Presentation on theme: "Financing Climate Resilient Development A World Bank Perspective"— Presentation transcript:
1 Financing Climate Resilient Development A World Bank Perspective Marjory-Anne BromheadThe World Bank
2 Some Guiding Principles from African Leaders Implement climate change programs to achieve sustainable developmentFood security and poverty alleviation are overridingRicher countries have financial obligations to help others achieve resilient growth
3 World Bank Strategy for Climate Resilient Development in Sub-Saharan Africa Adaptation and disaster risk reduction are an integrated agendaClimate variability creates annual losses of 1-2% of GDP, increasing floods and droughts, adaptation could cost 5-10% of GDPThere are mitigation and adaptation synergiesBetter land, water & forest management are key to adaptation but deforestation and land degradation are 65% of Africa‘s CO2 emissionsMitigation presents opportunities but increasing energy access is key:Only 8% of hydro potential realized , ample solar, cleaner coal is part of the solution, wood fuels and biomass are keyKnowledge, capacity building & new technologies are keyImproved climate knowledge, analysis &strategy risk insurance, new technologiesfor energy, agriculture ..Scaled up finance is necessaryUrgent action is necessary
4 Development Reduces Vulnerability Diversified economies, strong institutions, sound land and water management and urban planning, as well as educated, healthy people reduce country vulnerabilityFor e.g. rich Slovenia is more exposed but less vulnerable than Albania; Richer Botswana is more exposed but less vulnerable than Ethiopia…Relative change in length of growing period (LGP) by 2050 compared to present Source: Thornton et al. (2006)
5 World Bank & Climate Finance: Guiding Principles Primacy of UNFCCC process in design of climate finance modelsSupports governance reform to increase developing countries voiceOur role: help developing countries access and lend development/private sector finance and new climate finance for sustainable development with adaptation and mitigation benefitsOur collaboration is through country-led programs
6 Sources of FinanceIDA 15 was scaled up in part to help address climate changeDisbursements in agriculture, water supply, flood management & health were 17% higher 2008 thanNew instruments complement development & private sector finance
7 Climate-Resilient Development with IDA/IBRD Agricultural development policy loan in Ghana (2008) supports integration of climate risk/adaptation into development agendaHimachal Pradesh DPL in N. India supports renewable energy & adaptation strategies for glacier meltCredit to improve transmission of energy from Inga in DRC is ongoing (more than US$ 200 m)Support to sustainable land management, irrigation, safety net/improved watershed management in Ethiopia (over US$ 300 m)Arid lands, flood management & natural resource management programs in KenyaDrought risk insurance in Malawi
8 Financing: New Instruments WB/MDB Supported InstrumentsClimate investment funds (CIFs)Carbon FundsGas-flaring Reduction InitiativeGlobal Fund for Disaster Risk Reduction (GFDRR)OthersAdaptation Fund (2% tax on CDM & voluntary contributions)Bi-laterals donorsUN agencies (e.g., UNDP $90M Africa adaptation Program)African-Union/AfDB/EU (ClimDev Africa)Norwegian Funding for Avoided Deforestation
9 Climate FundsOverall aim: to pilot new financing instruments and help prepare countries to take advantage of post 2012 financial architecture, country-driven, cooperation between MDBs and development partners, learning is key
10 Pilot Program under preparation Climate FundsScaling-up Renewable Energy Program for Low-Income Countries (SREP) Target: $250MillionMitigationPilot Program under preparationThe BioCarbon Fund: A public/private initiative mobilized to demonstrate projects that sequester or conserve carbon in forest and agro-ecosystems. Aims to deliver cost-effective emission reductions, while promoting biodiversity conservation and poverty alleviation. The portfolio includes Afforestation and Reforestation, Reducing Emissions from Deforestation and Degradation and is exploring innovative approaches to Agricultural Carbon.
