Phase 4: Funding Strategies and Mobilizing Resources

30 Jan - 19 Feb 2017
Go back to Nationally Determined Contributions (NDCs) and Implementation of the Paris Agreement
  • What progress has your country made in thinking through how the implementation of your NDC will be funded (e.g., from national public budgets, private investment, international funds)? Is your country developing a funding strategy to articulate how different components will/may be funded (including conditional components that require international support)?
  • How does your country intend to estimate costs of NDC implementation, identify potential funding sources (public, private, international), and mainstream costs in the future?
  • Has your country begun analyzing current public and private resources being spent on climate change, or future investment flows and financial needs related to NDCs? How can countries re-orient financial flows and planned investments toward greener activities in the context of achieving NDCs?
  • What will need to happen at the national level to mobilize resources for NDC implementation in a comprehensive way (e.g., coordination with national budgetary processes; engagement of national assemblies and private sector; creation of enabling environments for private investment; development of bankable proposals; etc.)?
  • What will be the role of other ministries or institutions in this process (e.g., the role of national assemblies or finance ministries in allocating funds, etc.)? What will be the role of federal governments in creating enabling environments for private investment in mitigation and adaptation actions?
  • What challenges does your country expect to face in the process of developing an NDC funding strategy and mobilizing resources for NDC implementation? Based on your country’s experiences to date, what recommendations would you offer other countries?
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Comments (21)

Susanne Olbrisch • Climate Policy Specialist, UNDP at UNDP from United States Moderator

Welcome to the fourth phase of the e-discussion on NDC implementation! This phase focuses on Funding Strategies and Resource Mobilization. We invite you over the next two weeks to share your experiences and thoughts on financial aspects of NDC implementation.

The idea of this e-discussion is to engage policy-makers, experts and practitioners worldwide in an exchange on lessons and takeaways. Already during the last three phases of this e-discussion valuable insights and first-hand experiences have been gathered, we are looking forward to exchange with you now on views and approaches on financial considerations of NDC implementation.

We thank you in advance for your participation and inputs.

Alexandra SOEZER • Climate Change Technical Advisor, UNDP at UNDP from United States Moderator

Dear Raouf,

Many thanks for your contribution to the e-discussion and for pointing out how important the enabling environment for private sector engagement in NDC implementation is. I believe it would be interesting for the audience to hear from you more you about the mechanisms you are currently trying to set-up to incentivize private sector investment in NDC actions.

Best regards,

Alexandra

Susanne Olbrisch • Climate Policy Specialist, UNDP at UNDP from United States Moderator

Dear Raouf - Thank you very much for your open insights on the situation in Jordan. It is encouraging to hear that Lebanon is taking active steps towards a Green Growth Strategy and Action Plan.

As many countries are now in the process at looking at ways to determine required finance to implement their NDCs and to mobilize resources, are there any first takeaways from Lebanon in this regard? Looking forward to hearing from you.

Sidney Clouston

We are working from the USA and within Nigeria for the regional expression of improved Sustainable Development Goals (SDG). We focus on Energy and Water developments, as we do see these as being key to enable the other SDG.  One issue involves the Public - Private Partnership vehicle.  We face a schism between the offtakers at the grid of the electrical power generated and the investors of the power generation sites.  This involves the Power Purchase Agreement (PPA).  Certain activity is requested by the goverenment ministry prior to a signed PPA and the PPA is requested prior to the funding action.  A classical Catch 22.

Perhaps a Escrow function by the Paris Agreement parties can be established and boh parties are reviewed prior to a final deal is inked.  This is similar to the process of buying Real Estate with the Escrow Company organizing the required documentation and funding method.

Biafra (not verified)

That is very interesting although need extra revision

Biafra (not verified)

We unanimously could implement preferable project, we tend to be lever at unanimity

Emelia Holdaway (not verified)

 Ricardo and CDKN have developed a ‘Quick-Start Guide to NDC implementation’ (online here http://www.cdkn.org/ndc-guide/, and attached below) to help countries identify the steps to implement their NDCs. The Quick Start Guide includes a detailed reference manual, with a specific module on financing NDCs. The finance module is based on our experience supporting countries to access climate finance, setting out ten activities that countries may wish to follow:

1) Review current climate finance landscape

2) Establish institutional arrangements for the oversight and coordination of climate finance activities

3) Compile an overall costing for the NDC

4) Identify funding gaps and needs

5) Assess public and private financing options (including the potential for further domestic fiscal support, the eligibility of NDC implementation actions against bilateral and multilateral funding sources, and assessing options for private sector investment)

6) Develop a country climate investment plan which sets out the programme of investments required to implement the NDC and a strategy for meeting those financing needs

7) Secure direct access to international climate funds for national and subnational institutions

8) Develop a project pipeline and financing propositions that can be put forward to different financing sources

9) Increase private sector engagement and overcome barriers to investment

10) Design and implement a climate finance MRV system, including tracking and reporting climate-related spending across all relevant finance flows.

