DevelopingCountries-Full-Report.pdf 37 NATIONAL CLIMATE FUNDS: KEY CONSIDERATIONS FOR THE DESIGN AND ESTABLISHMENT OF NATIONAL LEVEL FUNDS TO ACHIEVE CLIMATE CHANGE PRIORITIES45 UNITED NATIONS DEVELOPMENT PROGRAMME – UNDP BACKGROUND & CONTEXT The ambitious shift toward sustainable and risk-informed development requires scaled-up and stable levels of finance from international, national, public and private sources. These sources must flow through an effective environment made up of sound policies, strong institutions and robust budgetary frameworks. Climate sensitive interventions can ensure that development is sustainable, ecosystems are protected, communities are more resilient to disasters and that all sectors play their necessary role in mitigation and adaptation. Based on UNDP’s experience in administering over 750 funds around the world, and in providing trustee and administrative agent services for over $5 billion in multi-donor trust funds, one tool that can help countries response to these challenges is a National Climate Fund (NCF). An NCF is a mechanism that supports countries to manage climate finance by facilitating the collection, blending, coordination of, and accounting for climate finance from a variety of sources. NCFs provide a country-driven system that can support numerous functions, including climate change goal setting and strategic programming, oversee climate change project approval, measure project implementation and performance, offer policy assurance and financial control of climate change funds and assist with partnership management. NCFs help countries to blend various resources together at the national level, providing a mechanism for shifting power away from traditional top-down fund management to country-level management. A country’s climate change objectives are managed and supported from the inside out, not the other way around. 45 This chapter has been developed based on UNDP’s Guidebook on National Climate Funds: Flynn, Cassie (2011). Blending Climate Finance through National Climate Funds: A guidebook for the design and establishment of national funds to achieve climate change priorities. United Nations Development Programme, New York, NY, USA. 38 KEY GOALS OF A NATIONAL CLIMATE FUND Four goals provide the foundation for its programmatic and operational components. First, by collecting and distributing funds to climate change activities that promote national priorities, an NCF provides a unified engagement point where the government, donors, development partners, civil society and other stakeholders can engage on and make decisions about climate change issues. Moreover, while traditional mechanisms under the UNFCCC are limited to collecting donor funds or resources under the Clean Development Mechanism (CDM), an NCF can attract a more diverse variety of sources of climate financing. Public, private, multilateral and bilateral funds, as well as innovative sources, can be collected by an NCF for coordinated and streamlined results. Second, an NCF facilitates the blending of public, private, multilateral and bilateral sources of climate finance. It is rare that one or two funds would be able to cover the costs necessary to transition and entire economy toward zero emission and resilient sustainable development. Rather, countries must blend together multiple sources — public, private, multilateral, bilateral — in a coordinated and streamlined way that is strategic and can further catalyze more resources to support action on climate change. NCFs can be designed to complement and blend sources from the emerging global public climate change financial system. The Global Environment Facility, Adaptation Fund and Green Climate Fund each collect resources and direct them toward climate projects at the regional, national and sub- national level. National Climate Funds are not meant to duplicate these financial flows or increase the burden on countries and implementing entities. Rather, NCFs provide a mechanism that can blend these resources with others resources at the project level. NCFs can provide the means for leveraging public funds to attract private funds and provide national-level coordination among and alongside the global climate finance system. Third, NCFs can coordinate country-wide climate change activities. The NCF mechanism responds to the need to provide flexible, coordinated and predictable funding to support the achievement of national priorities on climate change and development. In their structure and operations, NCFs are consistent with several principles of the Paris Declaration on Aid Effectiveness and the Accra Agenda for Action, including national ownership and alignment with national priorities; harmonization and coordination; effective and inclusive partnerships; and achieving development results and accounting for them. Fourth, by strengthening national institutions and financial management, an NCF can also support National Implementing Entities (NIEs) and other entities using the “direct access” modality to deliver climate change projects. NCFs support the strengthening of existing national institutions that drive development, climate change and aid effectiveness to reduce fragmentation and deliver results. This can also bolster national fiscal and financial systems to better prepare national institutions to absorb and manage all types of finance. National institutions can be better equipped to develop project proposals, manage funding, implement projects and monitor and 39 report the results. This expertise can promote greater country ownership and strengthen fiduciary management so that national entities can more readily access funds through the Green Climate Fund, Adaptation Fund and other sources as they become available. SIX KEY DESIGN ELEMENTS A key lesson learned from UNDP’s extensive experience and evidence-based research, is that an NCF must be carefully designed to align with national objectives and capacities on climate change. This requires careful consideration of its objectives and then crafting a structure that supports the achievement of those objectives. In addition it is critical that an NCF’s relationship to existing national systems ensures that the NCF contributes to efficiency and effectiveness of climate action on the ground. Based on UNDP’s experience at the national, global and regional levels, a set of key decisions that a country must consider when designing and establishing an NCF have been identified: 1. Defining the objectives - A country must identify its strategic goals on climate change and how the NCF will help it to achieve these goals. The objectives can include programmatic priorities (e.g. mitigation, adaptation) and management priorities (e.g. attracting private sector). Guiding questions include: a. What are the national priorities on climate change? Are there short, medium or long-term strategies that the NCF should support? b. Will the fund focus on thematic priorities (e.g., renewable energy) or support broader objectives? c. How will the objectives of the fund relate to the objectives of other international and domestic funds? 40 d. What timeframe is most appropriate? Should the NCF be time-bound? e. What are the expected financial flows to the fund? Have funds already been pledged? f. Are there stakeholders that must be acknowledged in the objectives? (e.g., indigenous peoples, women, youth, those associated with a specific industry, etc.) g. Should the objectives acknowledge a relationship with an entity or programme? (e.g. CDM) 2. Identifying capitalization - Deciding where the funds will come from is one of the most important choices that will shape the NCF. International, national, public and private can be delivered through an NCF. Capitalization must be realistic and grounded in the objectives and functions of the NCF. Guiding questions include: a. Based on the objectives of the fund, what kinds of sources will be blended together to capitalize the NCF? b. Will the fund utilize innovative sources, such as levies? c. Will donor funds be allocated to specific activities? (e.g., capacity building, institutional strengthening, investment) d. Are there any existing sources that could readily feed into an NCF? e. Will the size and sources of capitalization impact the size, governance or implementing arrangements of the fund? f. Are there specific structures necessary to support the fund’s capitalization? (e.g., laws or policies, partnership agreements) g. Will there be a regular process or cycle for raising funds? How will additional sources be attracted? 3. Instilling effective governance - Building on the objectives and capitalization, appropriate governing bodies, decision-making processes and oversight functions must be identified that will optimize the fund’s performance. Generally, the governing bodies make decisions on fund management and strategic direction. The governing bodies must have clear roles that effectively support the NCF without adding increased burden or bottlenecks in the programming cycle. Guiding questions include: a. What governing bodies are necessary to ensure efficient operations? Who reports to whom? b. How will any existing inter-ministerial or other national body relate to the fund? c. Who will be represented in the governing bodies? (e.g., government, private sector, civil society, United Nations, development banks, donors, other development partners) d. What decision-making process will be put in place? e. Who can submit project proposals? To whom do they submit them? f. What is the project proposal approval process? g. What safeguards are needed to increase effectiveness and efficiency? h. What body has ultimate oversight over the activities of the NCF? What individual person will lead this body? 41 i. In the case where there is more than one national environment or climate fund in a country, how do the governing bodies of these funds relate to one another? 4. Ensuring sound fiduciary management - Sound fiduciary management provides the foundation for the movement and tracking of funds to and from the NCF. A trustee or administrative agent should be identified to manage transactions and ensure that funds are collected and distributed in a coordinated and efficient manner. Capacity development can be a critical element of fiduciary management. Many NCFs identify an international development partner as the trustee but plan to transition this role to a domestic entity in the future. Guiding questions include: a. How will the trustee be identified? Can a government entity serve as the trustee? Is an external development partner required? b. Other than acting as a trustee, how will the government or domestic financial institution engage with the fund’s financial management? c. What services will the trustee provide? d. How can conflicts of interest between the trustee and implementers be avoided? e. What is the relationship between the trustee and the governing and implementing bodies? f. What fees will the trustee require? g. If the trustee will transition to another agent in the future, what capacity development activities should be undertaken? 5. Supporting efficient implementation arrangements – Implementation arrangements – the processes and agents set in place to complement climate change programming – must support the objectives of the NCF and align closely with other key design elements. Implementation arrangements include identifying programmatic instruments (e.g. grants, loans) and the system for carrying out programming and projects. Both of these elements should be streamlined to ensure efficient results. Guiding questions include: a. What kinds of programmatic instruments will be used? (e.g., grants, loans) b. Can the fund capitalize lending institutions to support implementation? c. How will the implementing entities be identified? d. What is the relationship between the fund and the implementers? e. How will the fund engage with the private sector? f. How can efficient delivery of funds be supported? g. Who has oversight and legal responsibility over implementation? h. How will the implementing arrangements relate to those of other domestic and international funds? i. What fees will implementing entities require? 42 6. Facilitating effective monitoring, reporting and verification - Monitoring, Reporting and Verification (MRV) enables the NCF to ensure that results are being delivered, and to collect lessons learned from implementation that will further refine and improve the NCF. The NCF should have unambiguous appraisal and performance criteria. Each stakeholder responsible for providing information on activities must have clear guidelines and standards. Guiding questions include: a. How can the NCF MRV system be built upon any existing systems? b. What type of programmatic or financial information should be reported? How often should information be reported and to whom should the reports be sent? c. How should MRV results be linked to project effectiveness? (e.g., pay for-performance options) d. Will audits be undertaken? By whom? e. Who will oversee the entire MRV process? f. What types of guidance materials are available or need to be created? What MRV capacity building activities should be undertaken? NCFS AS A LEVER FOR SUSTAINABLE DEVELOPMENT Thoughtful design of NCFs can help countries to use the tool effectively to collect, blend, coordinate and account for climate finance. Based on UNDP’s experience in delivering climate change action in over 140 countries, the above 6 key decisions can help to countries to tailor an NCF to be firmly rooted in, and aligned with, existing national strategies, frameworks, systems and other initiatives. In this way, NCFs can help countries to take better advantage of the increasing number of sources of finance available, build capacities, strengthen coordination and partnerships and manage finance catalytically. Importantly, NCFs can be an important tool to strengthen national systems for sustainable development now and in the future. 