11 Mobilizing, Delivering and Leveraging Climate Finance CDM & carbon offset markets, sector creditingCarbon taxesAuctioning ofemission rightsEmission cap and tradeGeneral taxes and other taxes, special funds“Baseline”Private and public investmentCatalytic climate financePossible sourcesMedian: $400 billionCurrent (2009) funding ~ $10 billionMitigation (2030) $billionAdaptation (2030) $30-90Median: $75 billionA huge gap: estimated needs vs. current resourcesMitigation~ US$9+bln p.a.Adaptation~ US$1+bln p.a.What is climate finance? This is a catalyst to re-orient a much larger volume of public and private development investments to climate-friendlier options by:Facilitating enabling policies, regulatory frameworks, institutions and markets in support of adaptation and mitigationCatalyzing transformational private and public investments and development programslow-carbon technologies (renewable energies, energy efficiency in industry, water use, transport, buildings...)terrestrial carbon (agriculture and forestry)climate resilience (change practices and factor-in climate vulnerability in infrastructure planning, in agriculture...)Supporting research, development and deployment of new technologiesFollowing preliminary and incomplete estimates, additional needs for low-carbon investments in developing countries could reach (median) $400 billion per annum by 2030 (range $140 billion to $675 billion a year) and $75 billion per annum by 2030 (range: $30 billion to $90 billion a year).Investment expected to be mostly of private origin.Those are estimates of upfront incremental capital needs and not abatement costs (the additional costs of a low-carbon project over its lifetime). While the economics of some low-carbon investment looks compelling (typically fuel saving, local health benefits, etc…), the upfront investment may still act as a barrier to climate action.Main reasons for differences in estimatesMitigation: ambition of targets, nature of policies to curb down GHG emissions (degree of participation, mechanisms), role of sectoral potentials (EE + forestry and land-use, included or not) and scope for technology.Adaptation: magnitude of climate change severity of its impacts (huge variation on CC scenario and regional picture) + mostly estimates for climate-proofing future investments – which tend to overlook other forms of adaptation (changes in behaviors, adjustments in operational practices or relocations of economic activity). The Economics of Adaptation to CC considers these other adaptation options (see presentation on Sept 30 th).Current dedicated resources in developing countries cover less than 5% of the future needs.- GEF (long the only instrument to address climate change, mostly through grant);- CDM (a market mechanism, potentially the largest channel to catalyze low-carbon investment),- Clean Technology Fund (CTF) under the Climate Investment Funds (CIF) (the most recently established highly concessional resources)[Over the past few years, DAC donors have allocated between US$3-4 billion for climate-change-related aid or about 3-4% of total ODA.]Support for adaptation (mostly from bi- and multi-lateral donors), though growing, is really lagging behind.The first two funds under the UNFCCC, administered by the GEF Secretariat, are the Least Developed Country Fund (LDCF) and Special Climate Change Fund (SCCF). The Adaptation Fund, whose funding mainly comes from a 2% share of proceeds on CERs issued to CDM projects, has been agreed at COP13 in Bali and is a new and additional source of funding that can eventually bring US$ bln p.a. but it is not yet operationalized. The Pilot Program for Climate Resilience is the first program under the Strategic Climate Fund of the CIF that will support strengthening climate resilience in core development and planning processes of select low income countries.Huge challenge in mobilizing adequate resourcesFragmentation (and diversity) of existing resources may quickly increase transaction costs for any applicant project or program.US$ 4,620 bln p.a. (2008)
12 World Bank Carbon Funds & Facilities Total funds pledged = US$ 2.1 billion (16 governments, 67 firms)Prototype Carbon Fund. $180 million (closed). Multi-shareholder. Multi-purpose.Netherlands Clean Development Mechanism Facility. (closed). Netherlands Ministry of Environment. CDM energy, infrastructure and industry projects.Community Development Carbon Fund. $128.6 million (closed). Multi-shareholder. Small- scale CDM energy projects.BioCarbon Fund. $91.9 million (Tranche 1 and 2 closed). Multi-shareholder. Mainly CDM LULUCF projects; some REDD and soil carbon.Italian Carbon Fund. $155.6 million (closed). Multi-shareholder (from Italy only). Multipurpose.Netherlands European Carbon Facility. (closed). Netherlands Ministry of Economic affairs. JI projects.Spanish Carbon Fund. $282.4 million (closed). Multi-shareholder (from Spain only). Multipurpose.Danish Carbon Fund. $69.4 million (closed). Multi-shareholder (from Denmark only). Multipurpose.Umbrella Carbon Facility. $737.6 million (Tranche 1 closed – 2 HFC-23 destruction projects in China).Carbon Fund for Europe. $65 million. Multi-shareholder. Multi-purpose. Managed with EIB.
13 Clean Technology FundAim is to help high emitting countries transform to lower carbon growth: US$ 5 billion raised so farPrograms of about US$ 0.5 billion each approved for Turkey, Egypt, Mexico & under preparation for Nigeria and South AfricaPart of broad-based energy transformation programsFocus on energy efficiency, renewables, transport shifts, urban planning
14 Pilot Program for Climate Resilience Aim is to help vulnerable countries mainstream climate resilience into development planning: US$ 0.5 billion raised9 countries & 2 sub-regions selected by independent panelNiger, Zambia and Mozambique; each country to get US$ 40 to US$ 70 million, with preparation grants of US$ 1-2 million depending on readiness.Likely to focus initially on key priority sectors (e.g. agriculture, coastal/urban flooding, watershed management, capacity building)Programs still under early preparation (early lessons learnt session in late October)
15 Forest Investment Program Aim is to catalyze practical measures and funding for Reduction of Deforestation and forest Degradation (REDD), and promote sustainable forest managementUS$ 260 million raised so farCountry selection process has not yet started: will include range of forest systems & biomes and willingness to participate in REDDOperational in 2010
16 Scaling up Renewable Energy The aim is to pilot new approaches to renewable energy in low income countriesFund-raising and design still ongoing
17 Forest Carbon Partnership Facility Aim is to build capacity and prepare countries to access large-scale REDD post 2012: US$ 107 million raised so far (UNDP and bank have complementary programs)Countries prepare readiness plan idea notes thenReadiness plans with grants of US$ 1-3 million (ethiopia, kenya, uganda, cameroon, gabon, Congo, DRC, CAR, Ghana, Madagascar, Liberia)
18 Carbon Partnership Facility Aim is to support strategic programs that move to low carbon investmentsTarget US$ 350 millionNo African countries yet!