 

We’ve been working with a number of countries over the past year to implement the above and develop the financing component of their NDC implementation plans, including identifying financing options for both the conditional and unconditional components of their NDCs. While the overall goal is to finance NDC implementation, we’re finding this process can also support efforts to mainstream climate change into planning- especially where there is engagement with sectoral Ministries to support them to access climate finance for their priority NDC actions.

Susanne Olbrisch • Climate Policy Specialist, UNDP at UNDP from United States Moderator

Dear Emelia,

Thanks for your timely contribution and the link to the useful guidance document shared! The steps outlined above are certainly key going forward. Additional experience from our work with countries would be that when reviewing the current climate finance landscape and then making a gap analysis for additional finance needs, this assumes that current finance is actually already being spent in the most efficient and best allocated way. - So one exercise countries also profited from in the financial assessment process was to really question the status quo – in terms of subsidies, taxes, grants etc. -, considering a more efficient and better allocation of existent (climate) finance to actually decrease the actual gap of additional finance required.

Kyoko Tochikawa

I believe there is now unanimous agreement with Raouf's view:

"Private investment in to NDC can only be achieved if the government can play a leading role in setting up the necessary mechanism needed to incentivize the financial flow for private investment. This is our challenge at the moment."

 

This view is consistent with Alexandra comment about the importance of the "enabling environment for private sector engagement in NDC implementation". The difficulty is how.

 

Our Low Emission Capacity Building (LECB) experience indicates that the creation of the enabling environment is often helped by the clear identification as to which of the following cases apply to the contemplated NDC action, each of which requires a different type of government support (with or without international assistance).

 

Case 1: No costing or revenue projection information is available

Funding will firstly be needed for a feasibility study or at least a pre-feasibility study that allows meaningful financial discussion to be held.

 

Case 2: The costing and revenue projection reveal that the NDC action is economically unattractive to the private sector

Public sector support is needed to enhance the economic appeal of the NDC action - e.g. an adequate feed-in-tariff system for renewable energy projects, interest payment subsidies, results-based grants tied to GHG reduction achieved, etc..

 

Case 3: While the costing and revenue projection show the NDC action is not unappealing in terms of profitability, no private sector funding is available for other reasons (e.g. risk associated with unproven technology in the country)

The creation of the enabling environment needs to entail measures specifically aimed at the identified barrier. 

Raouf Dabbas (not verified)

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Alexandra SOEZER • Climate Change Technical Advisor, UNDP at UNDP from United States Moderator

Dear Raouf and dear Kyoko,

Many thanks for your inspring comments, which are certainly interesting for many practitioners.

UNDP is engaging with countries on a variety of initiatives with the aim to stronger engage private sector and to mobilize additional climate finance.

Among these activities are e.g.: a systematic tracking of private sector climate finance, which allows governments to get a better view on the leverage effects of different policies. To help countries mobilize climate finance countries are carrying out assessments of finance required to address climate change/implement NDCs, which can serve also as pre-investment studies.

Further, UNDP is exploring options to set-up a partnership with a crowdfunding platform to increase access to finance especially for SMEs. Co-benefits of projects will be assessed, quantified and monitored by UNDP to increase interest of socially responsible investor that look for impacts and social returns beyond financial returns. We hope that this initiative with help to accelerate private sector engagement in NDC implementation.

I would be interested to hear from you, if you both think that the CDM that compensated investors in high risk countries for taking the risk through the offtake of CERs, was a multiplier that increased investment of private sector in low carbon technologies? Could a new, global Results Based Financing Fund (that pays for tCO2 reduced and additional SD impacts of a project) substitute for a market mechanisms until a market will/might be in place again and lead to quick results?

Thanks again for engagement in this discussion!