43 ANNEX: STRUCTURAL OVERVIEW AND DESIGN CONSIDERATIONS OF A NATIONAL CLIMATE FUND UNDP has developed a structural overview (below) that demonstrates how an NCF’s components can be arranged and the various design questions that must be answered. Resources, coordination, support and MRV flow between sources, governing bodies, the trustee, implementers and recipients. Throughout each component, stakeholders should consider how the NCF will deliver its services and what structural components and design decisions are necessary to support the achievement of the NCF’s priorities. 45 GHG EMISSIONS PRICING AND THE PRIVATE SECTOR WORLD BANK GROUP KEY POINTS Companies across a diverse range of sectors increasingly see greenhouse gas (GHG) emissions pricing (also commonly called “carbon pricing”) as the most efficient and cost‐effective means to cut carbon emissions. Companies are increasingly voicing support for government action to put a price on GHG emissions. Ahead of the UN Climate Leadership Summit in September 2014, more than 1,000 companies added their names to calls for carbon pricing led by World Bank Group, UN Global Compact, the Prince of Wales’ Corporate Leaders Group, and the 2014 Global Investor Statement on Climate Change. Business leaders are taking action on GHG emissions pricing. CEOs from 79 major companies joined the World Economic Forum-facilitated CEO Climate Leadership Group, with a first priority to put a price on carbon, and 90 leading companies have joined the action-focused Carbon Pricing Leadership Coalition directly and by alignment with the UN Global Compact Business Leadership Criteria on Carbon Pricing. CDP reports that over 1,000 businesses globally use an internal GHG emissions price or plan to do so in the next 2 years – a significant increase from the 150 companies that reported using an internal carbon price in 2014. BACKGROUND GHG emissions pricing policies use market signals to put a cost on the practice of emitting greenhouse gases, and create an economic incentive to reduce emissions. A growing number of countries, provinces and cities are designing such solutions. Currently, nearly 40 national and more than 20 sub‐national jurisdictions had adopted emissions trading schemes (ETS) or carbon taxes, covering approximately 12% of global emissions. 1 While not every country can put in place GHG emissions pricing, over 90 countries included a reference to carbon pricing or markets in their nationally determined contributions submitted to the UN Framework Convention on Climate Change in 2015. With new pricing regimes on the horizon, an increasing number of companies will be subject to new climate change regulations in their countries or subnational jurisdictions. To prepare for this, and ensure their ability to 1 State and trends of carbon pricing 2015. Washington, D.C. World Bank http://www.worldbank.org/content/dam/Worldbank/document/Climate/State-and-Trend-Report-2015.pdf Group operate effectively, businesses are taking steps to monitor their GHG emissions, determine their carbon footprints, re-think corporate strategies, and engage with policy makers and stakeholders in the policy design process.2 BUSINESS ENGAGEMENT The private sector has become increasingly engaged on GHG emissions pricing over the past two years. Ahead of the UN Climate Leadership Summit in September 2014, more than 1,000 companies added their names to calls for carbon pricing led by the World Bank Group, United Nations Global Compact, The Prince of Wales’ Corporate Leaders Group, and the 2014 Global Investor Statement on Climate Change.3 In 2015, six major oil companies also called for an international framework for carbon pricing systems open letter to governments and the United Nations.4 The World Economic Forum has seen the creation of the CEO Climate Leadership Group, with CEOs of 79 companies covering 20 economic sectors, with operations in over 150 countries and territories generating over $2.1 trillion of revenue, call for effective climate polices that include a price on carbon.5 Global businesses are increasingly engaging in public-private coalitions advocating for carbon pricing, with the launch of the Carbon Pricing Leadership Coalition whose government and private sector participants are committed to building the evidence base and mobilizing for effective carbon pricing policies.6 These companies and many others acknowledge that climate change is becoming more central to their business models and are moving to prepare for both the possible costs and opportunities. Further, the adoption of an internal carbon price in business strategies is spreading, even in regions where carbon pricing has not been legislated. INTERNAL CARBON PRICING Leading companies that are anticipating future GHG pricing or regulation are taking steps to incorporate the cost of carbon into decision‐making processes by using an internal “shadow price” or, less often, internal fee-anddividend programs. For many, this is part of a long‐term risk management strategy, and a means of talking about carbon in the language of business – as a gauge to evaluate return on related investments – and reward parts of the company that can demonstrate cost savings from lowering emissions. The number of corporations using an internal price on carbon has tripled since last year, with 435 companies disclosing to non-profit organization CDP that they used an internal price on carbon in their business planning in 2 Preparing for carbon pricing: Case studies from company experience. Technical Note 9. January 2015. World Bank Partnership for Market Readiness. 3 See http://www.worldbank.org/en/news/feature/2014/09/22/governments‐businesses‐support‐carbon‐pricing 4 See http://newsroom.unfccc.int/unfccc-newsroom/major-oil-companies-letter-to-un/ 5 See https://www.weforum.org/agenda/2015/11/open-letter-from-ceos-to-world-leaders-urging-climate-action/ 6 Carbon Pricing Leadership Coalition, www.carbonpricingleadership.org 47 2015.7 These companies represent diverse sectors and include, among others, utilities (American Electric Power, Xcel Energy, National Grid), energy companies (ExxonMobil, Shell, BP), technology companies (Google, Microsoft), airlines (Delta) and automotive (General Motors), financial services firms (Wells Fargo, TD Bank, Credit Suisse), and consumer products (Colgate-Palmolive, Nestle, Disney). Given that there is no market benchmark, CDP reports that the prices companies use vary widely, from $1 to $357 per metric ton on the companies’ carbon pollution. The majority of companies reporting use of an internal carbon price are based in Europe, with growing representation globally - most notably in North America and Asia. In particular, Asian corporations saw a more than a tenfold increase in use of internal pricing, from 8 companies in 2014 to 93 in 2015. Furthermore, an additional 583 companies globally indicate that they anticipate using an internal carbon price in the next two years. The growing use of internal GHG pricing as a planning tool suggests that mainstream businesses find the use of carbon pricing to be realistic, prudent and useful. Companies cite the use of a carbon price as a planning tool to help identify revenue opportunities, risks, and as an incentive to drive maximum energy efficiencies to reduce costs and guide capital investment decisions. Many companies also use internal carbon pricing to redirect capital to low‐carbon operation efforts. Finally, corporate GHG pricing can be an advocacy tool for companies to influence public policy development, such as a domestic price on carbon through an emissions trading system or other market mechanism. Corporations can also raise the importance of supporting GHG emissions pricing with other complementary measures, including performance standards, subsidies and incentives, and outreach/awareness campaigns, among others. PRIVATE SECTOR GHG PRICING RESOURCES World Bank Group Resources The World Bank Group has several carbon pricing initiatives that include private sector participation: The Partnership for Market Readiness (PMR) provides governments with a range of services to support readiness for carbon pricing, including support for participating government’s stakeholder engagement and preparedness, particularly interactions with the private sector.8 The Networked Carbon Markets (NCM) initiative explores how to link heterogeneous mitigation actions across countries and aims to facilitate cross border trade of units based on a shared understanding of the relative value of different climate action. In doing, so NCM collaborates with a wide range of partners, including private sector organizations.9 The Carbon Pricing Leadership Coalition (CPLC) is a voluntary partnership of governments, businesses, and civil society organizations that works to catalyze action toward the successful implementation of carbon 7 Putting a price on risk: Carbon pricing in the corporate world. CDP Report 2015 v.1.3. https://www.cdp.net/CDPResults/carbon-pricing-in-the-corporate-world.pdf 8 For more information, visit www.thepmr.org. 9 http://www.worldbank.org/en/topic/climatechange/brief/globally-networked-carbon-markets 48 pricing around the world. Launched in 2015 at COP21, the CPLC brings together leaders from business and government to build the evidence base for successful carbon pricing, to mobilize business support, and to have constructive dialogues, country by country, about how to advance effective carbon pollution pricing systems. Twenty-five governments, 90 leading businesses and 30+ NGO and strategic partners have thus far joined the CPLC to contribute to these efforts.10 WORLD BANK GROUP PRIVATE SECTOR-FOCUSED RESOURCES INCLUDE: 1 State and Trends of Carbon Pricing 2015 This annual report provides a global overview of carbon pricing instruments implemented or scheduled, along with analysis of trends and major issues in the carbon pricing. This analysis includes overview of impacts on competitiveness and carbon leakage – key issues for the private sector. October 2015. World Bank Group http://www.worldbank.org/content/dam/Worldbank/document/Climate/State-and-Trend-Report-2015.pdf 2 Carbon Leakage: Theory, Evidence and Policy Design This technical note provides an overview of the issue of carbon leakage, discussing the theory, evidence and policy design. The note addresses three broad questions: how to evaluate the expected competitiveness and carbon leakage impacts due to carbon pricing policies for different sectors and the entire economy; how to mitigate the risk of negative impacts and strengthen the positive impacts, and how to manage the process of dialogue between a government, business and civil society on the implications for competitiveness and risks of carbon leakage, and their mitigation. October 2015. Technical Note 11. World Bank Group Partnership for Market Readiness http://documents.worldbank.org/curated/en/2015/10/25189663/carbon-leakage-theory-evidence-policydesign 3 Preparing for Carbon Pricing: Case Studies from Company Experience This technical note examines the experiences of Royal Dutch Shell, Rio Tinto, and Pacific Gas and Electric as each adapted to operating within an emissions trading system. January 2015. Technical Note 9. World Bank Partnership for Market Readiness. https://openknowledge.worldbank.org/bitstream/handle/10986/21358/PCP.pdf 4 Emissions Trading in Practice: A Handbook on Design and Implementation This handbook helps decision makers, policy practitioners, and stakeholders create well-designed, emissions trading systems that are effective, credible, and transparent tools for helping to achieve low-cost emissions reductions in ways that mobilize private sector actors and encourage international cooperation. May 2016. World Bank Partnership for Market Readiness; International Carbon Action Partnership. https://openknowledge.worldbank.org/bitstream/handle/10986/23874/ETP.pdf?sequence=11&isAllowed=y 5 10 Carbon Pricing Leadership Coalition: Launch Report and Work Plan For more information, visit www.carbonpricingleadership.org 49 This report captures the launch of the public-private Coalition at COP21 in Paris, highlighting commitments by businesses and governments to lead on work to advance carbon pricing. The report further lays out the work plan of the Coalition to build and share the evidence base, mobilize business support, and convene dialogue events. January 2016. Carbon Pricing Leadership Coalition Launch Report and Work Plan ADDITIONAL PRIVATE SECTOR-FOCUSED RESOURCES INCLUDE: 1 Putting a Price on Risk: Carbon Pricing in the Corporate World This annual report provides an overview of global corporations disclosing the use of an internal carbon price in their operations and capital and risk management decisions. September 2015. CDP Report 2015 v.1.3. https://www.cdp.net/CDPResults/carbon-pricing-in-the-corporate-world.pdf 2 Executive Guide to Carbon Pricing Leadership This guide is designed for individuals completing due diligence on carbon pricing on behalf of their companies. It has been shaped by input from dozens of such individuals, as well as other experts who have been implementing