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Financing to address climate change
Veerle Vandeweerd
United Nations Development Programme
26 May 2008
Outline of the presentation
1. The challenge of addressing climate change: brief review of
2.
3.
4.
some of the findings of the HDR 2007;
Ongoing UNDP GEF and CDM projects; UNAFF
BAU is not an option;
The need for a new development paradigm.
1 1
The challenge of addressing climate
change.
The challenge of addressing climate change
- The world has less than a decade to avoid dangerous
climate change that could bring unprecedented human
development reversals.
- Climate change is a threat to humanity as a whole. But it
is the poor, a constituency with no responsibility for the
ecological debt we are running up, who face the most
immediate and most severe human costs.
- The Human Development Report 2007/2008 calls for a
‘twin track’ approach that combines stringent mitigation to
limit 21st Century warming to less than 2 degree
centigrade, with strengthened international cooperation on
adaptation.
3 3
The challenge of addressing climate change
Four distinctive characteristics:
• It is cumulative
• The effects are irreversible
• Large time lags – today’s emissions are tomorrow’s problems
• It is global
The sustainable emissions pathway is as follows
• The world – cuts of 50 percent by 2050 with a peak by 2020
• Developed countries – cuts of 80 percent by 2050
• Developing countries – cuts of 20 percent by 2050
with respect to 1990
4 4
Examples
The UK (population 60 million) emits more CO2 than Egypt,
Nigeria, Pakistan and Vietnam (total population 472 million)
The state of Texas (population 23 million) has a deeper
footprint than the whole sub-Saharan Africa (720 million
people)
The 19 million people living in New York have a deeper
footprint than the 766 million people living in the 50 least
developed countries
The distribution of current emissions points to an inverse
relationship between climate change vulnerability and
responsibility
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Impact on the poor
If every person living in the developing world would have
the same carbon footprint than an average person in the
US or Canada, we would need the equivalent to nine
planets to absorb the CO2
• 1 in 19 people are affected in developing countries
• The corresponding number is 1 in 1,500 in OECD
countries
Climate related risks force people into downward spirals of
disadvantage that undermine future opportunities.
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Development tipping points
5 Human development tipping points:
 Reduced agricultural productivity
 Heightened water insecurity
 Increased exposure to extreme weather events
 Collapse of ecosystems
 Increased health risks
Inaction on climate change will have serious development
implications and will affect mostly the poorest.
7 7
Impacts
- Glacial melting posses threats to more than 40 percent of
the world’s population.
- In the arid cost of Peru, 80 percent of fresh water
originates from glacial melt.
-The flow of the Indus, could decline as much as 70
percent.
- Possible consequences of one meter rise in sea level
- In Lower Egypt, 6 million people displaced and 4,500 kms2 of
farmland flooded
– In Vietnam, 22 million people displaced
– In Bangladesh, 18 percent of land area could be inundated affecting
11 percent of the population
– In the Maldives, more than 80 percent of land area is less than 1
meter above sea level
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Ongoing UNDP GEF and CDM
projects.
UNDP’s Environment & Energy Group:
Project Portfolio to date
General Environmental Projects
• > 1000 medium to large scale projects
• 6,000 small-scale projects
• Fund mobilization of nearly $1bn/year
1.0
0.8
Climate Change Projects
• Cumulative fund mobilization of
$2.1bn
• Project technologies include
Renewables, Conservation &
Efficiency, Transport and Low GHG
Technologies
Europe & CIS
$200m
$ bn
0.6
Africa
$331m
0.4
0.2
Arab States
$268m
0.0
2003
2004
2005
Global
$129m
Asia & Pacific
$853m
Latin America & Caribbean
$386m
2006
Fund Mobilization
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Mitigation
Mission
To develop and transform markets for energy & mobility
in developing countries & economies-in- transition so
that, over the long term, they will grow & operate
efficiently toward a less carbon-intensive path
Approach
 Removal of barriers to energy efficiency & energy



conservation
Removal of barriers to renewable energy (on & off-grid)
Promotion of environmentally sustainable transport
Integrated adaptation and mitigation
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Geographical imbalance in the CDM
Location of CDM Projects
• 4 countries (China, India,
Brazil and South Korea)
account for 70% of CDM
projects and 80% of CERs
through to 2012
• Sub-Saharan Africa accounts
for 2% of registered projects
and 5% of CERs through to
2012
• 88 non-Annex 1 countries
have yet to benefit from any
registered CDM project
activity – including 47
countries that possess DNAs
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Objective of UNDP’s Carbon Strategy
MDG Impact of
Carbon Projects
Objective for
UNDP’s Carbon
Strategy
Current
CDM
Market
Geographical & Sectoral Diversity
of Carbon Projects
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Carbon Finance: Mission
Mission: To access and leverage carbon finance for
sustainable development and contribute to the MDGs
Improve access to carbon finance to a broader range of
developing countries and project types through creating
effective carbon markets in low income countries
Maximize the carbon development dividend through promoting