Best,

Alexandra

Junji Hatano

Dear Alexandra

Thank you for your immediate response to the comment sent by my colleague, Kyoko Tochikawa.

In relation to your question in the last paragraph of your remark, I would like to say that in my view, it will be extremely helpful to have “a new, global Results Based Financing Fund (that pays for tCO2 reduced and additional SD impacts of a project)“. The value of such Fund is attributable not only to the current absence of working market mechanisms or to greatly depressed ER prices at the moment.

The type of fund you outlined is sorely needed in view of the decidedly greater caution now manifested by developing country governments about market mechanisms, as they have fully grasped the implications of Paris Agreement Article 6 – 5 (*) that explicitly prohibits host countries from including in their NDC achievement those emission reductions which have been internationally transferred.

This will not be an issue with the Fund you described, on the assumption that it will consist of results-based grants, without involving “internationally transferred mitigation outcomes”. The Fund will enhance the profitability of a great many NDC activities and, in so doing, will contribute to creating an enabling environment for private sector participation.

This said, it will be important to point out that the Fund will not be relevant to all NDC activities. As a results-based financing mechanism, it will require an activity to be carried out first, on the basis of the funding its implementer can raise. Using the terms in Kyoko’s comment, the Fund will help address the Case 2 problem (unattractive profitability for private sector participation), but will have only a limited effect in alleviating the Case 3 problem (unavailability of funding for initial investment for reasons other than low profitability). NDC activities with the Case 3 problem will entail different types of measures.

Junji

(*) Emission reductions resulting from the mechanism referred to in paragraph 4 of this Article shall not be used to demonstrate achievement of the host Party’s nationally determined contribution if used by another Party to demonstrate achievement of its nationally determined contribution.     

Alexandra SOEZER • Climate Change Technical Advisor, UNDP at UNDP from United States Moderator

Dear Junji,

Many thanks for your encouraging feedback.

The idea is indeed to not transfer the emission reduction outcomes under collaborative approaches to the country that provids support unless the fund would increase the emission reduction outcomes beyond conditional and unconditional targets expressed in a country's NDC.

It's also true that a RBF mechanism would not help all type of project developers to implement zero carbon technologies. A potential solution to this issue could be a fund manager such as an innovative 'crowdfunding' platform that partners with a variety of socially responsible investors and angel investors to provide financing for project developers in need for financing or an innovative green start-up.

By highlighting high impact projects, we received feedback from different stakeholders that socially responsible investors might be keen to see quantified and monitored sustainable development impacts in addition to financial returns. Tools that help to indentify, quantify and monitor such impacts could increase access to finance from such investors. UNDP is currently working on a 'Climate Action Impact Tool' that shall help project developers to identify, quantify and monitor impacts of NDC actions.

Best,

Alexandra

Sebastian Wienges

From my experience with the GIZ in supporting countries to develop the capacities as well as the plans to implement ambitious climate policies and actions, and my experience in the World Bank what can successfully trigger investments in sustainable development, I fully agree with Raouf: There is no need for more studies etc., we need to get started with implementation. The pieces of the puzzle now need to fall in places. And the three factors for a sustainable transformation are ‘stimulating finance’, ‘incentive legislation’, and a ‘willing investor’ – innovation, context and agents of transformational change.

In order to raise and combine finance from different sources and blend and channel them toward the implementation of the sectoral NDC commitments and the achievement of the NDC targets, pipelines of investable proposals are needed for financial institutions and investors. The GIZ has developed a NAMA Financing Training which helps guide governments through the process of developing an investment plan. This process includes a barrier analysis, the selection of appropriate financing instruments, identification of potential financing sources, the mobilization of the private sector, and the detailed design of the investment plan. Part of this training is a balance sheet for climate actions which is supposed to guide the compilation of a bankable proposal (see attached).

When the IFC analyzed the Climate Investment Opportunities in the implementation of NDCs they looked particularly in the costing-out of technology investments, including CAPEX per technology, geographically specific data for technology, regulations on and market prices of technology-specific products and services, current use of technologies in local markets, commercial potentials in local markets, consumption data, consumers' data on production patterns, fuel prices, emission reduction potentials etc. A bottom-up costing-out of NDC sectoral policies and actions is essential for the development of an investment plan.