carbon pricing programs within companies and/or advocating for government policies in countries around the world. December 2015. UN Global Compact, UN Environment Programme (UNEP), World Resources Institute. www.unglobalcompact.org/docs/issues_doc/Environment/climate/CarbonPricingExecutiveGuide.pdf 3 Shifting the Carbon Emerging business attitudes fuel momentum for global climate action Pricing Debate: Survey of leading global companies on changing view on carbon pricing policy, and business action to prepare for and seize opportunities from carbon pricing, including through MRV and internal pricing. December 2015. EY Climate Change and Sustainability Services www.ey.com/Publication/vwLUAssets/ey-shifting-the-carbon-pricing-debate-new/$FILE/ey-shifting-the-carbonpricing-debate-new.pdf.PDF 4 Emerging Practices in Internal Carbon Pricing: A Practical Guide This report presents emerging practices in internal carbon pricing and a pragmatic, 5-step guide for implementing a price on carbon within companies. November 2015. World Business Council for Sustainable Development http://wbcsdpublications.org/wp-content/uploads/2015/11/Leadership-2015Emerging_Practices_in_Internal_Carbon_Pricing.pdf 50 ANNEX This Annex includes a full set of new World Bank Group carbon pricing tools and resources (2015 to present) that may be of interest to the G20 Climate Finance Study Group. Partnership for Market Readiness (PMR) Knowledge Products 1 Options to Use Existing International Offset Programs in a Domestic Context Its objective is to support PMR country participants currently planning and/or designing domestic offset programs to identify how existing international offset programs can be best leveraged to develop domestic offset arrangements that suit their national circumstance. This can be at different levels of dependency, ranging from full reliance on international programs to fully independent domestic programs, and everything in between. It should be noted that this Note does not aim to clarify how best to design a domestic offset program, but rather focuses on how to use the experience of established international programs in this exercise. August 2015. Technical Note 10 http://www.ecofys.com/files/files/world-bank-group-2015-international-offset-in-domestic-context.pdf 2 Crediting-related Activities under the PMR: Status and Support for Implementation The objectives of this paper are: a) to review the PMR crediting-related activities presented in MRPs; b) to assess whether and how these activities can stimulate scaled-up mitigation by creating a domestic environment (technical, regulatory and institutional) that can support a range of climate policies; and c) to identify opportunities for the PMR to consolidate the support. The paper suggests that crediting can play a role in wider national climate policy development and discusses ways to assess how the crediting-related activities can serve to foster mitigation action under multiple policy instruments (supporting both market and non-market instruments). August 2015. - https://openknowledge.worldbank.org/handle/10986/22348 3 Guide for Designing and Developing GHG Data Management systems for Corporate/facility-level The Guide highlights the regulatory, policy, institutional and technical considerations associated with designing and developing a system, and also describe a comprehensive, step-by-step process for determining the functional and technical requirements of a system; and deciding on whether to design and develop a system using internal or external resources (or a combination of both); and on implementing arrangements of the system. April 2016. https://openknowledge.worldbank.org/bitstream/handle/10986/23741/K8658.pdf?sequence=5&isAllowed=y 4 China Carbon Market Monitor Provides timely information on China's seven pilot carbon markets and analysis of climate policy and market developments at the national level. 2015. https://www.thepmr.org/content/ets-news-china 5 Overview of Carbon Offset Programs: Similarities and Differences Maps the key elements and design features of offset programs, presenting the essential differences and similarities among existing programs. Design features of 11 programs are presented and explores how each addresses issues such as efficiency, environmental integrity, applicability, and transaction costs January 2015. Technical Note 6. - https://openknowledge.worldbank.org/handle/10986/21353 Networked Carbon Markets (NCM) Knowledge Products 1 Mitigation Value, Networked Carbon Markets and the Paris Climate Change Agreement This paper explores if, and how, Networked Carbon Markets (NCM), one of the possible models for creating a future global carbon market, could co-exist with a post-2020 UNFCCC climate change regime. 51 2016. Andrei Marcu www.ceps.eu/system/files/MitigationValueNetworkedCarbonMarketsandtheParisClimateChangeAgreement. pdf 2 Evaluating Mitigation Effort: Tools and Institutions for Assessing Nationally Determined Contributions Heterogeneity in mitigation pledges creates as significant demand for a well-functioning transparency and review mechanism. The specific forms of intended contributions necessitate economic analysis in order to estimate the aggregate effect of these contributions, as well as to permit ‘apples-to-apples’ comparisons of mitigation efforts. This paper discussed the tools that can inform such analyses, as well as the institutional framework needed to support climate transparency. November 2015. Harvard Project on Climate Agreements, IETA, Enel Foundation, World Bank Networked Carbon Markets. http://pubdocs.worldbank.org/pubdocs/publicdoc/2016/2/736371454449389076/pdf/Evaluating-MitigationEffort-Nov-2015.pdf 3 The Mitigation Action Assessment Protocol (MAAP) February 2016. DNVGL http://pubdocs.worldbank.org/pubdocs/publicdoc/2016/3/639271458579397657/Mitigation-ActionAssessment-Protocol-Feb-2016-CLEAN.pdf 4 Key Elements of the Mitigation Value Assessment Process This paper builds on the findings of an earlier unpublished discussion paper titled ‘Designing a Model for Networked Carbon Markets’ with its objective being to describe key elements of the mitigation value assessment process. October 2015. Justin Macinante http://pubdocs.worldbank.org/pubdocs/publicdoc/2016/2/913361454447774150/pdf/Networked-CarbonMarkets-Key-Elements-of-the-MV-Process.pdf 5 Design Options for an International Carbon Asset Reserve July 2015. INFRAS (Draft Paper) http://pubdocs.worldbank.org/pubdocs/publicdoc/2015/7/693001437421708911/Design-Options-for-anICAR-compressed.pdf 6 Key Provisions of a Regulatory Framework to Support Carbon Market Linkage This paper considers the regulatory framework that is required to be put in place in order to support the establishment of carbon market linkages, in particular, in light of the bottom-up approach contemplated by the Paris agreement. April 2016. Reed Smith (Draft Paper) http://pubdocs.worldbank.org/pubdocs/publicdoc/2016/4/680061461687518813/The-RegulatoryFramework-to-support-the-NCM-Linking-Model.pdf Carbon Pricing Leadership Coalition 1 The FASTER Principles for Successful Carbon Pricing: An Approach Based on Initial Experience This report lays out six key principles to put a price on carbon – the FASTER principles on fairness– for putting a price on carbon based on economic principles and experience of what is already working around the world. September 2015. World Bank Group, OECD http://documents.worldbank.org/curated/en/2015/09/25060584/faster-principles-successful-carbon-pricingapproach-based-initial-experience 52 LEVERAGING PRIVATE FINANCE WITH PUBLIC FUNDS WORLD BANK GROUP INTRODUCTION To address the challenges of sustainable development, we need to invest more, especially to address climate change. Yet, as a government official, or an investment professional, you have limited public funds you can allocate to each global agenda. Governments cannot finance all necessary investments, or quickly acquire the skills required to design and manage all those investments, or put in place regulatory frameworks, plan for supply chains or financial products. What you can do with limited public funds is to “crowd-in” or “mobilize” private investment. Donor governments can provide resources to “blend” public money with private finance, and have done so with the help of private sector oriented multi-lateral development banks (MDBs) to make aid spending go the extra mile – so let’s get started. By now, you’ve heard about “blended finance”. It means different things to different people. Generally, “blended finance” is a combination of public and private finance, which may or may not provide concessional1 terms. There are many shapes and forms where public and private funds can be combined – or “blended” – within say a single renewable energy project. 16 times leverage with IFC Blended Finance $5 billion in total project cost $1 billion IFC investment 1 When done well, blended finance has proven highly effective in jump-starting and help accelerate the development of highrisk, nascent sectors in emerging markets. The concessionality that is provided by public funds can influence how much private funds can be leveraged and also related to the objective or impact being sought. However, when applied indiscriminately, “blended finance” can subject projects and sectors to various pitfalls such as market distortion and inappropriate risk allocation. This could lead to “addiction” to donor funds where projects, or sectors cannot stand on their own. This is not the intent of blended finance. We will look into “Concessionality” / “concessional” in this note refer to the provision of financing for which compensation at market terms is not being sought. Examples include lower interest rates or taking a subordinated or first loss position without receiving market compensation for the risk. different blended finance structures and how the concessionality provided can influence how much leverage is achieved. Before we look at some project examples, let’s review how colleagues at the International Finance Corporation (IFC), a member of the World Bank Group, use “blended finance” for leverage in particular in the climate finance space. BLENDED FINANCE AT IFC Since 2009, IFC has blended over $300 million in donor funded concessional funds with IFC’s own commercial funds of over $1 billion to support more than 40 climatesmart projects that have leveraged $4 billion in third party non-IFC financing – so $300 million of public funds helped leverage $4,700 million of commercial finance - that’s 16 times leverage. IFC has built a track record as a disciplined investor of concessional donor funds, employing well defined processes and procedures that encompass all stages of the project cycle, from business development to project due diligence/approval to monitoring and evaluation. IFC’s blended finance operations allow IFC, and the private sector, to engage in new sectors, technologies, and countries sooner and/or at a larger scale than without blending, and leverage private finance. VARIOUS BLENDED FINANCE STRUCTURES IFC’s blended climate finance activities include pioneering investments including the first completed solar CSP plant with storage in the developing world, and the first private sector wind farm in Jamaica. These investments utilize a variety of structures and instruments, including debt, equity, and guarantees, that are tailored to the needs of each project. IFC has used various structured investments for its blended finance activities, from senior loans with concessional interest rates and longer tenors, or subordinated structures in loans and equity, or first loss guarantees to support risk sharing facilities. Different structures are used for different market situations to address the barriers hindering the investment to unlock private finance. For instance, depending on the perceived risk or initial high cost of a climate-smart investment in a given market, or technology, we could structure the subsidy upfront (ex-ante), as a low interest rate to offset a certain high cost of entry, or technology that has not reached scale. Blended finance can help improve the project’s competitiveness and de-risk the project for all the investors, and crowd-in private finance depending upon the investors’ risk appetite. Differently than when grants are provided, with blended finance reflows can be received from the donor-funded co-investments (which can be sent back to the contributor partner or used for new investments) while supporting 54 highly impactful climate-smart projects that may not be otherwise commercially viable due to high perceived risk and/or costs. PRICE CONCESSIONALITY The level of concessionality2, or implied subsidy, in each blended finance structure is determined to ensure that the projects or sectors do not get over-subsidized or “addicted” to subsidy. The subsidy is selectively applied so that it is the minimum required to make the investment happen. If repeatedly applied to the same sector, to ensure there is no addiction, then it is gradually reduced in successive projects, as you will see in the case of an innovative energy efficiency financing in Turkey. This will also ensure that subsidies are time-bound and temporary, so that projects in the sector can eventually stand on their own. An ex-post incentive structure, for example, will adjust the donor-funded loan’s interest rate downwards once milestones are achieved by the borrower, such as for example a certain number of loans to energy efficiency loans by a local financial institution. IFC’s Blended Climate Finance IFC’s Blended Climate Finance (BCF) Unit deploys concessional funds from development partners alongside IFC’s own commercial funds to catalyze climate-smart investments that wouldn’t otherwise happen in that form or at such time and that have a high development impact. BCF addresses market barriers by using concessional financial instruments (i.e. soft loans, equity, guarantees) to undertake pioneering projects that directly combat climate change and have a strong potential to transform markets. IFC’s climate change contributor partners for its blended finance activities include the IFC-Canada Climate Change Program, the Climate Investment Funds (CIF), and the Global Environment Facility (GEF). IFC is also now accredited entity of the Green Climate Fund (GCF). OTHER FORMS OF CONCESSIONALITY In other structures, the concessionality could be in the form of not only pricing, but also subordination, where the donor-funded investment is longer in tenor, or takes a subordinated position during repayment. These could include structures where interest payments on the donor-funded loan are temporarily deferred when the project is experiencing difficulties. Other subordinated structures could be in the form of a first loss protection, where the donor guarantees a portfolio of climate change investments, and the donor pays out before the senior guarantor in case there is a payment default in the portfolio. In such cases, where the donor provides 2 The level of subsidy is calculated by taking the IFC commercial and concessional interest payment differential over the life of the investment and discounting differences back with the relevant zero-coupon swap curve to arrive at the net present value. 