a carbon portfolio that strikes a balance between cost-effective
projects and high development impact projects
Develop capacity of programme countries to combine/sequence
different funding sources to achieve specific national targets
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Three-pronged approach for promoting access to carbon finance
Step 1:
Step 2:
Step 3:
Remove barriers to
direct investments in
climate-friends
technologies
Establish efficient hostcountry procedures for
CDM & JI review and
approval
Provide project
management
services to
individual project
developers
• Establishment of
• policy dialogue with
efficient host-country
procedures for review
and approval
regulatory authorities on
complementary instruments
• training for staff and
decision-makers
• knowledge
management
• South-South
cooperation
• Public awareness
raising
• identify priority sectors, key
stakeholders & prospective
projects
Develop projects via
the MDG Carbon
Facility
• extended baseline analysis
• analysis of key barriers for
targeted sectors
• initial stakeholder
consultation
• sector-specific strategies
• industry-specific workshops
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Adaptation Fund
• Innovative governance and financing source (not dependent on voluntary
contributions)
• Being operationalized in 2008 – challenge to put a system in place on
how to « use the funds »
• The Adaptation Fund could receive USD 80-300 million per year for the
period 2008–2012.
• Assuming a share of proceeds for adaptation of 2 per cent continues to
apply post 2012, the level of funding could be:
• USD 100–500 million per year for a low demand;
• USD 1–5 billion per year for a high demand.
• Continuation depends on CDM continuation and future demand
• Open to other sources of funds
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BAU is not an option.
The good news
• Financing is one of the building blocks of the Bali Road Map;
need for innovative approaches that can be negotiated and put
in place by 2009.
• Negotiations regarding financing have evolved to a broad range
of issues including the need to develop a financial regime that
addresses climate change, economic growth and sustainable
development.
• Governments want to be in the “driving seat”, while
acknowledging strong need for input from other players, such
as the private sector.
• Developing countries have stressed strongly the importance of
the effectiveness of new mechanisms to address their
development needs.
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A main challenge
•
Large amounts of money needed; different estimates from 3% to 0.3% of
global GDP (or 20% by 2050).
•
Considerable I&F flows will be needed to address climate change:
 Mitigation measures needed to return global GHG emissions to
current levels in 2030, require additional I&F flows between USD
200-210 billion in 2030 and a shift of about USD 158 billion to cleaner
technologies.
 Adaptation additional I&F flows needed for in 2030 amount to several
tens of billions of USD.
 ODA (2006): 100 billion.
 The longer we will wait the more it will cost.
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Sources of investment and financial flows: Mitigation
• Most of the investments in mitigation measures are domestic
and relate to technologies
• Important to focus on the role of private-sector investments as
they constitute the largest share of global investment flows
(86%)
• ODA is important in Africa, the LDCs and countries and sectors
relying strongly on public financing
• Potential of the financial mechanism of the Convention is limited
if it continues to rely on current levels and voluntary contributions
= USD 990 million for the period 2006-2010
• Carbon market is already playing an important role in shifting
investment flows but has limitations.
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2020
Sources of investment and financial flows: Adaptation
• Private sources of funding can be expected to cover a portion
of the adaptation costs in several sectors. In particular in the
AFF and Infrastructure sector where investment in privately
own physical assets would be needed.
• However, public resources are expected to play a predominant
role in all adaptation sectors and in particular in the coastal
zone and water sector.
• Measures will be needed to encourage/support private sector
adaptation and additional sources of funding dedicated to
adaptation will be needed.
• Adaptation = good development policy
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The need for a new development
paradigm.
Main challenges
•
Development patterns need to be changed now, because investment
decisions taken today will affect greenhouse gas emissions of the future.
•
To promote increased resilience to climate change impacts and a lowerGHG emission economy fall across a variety of sectors, such as energy,
agriculture, health, water resources, infrastructure, etc.
•
Creating climate change safe future will require:
 Shifts in investment patterns,
 Scaling up funding,
 Optimizing the allocation of existing funds.
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Action needed at different levels
• National policies can play key role in driving many of the needed shifts
and increases.
• Currently available sources could cover a substantial part of the additional
investment and financial flows needed. However, additional external
funding will be needed particularly for sectors in developing countries that
depend on government I&F flows.
• Optimal combination of mechanisms, such as the carbon markets, the
financial mechanism of the Convention, ODA, national polices and new
sources of finance is needed.