In order to up-scale business solutions, the enabling environment is, indeed, pivotal. UNDP published an excellent overview of public incentive instruments: Catalysing Climate Finance. Additionally, good practice case studies can help countries to replicate successful public interventions of peer countries to mobilize the private sector, including companies and households. And benchmarking and exchange among peers can help to disseminate good practice.

Experience shows that what comforts investors most is if other investors have already subscribed to a large investment. No investor wants to be the first or taking the largest share of the risk, but no investor wants to miss a trend or new market either. It is a chicken game. So, there needs to be a lead investor who moves first and who attracts other investors who will follow. Thereby, a model can be developed how investments in climate actions can be launched. In order to do that and to partner with a lead investor for financing NDC implementation, countries should partner with public and multilateral development banks. The NDC Partnership is actually the platform where all these agents – climate ministries, finance ministries, multilateral development banks – are coming together to create a narrative how NDCs can successfully be implemented.

Alexandra SOEZER • Climate Change Technical Advisor, UNDP at UNDP from United States Moderator

Dear Sebastian,

Many thanks for your contribution to Phase 4 of the e-discussion. It's encouraging to see that there is broad agreement among different stakeholders that it's now time to start implementation of NDCs.

UNDP has looked at barriers and associated risk which can hold back private sector investment in grid-connected renewable energy and developed a methodology to de-risk private sector investments and assist policymakers to cost-effectively promote investment in the renewable energy sector. A new off-grid methodology is currently tested in pilots.

In addition to the public policy and finanical measures that will be necessary to improve the enabling investment environment and to avoid delays until these de-risking instruments are successfully implemented, a global incentive scheme for the private sector through financial incentives direced directly at private sector could bridge the gap and accelerate actions.

UNDP is currently exploring several ways to increase access to finance for private sector and at the same time to promote high impact projects that support several other SDGs in addition to SDG 13.

Best,

Alexandra

 

Raouf Dabbas (not verified)

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Alexandra SOEZER • Climate Change Technical Advisor, UNDP at UNDP from United States Moderator

Dear Raouf,

Many thanks for your response - I couldn't agree more. The CDM was unfortunately, especially for unsophisticated project proponents too expensive as it required specialized consultants that were able to navigate through the pitfalls and demonstrate alignment with the many rules and regulations that the mechanism required. In the meantime, many CDM methodologies have been simplified and standardized baselines have made the calculation and the monitoring of emission reductions easier. For example in the Philippines, UNDP supported the development of a Standardized Baseline in the rice sector which only required one monitoring parameter. We are currently also working on a revision of a methodology in the waste sector. My personal opinion is that a certain quality standard for calculating and monitoring emission reductions will be needed to ensure transparency of accounting of emission reductions under the NDCs.

Challenges in accessing climate finance are often also related to cumbersome application and approval processes. I personally believe that any new RBF mechanism, designed with the goal to kick-start implmentation, would have to be simple enough for a technical person, experienced with the proposed project type, to complete a transparent but focused eligibility criteria template and avoid expensive project proposals for which international experts are needed which again would exclude many capable people with limited funds.

Best,

Alexandra

Glenn Hodes (not verified)

Susanne and Alexandra:

Greetings from Bangkok Regional Hub.

As a development-focused organization, UNDP's support to NDCs might well focus on how the Paris Agreement and its accompanying constituent NDC targets could work to enable or hinder the achievement of the SDGs, including SDG #13. Since financing climate action is integral to financing the SDGs overall, an integrated approach and financing frameworks will be required. This requires political leadership, sound enabling environments, and new architectures for the tracking and MRV of results and resources. In this respect, NDCs can be viewed as a key vehicle for building all of these important elements.

More fundamentally, there generally exists a large disconnect between climate policy and NDC targets and realistic, sustained levels of finance. In most countries, demand for climate finance will always vastly exceed supply. Therefore, unless more transparent, integrated frameworks are designed, climate finance will exist in a parallel universe, with a risk of low accountability and impact. By better leveraging national planning and budgeting processes and systems to align to NDC goals and actions, specific financing strategies and budgetary resource envelopes can be used to address this critical "implementation gap".

UNDP has developed and piloted several climate financing and budget management tools and strategic frameworks over the last few years. These include: a Climate Change Financing Framework; Climate Budget Tagging; Climate Public Expenditure and Institutional Reviews (CPEIRs); Climate Change Benefits Approach (CCBA) Guideline for Screening and Appraisal of Public Investments; and a Climate Change Budget Integration Index.