55 concessionality beyond pricing (for example, subordination), higher leverage can typically be achieved as compared to a structure where only a pricing concessionality is offered without any subordination or other higherrisk taking features. Again, it is important to structure the blended finance investment commensurate to the barrier that the donor funds seeks to address. Different structures address different barriers in different sectors and different technologies in various contexts, market situations. As such, the numbers in table 1 are not meant to indicate which structure is superior over another in terms of achieving leverage. It serves as merely an indication of different ranges of leverage different structures could achieve based on IFC’s experience in Table 1: Expected leverage of Private Finance blended finance. It is worth noting that often times, funded with donor funds3 Average Range projects in real sector which are relatively larger projects, Real Sector Debt 11x 3x-15x need more subsidy to achieve higher leverage compared to Sub-debt 22x 10xprojects with financial institutions which tend to be smaller 30x in size – however, subordinated structures, such as risk Financial Debt 6x 2x-10x sharing facilities that uses donor funds as first loss, typically Intermediaries First loss 30x 15xachieve the highest leverage, but with higher possibility of 50x public funds not being returned. It is important to have a view towards achieving a balance between the level of subsidy and targeted financial leverage. There’s no concrete science towards this, as again, this depends largely on the different barriers that are being targeted, the risk-appetite of the contributor and their preferences in terms of the type of impact to be achieved. Having said this, IFC has so far been quite efficient in terms of achieving leverage – when looking at data based on the use of CIF’s Clean Technology Fund (CTF) funds alone, IFC has helped leveraged over $2 billion by blending $130 million of CTF funds, that is about 16 times leverage in private sector projects. CTF overall has used $700 million which has helped leverage over $6.3 billion, that is about 9 times – this includes both private and public sector projects implemented by the MDBs. DEMONSTRATION EFFECT Now let’s shift gears a little and look in depth at some examples. To recap, blended finance can be a powerful tool to help support transformational, high impact, projects that are unable to attract commercial financing, but have the potential to become commercially viable over time. By blending public sector funds in the form of co-investments in private sector projects, IFC not only directly enabled important climate-smart projects, but also helped demonstrate to private developers and financiers that these sectors can be in fact profitable, stimulating a series of follow-on investments to scale-up the sector faster than it would have “without” blended finance. As the solar photovoltaic (PV) project in Thailand below will 3 Indicative leverage ratios based on IFC’s portfolio of blended climate investments in the last several years. 56 illustrate, follow on projects do not require subsidy as the demonstration effect kicks in. Again to ensure subsidy is temporary and limited to the initial projects in the sector. BLENDED FINANCE EXAMPLE 1: ACCELERATING SOLAR PV IN THAILAND 2008, solar energy accounted for less than 2 MW of installed capacity in Thailand. IFC helped provide the solar market with an initial boost and demonstrated that large scale solar PV was possible in Thailand. But to reach a sustainable market growth trajectory, solar developers required blended finance to move from governmentsubsidized pilot projects to purely commercial solar farms. Indeed, even with three successful solar farms online, IFC client “SPCG” was unable to attract necessary long-term financing for its follow-up projects from local banks, which were concerned about the viability of a solar Independent Power Producer (IPP) in Thailand. IN To help sustain the solar sector’s momentum in Thailand, IFC stepped in to support SPCG’s follow-up solar farms with blended finance. By providing SPCG with a financing package including $8 million of IFC’s own account commercial funds blended with $4 million in concessional funds from CTF, SPCG secured previously unavailable long-term financing for its two solar farms from local private sector banks. IFC’s CTF-supported financing package resulted in a blended lower interest rate and longer tenor, which helped reduce long-term project finance risks for lenders. Successful operations of the project sent positive signals to the local financial markets. By late 2011, the solar farms had begun supplying clean, renewable power in Thailand, paving the way for SPCG to transition from a small-scale solar developer to the largest solar farm developer in Thailand. Early support from IFC blended with CTF funds, have enabled SPCG to expand its development plan to over 250 MW. SPCG’s solar farms are expected to attract upwards of $800 million of clean energy investments without further subsidy, while avoiding over 200,000 tons of CO2 emissions annually, the equivalent of taking more than 40,000 passenger vehicles off the road. The financial success of these early solar farms has helped drive private investment in Thailand’s clean energy sector, prompting industry analysts to identify Thailand’s solar market as one of the most attractive among the world’s emerging markets. Thailand is now on its way to meet its goal of 3,000 MW of solar PV by 2021, which will improve Thailand’s energy security and economic sustainability. BLENDED FINANCE EXAMPLE 2: ENERGY EFFICIENCY FINANCING IN TURKEY Blended finance can be offered via financial intermediaries (FIs) as well. IFC blended $21 million of CTF funds with almost $100 million of IFC’s own funds in three projects to increase both the supply and demand of energy efficiency (EE) financing in Turkey. The aim of the programmatic approach was to demonstrate the value of EE across Turkey’s energy-intensive sectors, while developing a track record of successful investments to accelerate EE financing by local FIs, reducing reliance on donor-support overtime and eventually without needing it. IFC opted for EE leasing, rather than a lending, approach for end users, which was almost non-existent at the time. Under this model, IFC provided low interest loans from CTF funds to three Turkish leasing companies for the purpose of financing projects and equipment that met specific EE parameters. The leasing company would then market EE financing to its current and prospective customers, predominantly SMEs. Once a customer decided to acquire EE equipment, the leasing company would purchase the equipment using IFC-CTF funds and provide the equipment through a lease to the customer. The intent is to pass on the subsidies to the final customer. 57 Additionally, IFC provided each of its leasing company clients with parallel advisory services to help the leasing companies build their internal capacity to successfully identify, assess, and market a portfolio of leases specifically for EE. The final goal was to equip these client companies with the tools required to scale EE financing portfolios on their own over the long-run. In 2013, IFC reduced the amount of concessionality in the loan to one leasing company by over 60% compared with its 2010 loans to two other leasing companies. Subsequently, just two years later, in 2014, IFC provided a $96 million EE loan to the same leasing company on fully commercial terms without CTF. As Turkey’s EE market continues to attract these types of significant capital inflows on commercial basis for EE solutions, local companies will have a better chance of finding a competitive edge in the global marketplace in addition to growing the EE market in Turkey. Blended Climate Finance – Other Project Examples Bosnia and Herzegovina / Energy Efficiency —€7.5 million investment to support energy efficiency upgrades for a glass producer, reducing GHG emissions from the client’s manufacturing operations by 40,000 metric tons MT of CO2 (MTCO2) emissions/year. Honduras—$19.5 million investment to help finance 81.7 MW of utility-scale solar PV capacity in Honduras, an IDA country. The project is expected to reduce costly, fossil fuel imports while reducing approximately 70,000 MTCO2 emissions/year. South Africa / CSP —$41.5 million investment in two concentrated solar power (CSP) plants in South Africa. These demonstrative projects, the first of their kind in SubSaharan Africa, are expected to avoid 442,000 MTCO2 emissions/ year. Ghana / EE —$15 million investment to boost output at a 220 MW power plant by 50%, without incurring any additional fuel consumption. The project is expected to reduce power costs for Ghanaian consumers and businesses, as well as avoid 118,000 MTCO2 emissions/year. CONSIDERATIONS WHEN STRUCTURING BLENDED FINANCE PROJECTS Managing project risk –think carefully about how to mitigate project risk. Note that risk transfer is not the same as risk mitigation. While it is possible to use public funds for guarantees, mezzanine tranches and other structures to buy down part of the project risk, these instruments do not necessarily make a project less risky. If proper alignment of interest is not maintained, they can merely transfer the risk to the public sector donor. In the long term, to avoid investors from getting “addicted” to donor funds, it is preferable to pursue risk allocation structures which align risk exposure to the party who can manage that risk – thus providing incentives to actually reduce the risk. There are private investors that do not mind taking risk, so long as they can diversify and hedge it. But most importantly, private investors want to be compensated for the risks they are taking – although often resulting in 58 more costly, less affordable infrastructure. In contrast, structuring to reduce risk strengthens the economic fundamental and makes infrastructure more affordable. To this end, good project structuring allocates risks to parties best able to manage them, hence reducing overall project risk. Institutions with a relationship with the government, such as the MDBs, are better placed to manage political risk than are private investors. For alignment of interest, donor funds often take same instrument as MDB unless specific reasons demand otherwise. Good risk allocation also shares risks based on the different risk appetites of different parties. A key value addition of a blended approach to public finance is that it brings different risk appetites and time horizons into the transaction. This offers opportunities for blending public and private finance in ways that structure assets to meet private sector risk and time profiles. For example, public funds may have a longer time horizon, and so can offer longer tenor or deferral features, allowing private investors to take shorter term risk. Risk appetites are constrained by the size of balance sheets. Risk appetites can be constrained by the size of balance sheets. Investors decide how much capital they want to put at risk for different risk exposures. Hence, a constraint to getting large investments financed is that the ticket size for each investor may exceed their risk limits, either for that deal or for their total investment portfolio of that asset type. Financial intermediaries can help by distributing assets across multiple investors to reduce the risk exposure of each investor, as in syndicated loan programs. But at the portfolio level, investors may soon fill their appetites for certain risks (e.g. small countries, fragile states, riskier technologies) while many investment needs remain unmet. By introducing investors to new classes of risk that they have not previously had exposure to, it can help them