20 Blending of Climate Financing Instruments Necessary YearCash Floww(-)(+)Grant FundsCFCTFCF: Carbon Finance; CTF: Clean Technology FundGrant funds forinitial breakthroughExisting financing instruments need to be deployed and packaged at scale to successfully support scaling up mitigation action and technology development and dissemination. The instruments are designed in such a way that they are best suited to assisting with different stages of the commercialization process. For example the GEF could be used to pilot a new technology (grant subsidy for a public good), with the Clean Technology Fund supporting in subsequent stages to have broader demonstration of the technology (concessional investment finance) backed by carbon finance payments (cash-flow payment for climate service).Synergies between climate financial instruments can be exploited through simultaneous or sequential programming.Requires forethought and understanding.Improves both efficiency and impact of financing.Efficient and effective use of innovative financing instruments requires:A strategy for bundling and processing of financial flows from different sources;Consideration of, and funding for, public co-benefits;Integration of innovative financing instruments (e.g. climate finance) with development planning, policy making and financing for sustainable development;Cash flowsThese three mitigation financing tools provide support of a slightly different nature to different stages of market development and transformation. If used together, they can bring the adoption of the new technology nearer to the present and possibly increasing its penetration. The three climate-change financing instruments can also be used to make a single project more cost-effective, and accelerate the growth of these markets in which they take place. Given the relatively high costs of the investment and the up-front risks associated with e.g. developing a geothermal resource, such a project would have greater costs and possibly smaller revenues. This chart represents the cash flow of this re-designed low carbon development project. The expensive geothermal project can be made both more profitable and more effective, through structuring of the project financing around the three mitigation financing instruments.In the case of a geothermal project, GEF grant resources can be utilized to facilitate policy changes to make geothermal investments more attractive and to cover the heavy expenses associated with the up-front risks of resource confirmation. CTF funds can help defray the high capital costs of geothermal development, which may be preventing such projects from being more attractive than conventional fossil-fuel generation plants. Additional revenues through carbon finance provided to the project implementers once the emissions reductions are certified serve as an extra cash flow, making an investment project more profitable than it would have been otherwise. However, these funds are not available until the investment is in operation and therefore serve as a performance incentive to the project implementers.for example, the Bank is working on a carbon finance operation in India to stimulate the accelerated replacement of chillers (through the CDM's programmes of activities). That project is designed - and made feasible - by combining GEF funding, the Multilateral Fund of the Montreal Protocol and carbon finance. Each mechanism brings a critical support to the financial structure of the programme.
21 Blending of Financial Sources and Policy Instruments Necessary Lighting switchPolicies and Regulations;Incentives for Barrier RemovalTechnical Assistance;Capacity DevelopmentCarbon financeSupport for R&DPrivate investmentsPublic financingIndustry: EE in cementPower generation from landfill gasGrassland managementDevelopment FinancingReforestationEnabling environment is crucial both generally and for individual programs/projects.It is analytically elegant to portray one instrument or financial vehicle for one project, but it is important to recognize that reality is more complex. More and more, we focus on building synergies between different instruments to reach financial closure and make project and program ideas a reality - and this is true for different technologies: from efficient lighting programs to wind farms.Current initiatives targeting REDD illustrates how a mix of instruments is required to steer a transformation of behaviors and investment decisions: a combination of upfront finance (concessional and innovative finance -- notably through FIP) and performance-based incentives (FCPF) are needed to promote policy reforms, build capacity, and undertake investment programs. The example also highlights the crucial role of public finance as a catalyst for climate action.The Senegal Rural Energy Efficient Lighting program combines an IBRD loan for rural electrification with carbon finance for demand-side energy efficiency. Both go hand in hand.It is important to recognize the opportunities for building synergies between different financial instruments. “Blending” is critical to leveraging maximum mitigation potential.WindSolarProject/program needs to be financially solid to be able to deliver real, measurable and long-term benefits related to the mitigation of climate change
22 Mainstreaming Climate Resilience into CAS Ongoing process: Ethiopia, Malawi, beginning in Senegal, Nigeria, Cameroon, Kenya, Namibia …Climate resilient development and long term sustainable development are one and the same!