• The entities that make the investment decisions are different in each
sector, and the policy and/or financial incentives needed will vary.
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A focus on developing countries needs
•
Most importantly priorities should be identified by developing countries
themselves in accordance to their specific national conditions and needs.
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Options under discussion
• How to scale up and best allocate ODA and what is the potential for the
Convention Funds under the financial mechanism, given their small
share?
• What is the possible role of, and what are the possible incentives to,
promote national and international policies and regulations that can
stimulate shifts in investment and finance?
• What are the possible innovative mechanisms to leverage additional
funding and how should these new mechanisms be governed and used?
• How can we use new and additional resources to redirect investments
towards carbon neutrality and development benefits?
• Need to consider investments and finance to address climate change as
linked to overall investment and finance for development.
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Convention Funds and ODA
• Limited share of global I&F flows – but important role
• Important processes to keep in mind:
 The Review of Financial Mechanism
 The fifth replenishment of the GEF
 New funds and initiatives being developed and initiated in IFIs and
MDBs – how to link them to UNFCCC and development?
 Various ongoing discussions about “integrating Climate Change in
development cooperation”
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Carbon Markets – CDM: The potential
• CDM already shows a significant potential to leverage domestic and
international investments
• The supply of Kyoto units could be abundant compared to the level of
compliance demand for the period 2008–2012
• Under a low estimate of compliance demand by Annex I Parties in 2030
(market of USD 5–25 billion per year), the current flow of CDM projects
would provide sufficient supply
• Under a high estimate of compliance demand (market of USD 100
billion per year), a large fraction of the potential emission reductions,
from all existing and new categories of projects/mechanisms would be
needed to for the supply
• Policy certainty is important for investors. A longer-term international
agreement on climate change broadens the range of mitigation
measures that are attractive investments
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Carbon Markets – CDM: the challenge
• Innovative governance and financing
• Countries and sector risks are "structural" problems that need to be
addressed through complementary development assistance and
appropriate national policies (enabling environment for investments)
• Some activities may, even with a high carbon price, need additional
incentives
• The experience with the ongoing CDM shows that risks are being taken
in a large part by domestic capital
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Carbon Markets - CDM
• Expansion of carbon markets demand depends on negotiations on
targets
• Many proposals for expansion of supply in carbon markets and CDM:
 CO2 capture and storage,
 Tradable credits for Deforestation in developing countries (REDD);
 Tradable credits for sustainable development policies and measures (SDPAMs);
 Sectoral CDM;
 Policy CDM
 Other options for REDD, SD-PAMs and sectoral targets propose financial
or other incentives, rather than tradable credits.
Proposals need discussion and analysis of feasibility
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Innovative means for finance
• Application of a levy similar to the 2 per cent share of proceeds from the
CDM to international transfers of ERUs, AAUs and RMUs. (issues for
consideration under KP Art 9 review).
• Auction of allowances for international aviation and marine emissions
(issues linked to negotiations under “bunker fuels” and to other forums
(such as ICAO and IMO)).
• “Carbon taxes” applied nationally and maybe globally: proposal put
forward by Switzerland.
• International air travel levy: similar to programme by France of 5 per cent
on first and business class tickets to raise funds for fighting HIV/Aids and
other pandemics.
• Funds to invest foreign exchange reserves: Voluntary allocation of up to 5
per cent of foreign exchange reserves to a fund
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Sources/ measures
Potential application and expansion
Mitigation
Convention
Financial Mechanism
- GEF trust fund
- SCCF
- LDCF
Bilateral funding (4.3)
Insurance
Kyoto
Protocol
Emissions trading
CDM
JI
Adaptation Fund
New sources?
Policies
“Outside”
Convention
Development funding / ODA
Foreign direct investments
Domestic private investments
Domestic public investments
Trade
Etc.
Adaptation
LULUCF
Technology
Etc.
Development and climate change
• Addressing climate change brings the need for a new development
paradigm.
• The need to financing for nationally appropriate climate change
mitigation and adaptation actions should be viewed as an essential part
of the global fight against poverty and for achieving development goals.
• Grappling with the diversity of international funding sources and
investment opportunities poses a heavy burden on developing countries
that are seeking to enhance national development through international
financing.
• The different eligibility rules and procedures could lead to stand-alone
investments, not integrated into the overall development frameworks
and national efforts to achieve the MDGs.
• The UN is (or should be) ideally positioned to assist developing
countries to access, integrate and sequence this international financing
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and find innovative solutions.
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Climate change: a challenge but also an opportunity
 Climate change is not only an environmental issue but
mainly a development issue;
 Given the magnitude of investments needed and the many
players and sectors involved, if we take a rational approach,
we can use the climate change challenge to redirect
development towards sustainability;
 The choice is ours!
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