calibrate their risk perceptions—as their perception of risk comes down, the share of risk or the incentive support which public finance needs to take or provide can also decline – this is seen in Risk Sharing Facilities – a product that allows the sharing of risk across different stakeholders. Of course this works better in larger emerging markets where financial institutions and capital markets are large enough to intermediate significant capital flows. For smaller countries, regional financial institutions and capital markets could play a similar role, but unless the region shares a common currency, currency risk will be an important consideration. LESSONS FROM IFC’S BLENDED FINANCE EXPERIENCE Taking into account the above, IFC has identified two key elements that are critically important to effectively apply blended finance in challenging markets and sectors: governance and execution. Strong Governance: IFC has a mature and well established set of board-endorsed principles for governing its blending operations. At the individual project level, IFC applies the same standards when investing on behalf of donor partners as it does with respect to the administration and management of IFC’s own affairs, including the application of integrity due diligence and environmental and social safeguards. IFC has also established a senior committee to approve the use, structure, and terms of donor-funded concessional finance used as part of the overall blended financial package provided to the client. This senior committee ensures that IFC uses a disciplined, targeted, and strategic approach for its blended finance investments to safeguard donor interests through the application of key principles: (i) Focusing on projects where 59 IFC financing alone is unable to make the project happen; (ii) Minimizing concessionality to minimize the potential for market distortion; and (iii) Supporting sectors that could achieve financial sustainability in the medium term. Effective execution: Over the past decade, following the successful deployment of pilot projects, IFC added to its toolbox a blended finance product offering. This has enabled IFC to build a track record as a disciplined investor of concessional donor funds, employing well defined procedures that encompass all stages of the project cycle, from project due diligence/approval to monitoring and evaluation. IFC’s blended finance operations allow IFC, as well as its contributor partners, to engage in new sectors, technologies, and countries sooner and/or at a larger scale than without blending. This approach has made contributor partners comfortable with delegating authority to IFC for project approvals, maximizing efficiency, reducing transaction costs and leveraging IFC’s experience to support of impactful private sector projects. If this targeted and disciplined approach were more broadly adopted in the market, it can help reduce the potential of market distortions and maximize the impact and catalytic effect that public funds could have in the context of using blended finance for private sector operations. KEY TAKE-AWAYS Blended finance can help support private sector investments that are otherwise not commercially viable due to high perceived or actual risks and/or costs. Blended finance co-investments therefore fill a temporary gap in the market with concessional donor funds and help accelerate/catalyze additional private sector investments. Blending concessional finance with commercial finance for private sector investments requires a robust governance system to ensure that blended finance investments minimize market distortions and catalyze projects that would not otherwise happen. Blended finance practitioners should ensure that the same standard of care is applied in the administration and management of donor funds as with a MDB’s own funds. IFC’s adherence to this standard has made donors comfortable with delegating authority to IFC for project approvals, maximizing efficiency and increasing investment volume. MDBs are capable of balancing the necessary collaboration with host governments and at the same time ensure donor funds are used to meet donor requirements under MDB’s established governance and capacity. Clear articulation by contributor partners of the risk-reward expectations of their funds is essential for efficient partnership and maximize the benefit from the governance and disciplined approach to blending such as that of the IFC. CONCLUSION Blended finance is not a silver bullet to achieve leverage, and should be used as part of a broader strategy that includes regulatory and pricing reforms to achieve both leverage and also the intended impact. But overall, blended finance has proved an effective element of the development finance toolkit to crowd-in private 60 investment and will continue to be going forward. Blended finance investment solutions capitalize on partnerships among a multitude of development and private sector partners: international organizations, donor agencies, and private enterprise. For this multi-stakeholder partnership to have the desired leverage and development impact, public institutional expertise and emerging-market knowledge are essential to identify and structure projects that can demonstrate market and sector sustainability in the long run. The successful deployment of blended finance requires a well-crafted risk/return allocation for innovative investments and strong governance so that both leverage and the development objectives of IFC and its blended finance funders are ultimately met. 61 ACCESS TO CLIMATE CHANGE INFORMATION TO ENHANCE ADAPTATION GEF SECRETARIAT BACKGROUND Even in absence of further GHG emissions, current GHG in the atmosphere have set climate change in motion for decades to come, requiring urgent adaptation action, along with finance to support it. The UNEP Adaptation Gap Report (2016), confirms that the costs of adaptation in developing countries, previously estimated in the range between $70 billion and $100 billion a year globally by 2050, are likely to be a significant underestimate. At a minimum, the costs of adaptation are likely two-to three times higher by 2030, and potentially four-to-five times higher by 2050”. A growing body of evidence makes clear that information plays a critical role in enabling adaptation. The UNFCCC guidelines for developing National Adaptation Programs of Action (NAPAs) call for a synthesis of all existing climate change information, as well as specific climate change vulnerability assessments, to determine urgent and immediate adaptation needs. National adaptation plans are based on the assessments of vulnerabilities and climate impacts, and agencies and nongovernmental organizations (NGOs) working on the ground have piloted innovative approaches to information sharing, both in terms of provision to the communities and sourcing community-based observations. Given the importance of information to adaptation, there has been an effort to support national and regional infrastructure for climate services, which would serve as central clearinghouses and repositories of climate information, as well as sources of information products based on end-user needs4 (WRI 2012). BARRIERS TO GOOD INFORMATION USE Adaptation is subject to the constraints that are pervasive in development relating to information constraints, and integration of all relevant data, information, and knowledge. Although decisions are not made on the basis of information alone, it is an integral input for decision making. Whereas data are raw facts that are collected and represented without interpretation or relation to other things, information is created by integrating several sources and types of data. Therefore, the connections by which data are linked give rise to information. 4 http://www.wri.org/sites/default/files/pdf/climate_change_adaptation_lessons_south_asia.pdf 62 Information is created and used to address an issue or to provide input for a decision. Knowledge is the understanding that results from a combination of information and experience and underpins the ability to collect the appropriate information. Some of the barriers to information use include but are not limited to: Research and information production suffers from a failure to integrate different sources of information. In addition, most climate change data and analysis tend to remain in institutional or sectoral silos. As a result, analysis is often unable to address the complex relationship between multiple scales and issues. Many regions around the world face a lack of capacity and resources at the central and lower levels of government to integrate the different sources of information needed for adaptation. In particular, there are a limited number of trained individuals who are able to conduct the cross-disciplinary work required for adaptation. Many parts of the developing world remain data-poor, especially about many social and environmental processes, including climate. Data about the biophysical and socio-economic processes needed for decision making are often missing or non-existent. Data about climate change and its current impacts, as well as projections of future impacts, are often missing at the relevant scales where adaptation decisions need to be made. Processes for information creation are often top-down and supply driven, and most data gathering, analysis, and research work around adaptation is not driven by a thorough and coordinated analysis of user needs. Too little attention and few resources are spent on dissemination and sharing. GEF’S EXPERIENCE IN INVESTING IN ACCESS TO INFORMATION ON CLIMATE CHANGE AND IMPACTS The GEF supports country-driven projects and programs concerning various environmental issues, including supporting access to information on climate change. 5 The GEF’s adaptation portfolio spans $1.4 billion in investments, which are supporting some 148 projects in 130 countries. The vast majority of these projects are assured to generate some form of information that will support adaptation to climate change. More formally, 62 projects funded out of the Least Developed Countries Fund (LDCF), totaling $330 million, and 28 projects financed out of the Special Climate Change Fund (SCCF), in the total amount of $126 million are helping more than 60 countries strengthen their climate information services -- including 36 least developed countries (LDCs)6. GEF investments in this area span a wide range of types of access, information, and impacts. These include: End-user access to improved daily and seasonal forecasts as seen in Gambia. Better hazard monitoring for low-lying coastal areas and/or monitoring systems for dunes, beaches, mangroves and sea level rise (e.g. Mozambique) 5 More information on how a country can access GEF funding, including LDCF and SCCF, can be obtained by contacting the country’s GEF Focal Point. The list of Focal Points can be found at: https://www.thegef.org/gef/focal_points_list 6 Figures as of May 2016. 63 Integration of hydro-meteorological model (using meteorological data from automatic weather stations) with climate change risk assessments and socio-economic parameters in Rwanda. Climate-related disease surveillance system integrated with a comprehensive climate data and information management system (e.g. Samoa); Geospatial fire occurrence dataset development based on satellite data and GIS mapping (Central Province in Zambia) Locally-appropriate climate information systems for dissemination of up-to-date climate risk information to community leaders, extension staff and farmers / pastoralists, to change behavior by providing key groups with updated information, as in rural Ethiopia. Meteorological data for government planning and decision making (e.g. in Zambia this included training for government planners in interpreting the seasonal weather forecast in terms of time of planting, choosing the variety of seed to be planted, flood probability and probability of animal disease outbreaks.) Other innovations in early warning systems and related communication. China, as part of the global project developed software modules for a heat-related health risk early warning system using a mathematical model based on historical health and climate data. The software provides early district forecasts of heat related health risks and offers public health recommendations, including district-specific health communication products. Uzbekistan, part of the same global project, developed a ‘Meteorological Comfort Index’ based on 10-day meteorological forecasts; the index was then included in the early warning system. Comprehensive initiatives that address the full value chain of climate information services -- from the physical observation network to data collection, analysis, packaging, communication and application An example of the latter is the initiative on Climate Information for Resilient Development and Adaptation to Climate Change in Africa (CIRDA). The GEF, through the LDCF and in partnership with UNDP, is providing nearly $60 million to support 11 LDCs in Sub-Saharan Africa in their efforts to better collect, analyze and disseminate climate information. The program will apply climate information for early warning systems as well as decision-support for better development planning in vulnerable sectors. Climate-risk pricing entailing the development of risk models, risk maps, and platform providing the climate risk-based cost of insurance. LESSONS Climate information, capacity building and improved policy environments are crucial for supporting adaptation