Taken together, these can support countries to both implement and finance their NDCs—especially those actions and targets that are unconditional on additional external finance. 

A growing number of countries like Cambodia, Bangladesh, Indonesia, Nepal, and Pakistan are starting to erect such Climate Change Financing Frameworks. These have the potential to serve as a pillar of UNDP's support for taking forward sustainable, country-led and owned NDCs in at least three key ways:

  • by developing strategic financing frameworks and building the confidence of external actors to better manage and track climate finance, so as to mobilize more resources from all sources;
  • by enhancing planning and budget decision-making to ensure existing resources are spent more rationally based on climate risk and cost-effectiveness factors as well as the evidence of impact and effectiveness;
  • by targeting the benefits from climate finance to reach the poorest and most vulnerable and in a more integrated way to reach national SDG targets.

Moreover, while government leadership and public resources are essential, CCFFs recognize that these must be backed up by the engagement and support from the private sector, civil society, and other accountability actors, including Parliaments and the media. That is why the reforms to public economic and financial management that CCFFs address also serve to identify entry points to leverage public finance and catalyze households and the private sector to scale up climate-friendly investments.

Additional detail on these tools follows:

A CCFF outlines a reforms road map to enhance macro-fiscal planning and budget management by systematically integrating climate change into PFM systems and improving inter-ministerial coordination mechanisms. It has several different elements and serves different functions that, taken together, support decision-makers to strengthen the capacity of country systems to deliver climate finance in more effective, equitable, and accountable ways.  Currently about 47% of developing countries have both unconditional and conditional targets according to a recent Germanwatch brief. And around 20 countries have also aready committed their intention to finance NDC actions from the national budget. The CCFF can thus evidently provide a supportive foundation for NDC finance, particularly for domestic financial sources.

A CPEIR gathers evidence on the scope and allocation of climate change related expenditures in domestic public budgets. Building from an analysis of existing policy, institutions and budget data, the CPEIRs formulate recommendations on how to strengthen the budget process to better monitor climate change expenditures. CPEIRs have now been undertaken with UNDP support in more than 15 countries. A number of countries have included CPEIR data as an input to their INDCs, Biennual Update Reports (BURs), National Climate Change Communications and climate finance proposals to the GCF and other vertical funds under the UNFCCC.

Climate budget coding or tagging and systematic expenditure tracking systems have also been put in place across public and private flows of finance for climate change. This is a critical step to linking results of climate finance to actual funding flows. Many countries have proceeded with this work after having first completed a CPEIR. For example, linked to the CCFF, Cambodia was the first developing country in the world to autonomously produce a climate public expenditure report. This is particularly relevant to supporting and strengthening systems to respond to the eventual transparency framework of the Paris Agreement and climate finance MRV frameworks. In the medium to long-long run, budget system reforms enabled by budget coding/tagging is the cheapest and most effective option. Integration into PFM systems also incentivizes climate change to be a key criterion in the allocation of public investment and encourages efforts to climate-proof critical infrastructure to avert future losses and damages and to extract full value for money.

The Climate Change Budget Integration Index (CCBII) is a diagnostic tool countries can use to support climate budgeting and related governance. Created by UNDP in 2015, it measures the extent to which, and how well countries are integrating the issue in their PFM systems. It is an easy-to-use tool whose results are particularly useful for identifying strengths and weaknesses and designing responses to address gaps. Many components are assessed along different dimensions: policies, systems, accountability, and development partner adoption. Nepal and Pakistan have implemented the index over a couple of years.

The Climate Change Benefits Approach is a tool that Ministries of Finance, line ministries and budget officials can use to guide the screening and investment appraisal of public investments and routine programme delivery. It was piloted in Thailand and used to frame budget proposals in the annual process—including the design of a mega-project on flood protection that will serve to safeguard millions of people who live along the Chao Phraya river basin. The CCBA tool enhances traditional cost-benefit analyses and demonstrates how wiser spending today can cushion against the effects of climate-related disasters tomorrow. It also demonstrates a potential flow-chart for how line ministries can effectively filter and prioritize projects and programmes appropriate for more in-depth climate risk screening and appraisal. 

Additional resources including a country database of CPEIRs can be found on the website: www.CFADE.org

With appreciation for the opportunity to contribute to the online discussion,

Glenn Hodes on behalf of the Governance of Climate Change Finance team