at scale. Specifically, they are the building blocks for mobilizing private finance for adaptation, but stronger partnerships are needed to unlock opportunities at scale. In South-East Europe, the GEF, through the SCCF, works directly with the insurance industry to support the development of an appropriate policy and regulatory framework, as well as improved climate information services, with a view to scaling up access to catastrophe insurance products. Several GEF projects provide direct awareness raising, training and other capacity development support to private companies in key, climate-sensitive sectors. The project Enhancing Resilience to Climate Change by Mainstreaming Adaption Concerns into Agricultural Sector Development in Liberia, for example, had provided training and knowledge sharing support to environmental officers of extractive companies such as BHP Billiton, Lee Group and Putu Company. The projects Increasing Climate Change Resilience of Maldives through Adaptation in the Tourism Sector and Enhancing the resilience of tourism-reliant communities to climate 64 change risks had invested considerably in providing information on climate change impacts to tourism operators with a view to promoting the broader adoption of climate-resilient practices, and informing the rehabilitation and construction of infrastructure assets, thus ensuring their economic sustainability. Public finance will continue to be needed to pilot new approaches, technologies and practices to address adaptation challenges in different regions and sectors, and this extends to generating information in support for adaptation to climate change. Public finance is essential to tackling the barriers to investment at scale. Lack of information to support decision-making for adaptation to climate change is a key barrier. Public finance is likely to be more effective when guided by the needs and opportunities provided by the civil society and private sector, and this extends to the provision of information for adaptation to climate change as well. CONCLUSION AND FUTURE DIRECTIONS Public finance is urgently needed to raise the awareness and build the capacities of governments, communities and businesses to identify, understand and effectively respond to climate change risks. GEF projects are currently helping over 80 countries develop information to support adaptation to climate change, including water, agriculture, tourism, health, and other climate-sensitive sectors, in partnership with ministries and other key institutions that need to provide regional, national or sub-national leadership in adaptation. However, despite progress in many countries, there is still a large unfinished agenda before this integration will be fully achieved. Ultimately, improved climate information, along with better institutional and technical capacities, should contribute towards the continuous and progressive integration of climate change risks and adaptation into policies, planning and decision-making processes at different levels. Domestic leadership is critical for achieving integration, but public finance from the GEF and others has helped inform this transition, and ensure that adequate institutional frameworks. The risk of delaying the development of information systems for adaptation to climate change is increasingly being perceived as too high to warrant waiting until more accurate and precise information becomes available. Moreover, since there are some types of uncertainty that are impossible to avoid, it makes sense to develop systems based on best-available information and building provisions and flexibility for imperfect knowledge. However, this is still not common practice with regards to current information collection and management systems and in decision-making processes. Meanwhile, adaptation practitioners are devising approaches to address impact to climate change even in information-poor contexts. Such developments should also be considered when assessing information needs and potential investments in order not to direct resources towards developing information and systems that may not be essential. 65 CAPACITY BUILDING TO SUPPORT CLIMATE FINANCE AND TECHNOLOGY GEF SECRETARIAT CAPACITY BUILDING IS CENTRAL TO GEF’S MANDATE Through the its investment activities, the GEF has provided resources7 to assist countries to enhance their capacity to address climate change issues, establish new policies and processes, and enhance reporting, and prepare deliverables linked to the UNFCCC reporting process. In the calendar year 2015 the GEF provided a minimum of US$189 million for capacity building activities8. Furthermore, the GEF has demonstrated that targeted investments to foster an enabling environment through capacity building can lead to successful investments that replicate and scale even after the GEF project is completed. For example: GEF/UNDP investments in South Africa, Uruguay, and dozens of other countries led to development of de-risking strategies, such as feed-in-tariffs, to promote wind and solar power. In both countries, GEF support helped government Ministries establish policies and regulatory frameworks that facilitated the rapid growth of sustainable energy sectors. The GEF/World Bank project China Utility-Based Energy Efficiency Finance Program has enabled commercial banks, utility companies, government agencies, and energy service companies which supply energy efficiency equipment and services to collaborate for the first time, in creating a sustainable financing model. This program successfully reduces greenhouse-gas emissions and promotes cleaner production through the implementation of energy efficiency and renewable energy projects, and enhanced the capacity of government institutions and the private sector. GEF and the World Bank supported policy development in Mexico that allowed the national power utility to provide on-bill financing for consumers to purchase more energy efficient air conditioners and refrigerators. The program is now global, with UNEP helping GEF and private sector partners such as Philips, Whirlpool, and ABB develop harmonized standards for efficient products which helps companies bring those products to market more rapidly. 7 GEF resources for capacity building and investment projects can be accessed by a country through GEF Agencies, with endorsement from the GEF Focal Point in that country. 8 This does not quantify all the capacity building in GEF investment projects, but refers to specific activities and components within projects 66 In Morocco GEF resources are being used to strengthen the capacity of public and private institutions to integrate climate change adaptation in projects directed to small farmers. The project is training key public and private organizations incorporating climate change concerns in the agricultural sector. In India, GEF investments have helped to create policies and regulations to allow investments in small and medium enterprises to flourish. GEF financed policy support and risk-sharing helps catalyze more private sector investment. In Ecuador through the project Adaptation to Climate Change through Effective Water Governance, GEF resources have been used to reduce vulnerability to climate change through the effective governance and management of water resources. This project played an important role in raising awareness of the adverse effects of climate change at different levels of decision-making, and contributed towards the development of the National Climate Change Strategy (2012-2025). GEF’s experience demonstrates that capacity building is not an end in itself, but helps foster new and improved policies, regulations, and institutional capabilities to accelerate and expand climate finance investments. NATIONAL ADAPTATION PROGRAMMES OF ACTION FOR LEAST DEVELOPED COUNTRIES National Adaptation Programmes of Action (NAPAs) for Least Developed Countries (LDCs) provide a process for the LDCs to identify priority activities that respond to their urgent and immediate needs with regard to adaptation to climate change - those needs for which further delay could increase vulnerability or lead to increased costs at a later stage. The UNFCCC has a work program for LDCs which includes the development of NAPAs that have been financed from the Least Developed Country Fund (LDCF). The LDCF is managed by the GEF. The NAPA documents contain project priorities which are then developed on detail project proposals or NAPA implementation proposal and then submitted to the GEF for further financing. So far the GEF has financed 51 NAPAs worth $12.20 million. In terms of NAPA implementation projects 49 countries have accessed 172 projects These projects are critical in assisting the LDCs countries to adapt to the adverse impacts of climate change and provide vital support to reduce the vulnerability of the LDCs to the changing climate. 67 Box 1 Malawi National Adaptation Programme of Action Malawi submitted its National Adaptation Programme of Action (NAPA) to the UNFCCC in March 2006. The NAPA for Malawi identified the following as proposed project concepts/ideas:, (a) Improving community resilience to climate change through the development of sustainable rural livelihoods; (b) Restoring forests in the Upper and Lower Shire Valleys catchments to reduce siltation and associated water flow problems; (c) Improving agricultural production under erratic rains and changing climatic conditions; (d) Improving Malawi’s preparedness to cope with droughts and floods, and (e) Improving climate monitoring to enhance Malawi’s early warning capability and decision making and sustainable utilization of Lake Malawi and lakeshore areas resources. Malawi has been able to mobilize US$26.95million from the GEF managed least developed country fund, to address these project priorities. The projects financed include: (i) Climate Adaptation for Rural Livelihoods and Agriculture (ii) Climate Proofing Local Development Gains in Rural and Urban Areas of Machinga and Mangochi District (iii) Strengthening Climate Information and Early Warning Systems in Malawi to Support Climate Resilient Development and Adaptation to Climate Change (iv) Implementing Urgent Adaptation Priorities Through Strengthened Decentralized and National Development Plans and (v) Building Climate Change Resilience in the Fisheries Sector in Malawi; NATIONAL COMMUNICATIONS AND BIENNIAL UPDATE REPORTS National Communications (NCs) and biennial update reports (BURs) are reporting requirements for developing countries to UNFCCC, which have to be completed every four years in the case of NCs and every two years in the case of BURs. The NCs and BURs provide information on greenhouse gas (GHG) inventories, initial measures to abate and mitigate greenhouse gases, identification of actions to facilitate adequate adaptation to climate change, measurement reporting and verification systems and any other information that the Party considers relevant to the achievement of the objective of the UNFCCC. Many countries use this process to identify project concepts and ideas to be submitted for further funding and the information which is contained in these NCs and BURs is often used as baseline data for projects. Since its inception the GEF has financed 417 NCs worth almost US$250 million, and 97 BURs worth US$42 million. In addition, the GEF has provided further support for global projects to provide additional capacity building to help countries with prepare their NCs and BURs. TECHNOLOGY NEEDS ASSESSMENTS The GEF has provided resources to countries to prepare technology needs assessments (TNAs). The TNA is the first step in understanding the needs for technology transfer in the country. It provides an opportunity to identify the need for new technology, equipment, knowledge and skills for mitigating greenhouse gas (GHGs) emissions and reducing vulnerability to climate change. In many developing countries there are many barriers such as, high costs of new technology, lack of access to finance, lack of awareness and access to technical information, inadequate or restrictive government policies and 68 regulations, lack of institutions to promote and deploy new technologies, and lack of skilled human resources can all hinder efforts to transfer technologies from one country to another. The TNA can assist in addressing some of these barriers, by building national capacities, institutionalizing the TNA process, integrating TNA results into planning processes, and facilitating national dialogue with policy makers and investors to lay the foundation for further investment. Many of the technology need assessment programs have been financed through the GEF financed Poznan Strategic Program on Technology Transfer which was established at UNFCCC 13th Conference of Parties. The Poznan Program has assisted developing countries adopt environmentally sound technologies. Once the TNAs are complete the GEF or any other institution can finance pilot projects, to realize the deployment, diffusion, and transfer of the technologies. The outputs of many of TNA have been used for national sectoral and development planning processes. In Ghana, the outputs of the TNA have been used for the development of a national climate change policy, while in Moldova, results of the TNA process have been used for a low emissions development strategy. Box 2: Priority project selection from TNA’s Financial resources are often allocated from international sources to support implementation of priority projects identified in TNA. The project Building Adaptive Capacity through the Scaling-up of Renewable Energy Technologies in Rural Cambodia, was identified in the technology needs assessment of Cambodia. The project is now being financed by the GEF. The objective of the project is to achieve a large-scale adoption of Renewable Energy Technologies (RET) in the rural development sector of Cambodia through testing high potential new RET, improving the rate of adoption of RET proven to work in Cambodia and establishing enabling conditions for scaling-up. The project amount is US$4.6million SUPPORT FOR NATIONAL APPROPRIATE MITIGATION ACTIONS (NAMAS) A nationally appropriate mitigation action refers to any action that reduces emissions in developing countries and is prepared under the umbrella of a national governmental initiative. In many instances the policies and initiatives can be directed at transformational change within an economic sector, or actions across sectors for a broader national focus. Overall, the GEF has supported more than a dozen countries to prepare NAMAs and catalyze investment. For example, in Peru the GEF has provided resources for a NAMA, which will establish national voluntary emission reduction targets in various sector and sub-sectors, as well enhance the capacity of private and public sector entities in the implementation of climate change mitigation programmes. INTENDED NATIONALLY DETERMINED CONTRIBUTIONS TO THE UNFCCC At UNFCCC COP 19 and 20 countries were invited to initiate or intensify domestic preparations for their Intended Nationally Determined Contributions (INDCS). These INDCS were a key part of the agreement in Paris. The INDCs for many countries provided information on possible greenhouse gas reductions which countries would make for 69 the Paris Agreement. In addition, many INDCs provided information on the resources required which would be needed in order to reach potential GHG emission reduction targets. These INDCs thus provided considerable baseline information on the future financing requirements for many developing countries, for the relevant technologies which would allow them to meet GHG targets. The GEF has provided resources to 46 countries to assist with the preparation of their INDCs, which will lead those countries to access additional finance in the future for climate change investments. The GEF can provide resources to assist countries with projects to implement activities that advance priorities identified in their respective INDCs. Box 3: Thailand intended nationally determined contribution (INDC) to the UNFCCC Thailand received GEF financing to prepare its INDC to the Paris Agreement. Thailand’s INDC identified that it intends to reduce its greenhouse gas emissions by 20 percent from the projected business-as-usual (BAU) level by 2030. Thailand’s INDC highlights the key progress that is being made in the energy sector through the Power Development Plan (PDP), the Alternative Energy Development Plan (AEDP) and the Energy Efficiency Plan (EEP). The PDP sets a target to achieve a 20% share of power generation from renewable sources in 2036. The AEDP aims to achieve a 30% share of renewable energy in the total final energy consumption in 2036. The EEP plans to reduce the country’s energy intensity by 30% below the 2010 level in 2036. The Environmentally Sustainable Transport System Plan also proposes ambitious actions to promote road-to-rail modal shift for both freight and passenger transport, which include extensions of mass rapid transit lines, construction of double-track railways and improvement of bus transit in the Bangkok Metro areas. CROSS CUTTING CAPACITY DEVELOPMENT Countries require appropriate foundational capacity to undertake the necessary actions to achieve sustainable development and overcome global environmental challenges. The capacities needed to meet global environmental objectives are closely linked to the capacities to undertake priority actions at the national level. Building countries' capacities for safeguarding the global environment has always been and must remain a key concern for the GEF. Cross-Cutting Capacity Development in the GEF context traditionally refers to the targeted support provided to countries to strengthen their capacities to meet their commitments under the Rio Conventions and other Multilateral Environment Agreements (MEAs). This type of capacity development is focusing on addressing systemic crosscutting national environmental management issues in GEF recipient countries, and it’s complementary to capacity development under individual Focal Area projects. The Cross-Cutting Capacity Development in the GEF allows countries to establish synergies between the Rio conventions and other MEAs and the consequent possibility to work across sectors of the economy. These projects bring together the national and local stakeholders, in particular the Ministries of Finance, Agriculture, Industry, Energy, Planning, Budget, as appropriate, so that the issues referring to the global environment are understood as an essential part of national interest and are incorporated into the regular process of decision 70 making. These projects also highlight further areas for development and investment, and thus provide the baseline information for future projects within the countries. . In GEF 6, a total of 34M USD was made available for Cross Cutting Capacity Development Projects and about 12M USD has been committed and projects continue to be received. THE PARIS AGREEMENT AND GEF SUPPORT FOR THE CAPACITY BUILDING INITIATIVE FOR TRANSPARENCY The Capacity Building Initiative for Transparency (CBIT) was established as part of the UNFCCC Paris Agreement. The CBIT will aim to strengthen the institutional and technical capacities of developing countries to meet the enhanced transparency requirements in the Paris Agreement. The CBIT covers the period leading up to 2020 and beyond. The GEF is in the final stages of development for this effort, working closely with donors, recipient countries, agencies and stakeholders to craft an initiative ready to launch in late 2016. CONCLUSION Through the its investment activities, the GEF has provided resources to assist countries to enhance their capacity to address climate change issues, establish new policies and processes, enhance reporting, and prepare deliverables linked to the UNFCCC reporting process. GEF’s experience demonstrates that capacity building is not an end in itself, but helps foster new and improved policies, regulations, and institutional capabilities to accelerate and expand climate finance investment. GEF investments help countries identify and create the right enabling environment to catalyze additional public and private sector climate finance. 71 INSTITUTIONAL ARRANGEMENTS: FOUR KEY ELEMENTS FOR NATIONAL BODIES TO SUPPORT EFFECTIVE FLOW OF FINANCE TO ACHIEVE CLIMATE CHANGE PRIORITIES UNITED NATIONS DEVELOPMENT PROGRAMME – UNDP BACKGROUND AND CONTEXT The ambitious shift toward zero-carbon and resilient sustainable development requires scaled-up and stable levels of finance from international, national, public and private sources. These sources must flow through an effective governance environment, including a network of strong institutions at the national and sub-national levels. Comprehensive climate sensitive interventions, rooted in well-coordinated national bodies, can ensure that development is sustainable, that ecosystems are protected, that communities are more resilient to disasters and that all sectors play their necessary role in delivering mitigation and adaptation actions. Strong institutions to channel climate finance are especially critical in the context of the Sustainable Development Goals (SDGs) and the Paris Agreement. Each country’s targets under the SDGs and their Nationally-Determined Contributions (NDCs) submitted under the Paris Agreement represent a new era of climate action. A variety of sources and channels are available to fund this work – the Green Climate Fund (GCF), Global Environment Facility (GEF) and multilateral and bilateral funds can be accessed through international actors and direct access. In UNDP’s decades of experience, countries can make the best use of new and existing opportunities for climate finance when strong, dynamic and responsive institutions ensure effective, equitable and efficient results. UNDP, in partnership with the GCF, GEF, Adaptation Fund, and other multilateral and bilateral partners, has delivered $2.3 billion in mitigation and adaptation projects in nearly 160 countries. The organization’s decades-long track record includes strategic assistance in catalyzing and leveraging climate investment into climate policies, technologies, practices and enterprises. This includes working at the national and subnational levels, as well as with vulnerable populations within countries, including women, girls, youth, indigenous people and remote communities. Based on UNDP’s experience, four key elements of a strong institutional system to address climate change have been identified: National capacities in place to plan for finance; Capacities to access different forms and types of finance at the national level; Capacities to deliver finance and implement/execute activities; 72 Capacities to monitor, report, and verify on financial expenditures and associated results/transformative impacts. It is important to note that, while these core elements are almost always present in some form at the national, sub-regional, or local levels, this does not translate into a one-size-fits-all model. Different configurations of these four components can exist within institutions, between institutions, or across national or sectoral systems. Different functions to achieve these elements – such as multi-stakeholder engagement, decision-making processes and partnerships – can be carried out through a variety of national systems and models, each of which is particular to its country context. THE FOUR KEY ELEMENTS IN DEPTH 1. CAPACITIES FOR FINANCIAL PLANNING Financial planning—that is, planning for the supply, management, and use of financial resources to fulfil a given aim—is a fundamental step in ensuring the effective, efficient, and equitable use of climate finance. Planning allows decision-makers to articulate their climate-related priorities and the financial resources required to meet them. Planning also includes assessments of climate finance flows, allowing policy-makers to match their priorities with potentially available resources. Building and strengthening national, sectoral, and local financial planning capacities ensures the integration of climate finance within national development and budgetary processes and so aligns climate and economic and social growth pathways. 2.1. ASSESS NEEDS, DEFINE PRIORITIES, AND IDENTIFY BARRIERS TO INVESTMENT Planning for climate actions at the national level must be based on overarching development priorities at the national level. This requires identification of national climate change actions based on robust climate change scenarios and emissions baselines, development plans, projections of impacts of actions, and a review of innovative solutions and practices available. On this basis, effective and appropriate actions and priorities can be articulated, including both new actions and actions that mainstream climate change within existing development spending. The capacities required at the national level to assess needs and define priorities are complex to build and the process for strengthening these capacities is iterative. This is particularly important given that climate finance flows are neither purely public nor purely private. This varied landscape requires specific national mechanisms for coordinating relevant government and civil society stakeholders around climate priorities, particularly ministries 73 of finance, as well as key economic and social actors, including international and domestic private sector stakeholders. The case of Tunisia Tunisia has developed The Tunisian Solar Plan (TSP) as its official long-term plan for renewable energy. The TSP sets out Tunisia’s ambition to harness its renewable energy resources in order to advance Tunisia’s sustainable development. It includes specific 2030 targets for investment in wind energy, solar photovoltaic and concentrated solar power, however, it will require immense financial support in order to make this ambition plan a reality. Through UNDP-GEF, as part of the project preparation activities, UNDP has performed a Derisking Renewable Energy Investment (DREI) modelling analysis on the possible government interventions to create an investment environment to meet the TSP’s 2030 targets. The results provide quantitative data on the cost effectiveness of these government measures and help assist in the selection of the government interventions which can be included in mitigation planning and action, thus making the environment more favorable to investment, both public and private. 2.2. IDENTIFY POLICY-MIX AND SOURCES OF FINANCING Against the backdrop of comprehensive climate strategies decision-makers must be able to identify the resource flows required for priority activities and plan the associated sequencing of such flows. To engage in this process requires an understanding of the financial baseline—that is, what existing resources are already being used for climate change activities. A periodic financial scan can be used to determine this baseline at the national level; there are a number of different tools to support this process. Two from UNDP include: An investment and financial flows assessment (I&FF) that creates a baseline of existing expenditures at the sectoral scale and maps this on to priority climate-related activities to identify gaps; A climate public expenditure and institutional review (CPEIR) that assesses current on-budget climate finance expenditures across sectors. Having identified existing financial flows, diverse capacities are needed to identify finance from different sources to fill remaining funding gaps. A central capacity in this process is matching supply to demand. Identifying sources for climate finance can be highly complex given the range of finance available each of which is appropriate for different activities in particular circumstances. For some countries the majority of climate finance flows through private channels, while in others significant volumes are channelled through national budgets. The case of the Dominican Republic – Planning in action The Dominican Republic used UNDP’s investment and financial flows (I&FF) methodology to assess the additional funds required to implement key mitigation and adaptation measures to address climate change in the energy, water and tourism sectors. The analysis allowed the government to quantify both the additional investment funds required, as well as needed shifts in investments, and needed regulatory levers. The I&FF methodology encouraged the engagement of both sectoral and climate change experts in the various sectors, as well as policy makers. This process strengthened links in the country between the Ministries of Environment, Tourism, Economic 74 Planning and Development, and the Central Bank and private sector through a collaborative approach that was maintained after the I&FF assessment was completed. An Inter-Sectoral Committee created to review the I&FF assessments continued to meet regularly after the I&FF assessment was completed and the results were also included in the country’s Intended Nationally Determined Contribution that was submitted to the UNFCCC in 2015. 2. CAPACITIES TO ACCESS CLIMATE FINANCE In the context of a myriad of sources of finance, it is increasingly important for countries to be able to directly access resources from different sources, and then blend and combine those resources at the national level in order to access a wider range of financial instruments. This includes formulating projects, programmes, and sector-wide approaches that attract and catalyse further public and private financing. Accessing finance requires a range of different institutional tools, mechanisms, and modalities; specific capacities are needed at the national level to put in place and operate such modalities. 3.1. DIRECTLY ACCESS FINANCE The variety of options for accessing climate finance has increased over recent years, particularly for public finance from multilateral sources within which the concept of “direct access” has emerged. Use of direct access modalities require national or sub-regional entities to undergo an accreditation assessment that requires strong fiduciary capacities, compliance with environmental and social safeguards, as well as capacities associated with the roles and functions of an implementing entity. While this modality has the potential to greatly increase country ownership over fund allocation and coherence in accessing both multilateral and bilateral resources in ways that are aligned with low-emission and climateresilient development strategies, access through this track will likely require more substantial financial management capacities, including legal arrangements for holding funds in trust, and governance systems to oversee allocation and report on the use of resources. Building and strengthening these capacities, including fiduciary systems, transparent multi-stakeholder allocation systems, and appropriate legal and reporting arrangements, will be critical to the effective use of resources under this modality. 3.2. BLEND AND COMBINE RESOURCES In addition to direct access, recipient countries express the need to blend and combine climate finance resources—a process that allows access to a wider range of types of financing at the national level. This can take two forms: either the bundling of different types of finance within a single project or programme (combine), or the use of one resource to restructure the terms of another, non-grant resource (blend). Both provide recipient countries the power to transform resources at national level and empower decision-makers to access to a wider range of financial instruments than might otherwise be available from international financial suppliers to meet their needs. Transferring the ability to combine and blend climate finance to the national level increases recipient country ownership over how finance is used and in what form. However, both blending and combining require specific financial mechanisms and capacities at the national level. 75 3.3. FORMULATE PROJECTS, PROGRAMMES, AND SECTOR-WIDE APPROACHES TO ACCESS FINANCE Accessing finance also requires recipient countries to be able to formulate “bankable” project and programme proposals—that is, projects that are sufficiently robust, have appropriate risk management mechanisms, and have a favourable internal rate of return and so are financeable—from local to sectorwide scales. Programme formulation can take various forms. For example, a policy tool such as a feed-in-tariff regime provides an enabling environment in which it becomes profitable for international debt and equity providers and/or local companies to invest in the installation and management of renewable energy technologies. Programme formulation at this scale is a complex task and requires institutions, to have the financial and engineering expertise to develop not only a policy and regulatory framework to run the programme but also strong financial systems to combine the right types of finance in the most catalytic way. Legal assistance and support to put in place and strengthen regulatory tools, such as price premiums, is required before private finance can begin to flow. However, once in place such systems catalyse significant volumes of private investments and so upfront public support can be reduced. 3. CAPACITIES TO DELIVER FINANCE Delivering finance—that is, the implementation and execution of activities at the regional, national, or local level— is a key component of ensuring that climate finance contributes to effective and transformative actions at the national level. Delivering resources requires national systems that provide financial oversight and management, as well as execution services such as procurement, contracting, or hiring. These systems must have a local supply of expertise from which to procure skills to undertake project activities. Furthermore, partnerships and coordination among entities are essential to ensure that project-level activities are in line with national development planning and strategies. 3.1. IMPLEMENTATION AND EXECUTION Implementation and execution services are core capacities required for climate finance to be delivered effectively. Implementing entities are responsible for identifying, overseeing and appraising programmes/projects for the provider of finance. Moreover, implementing entities would normally be expected to hold the resources released by the funding source (in the case of public resources). This role necessitates robust fiduciary capacities, including self-investigative powers, many of which are required to gain access to resources in the first place, especially in the case of direct access. While undertaking a different role, the executing entities receive funding to undertake programmes of work and may utilise sub-contracting arrangements to complete these activities. They require transparent procurement procedures and must be able to report regularly to implementing entities on progress. Critically, executing entities must have project management capacities. In addition, a specific set of capacities relates to domestic public finance that flows through the national budget. Simply adding greater quantity of climate change-tagged finance within national budgets does not by default 76 mean greater quality of spending on climate change. This is also the case for international finance that flows “onbudget” as direct budget support. Capacity is needed within the public financial management system to deliver resources to implementing partners, whether line ministries and government agencies or external contractors, and to ensure that resources are spent on effective and sustainable mitigation and adaptation measures. 3.2. LOCAL SUPPLY OF EXPERTISE AND SKILLS Both implementation and execution systems rely on a pool of local skills that can be contracted to undertake various elements of climate projects and programmes—from background analyses to installation and maintenance of technologies and project management skills. Capacity development is often needed to develop this endogenous talent pool and grow a green economy at the local scale. Examples of such activities include: Vocational training of professionals such as architects, engineers, contractors, builders, clean energy installers as well as sales personnel Individual guidance related to project design choices such as technology selection or choice of suppliers and contractors Leadership programmes 3.3. PROJECT COORDINATION AND DECISION MAKING SYSTEMS With multiple sources of finance, often in multiple forms, entering the national sphere both within and outside the national budget at both the macro but also micro level, coordination systems at the project level are essential. Such mechanisms should be linked with national zero carbon and resilient sustainable development strategies to ensure coherence between planning and implementation. Furthermore, coordination systems at the project level are important to ensure that implementing and executing entities are programming resources in ways that are gender sensitive and respect local rights. Such coordination and decision-making systems could be a multi-stakeholder steering committee, rather than a national level body; what is essential is that systems are in place to ensure marginalised groups are included within the delivery of climate finance. Support is essential for the development of these systems and often requires dedicated technical assistance resources to be built into project budgets. Notable examples of this are projects in the area of REDD+, which involve a large number of stakeholders at the project scale. 77 4. MONITORING, REPORTING, AND VERIFICATION CAPACITIES The final component is the capacity to monitor, report, and verify (MRV) financial flows, expenditures, and results. Within the context of the UNFCCC negotiations, transparency of financial flows and of results on the ground are treated as distinct issues. On one hand there are discussions about the MRV of financial flows; on the other there are discussion about the MRV of mitigation actions themselves, such as GHG reductions and development benefits. However, at the national level there are significant overlaps in the capacities required to MRV finance expenditures and results, especially when related to payment-for-results. Such systems require an explicit attribution of GHG reductions (“results”) in order to access financial flows (“payments”) and so necessitate integrated national reporting mechanisms. Thus a flexible approach is needed to building MRV systems while maintaining a consistent level of transparency and accuracy. 3.4. MRV SYSTEMS MRV systems are needed to understand what financial resources are flowing where, for what purpose and how effectively they abate GHG emissions and/or build resilience. Increasingly financial contributors require reporting of this nature; in addition, data is needed to ensure that at national, regional, and global levels actions are collectively adding up to what is required by climate science. Furthermore, monitoring national financial flows is an important part of the financial planning component; as data on financial flows is collected planning decisions on needs, sources, and channels can be altered creating a dynamic planning process that is resilient to a changing climate. Capacities to undertake this work include the ability to monitor financial expenditures on climate change activities that are both flowing within and outside the national budget, including carbon finance flows. In addition, verification systems are needed to calculate results and determine the impact of finance on the climate, poverty reduction, and national development priorities. National Communications to the UNFCCC have been used as a platform through which to communicate both financial flows and results of financed interventions. The preparation of these communications requires strong financial tracking systems. Such systems must not be limited to international public finance but also cover domestic expenditure and private investments. This requires a mix of tools and coordination systems. CONCLUSION All four elements – planning, accessing, delivering and measuring – of climate finance provide a framework for institutional strengthening in order for countries to achieve their climate and development objectives. A strong focus on building these capacities can lead to more effective and catalytic use of climate finance at the national level. With these capacities developing countries are better placed to overcome the key challenges and use it catalytically to generate transformations at the scale required to address climate change. 78