55329 D E V E L O P M E N T · C L I M A T E · A N D F I N A N C E Beyond the Sum of Its Parts Combining Financial Instruments for Impact and Efficiency June 2010 SUPPORTING LOW-CARBON DEVELOPMENT FROM ISSUES BRIEF #3 MULTIPLE SOURCES The Global Environment Facility (GEF), Although the current level of dedicated funding available carbon finance, and the Clean Technology to support climate change mitigation continues to grow, its Fund (CTF) constitute the bulk of dedicated current level of about $8 billion per year covers only a fraction of developing countries' needs, which are esti- funding for low-carbon development. To mated at $140­175 billion per year by 2030.1 At present, achieve the largest possible impact, practi- there are three primary dedicated sources of financing for tioners must learn to combine these low-carbon development: the Clean Development resources in the same project or program Mechanism (CDM) and the carbon market, catalyzing in order to both reduce transaction costs low-carbon investment through revenue enhancement; the and maximize synergies. This Issues Brief Clean Technology Fund (CTF), providing highly conces- sional investment capital; and the Global Environment considers six projects that are using Facility (GEF), serving as the largest provider of grants to resources from one or all of these sources address climate change for the past 20 years (see Table 1). in combination with development finance to These three instruments remain the largest and most advance low-carbon development. It lays commonly utilized sources of mitigation financing for out a conceptual basis for how GEF, developing countries even though other initiatives--some carbon finance, and CTF resources can be of which utilize new avenues and channels for funding-- have recently emerged. This Issues Brief examines the fit together to make a wider range of miti- World Bank Group's (WBG) ability to combine resources gation projects financially and economically from these three established financial instruments; to attractive. maximize the value of that blending; and to overcome the 1 All amounts in U.S. dollars unless indicated otherwise. 2 obstacles to successful blending. Its message is that despite The instruments listed in Table 1--the GEF, the CTF, and an increasingly fragmented climate financing landscape, the Carbon Partnership Facility (CPF)--are designed to development institutions can help client countries make pay only the partial, incremental, or additional costs of use of all available resources to craft an efficient and effec- low-carbon activities. World Bank financing--making use tive response to the challenges posed by low-carbon of International Bank for Reconstruction and development. Development (IBRD) or International Development Association (IDA) resources--must be combined with domestic public or private resources to provide the under- lying development finance essential to make these instru- Wh y C OMB INE RE S OURCE S ? T hE ments effective in helping countries meet their low-carbon RATIO N AL E FOR B L E NDING development goals. Over the past decade, the fraction of the Bank's energy portfolio devoted to renewable energy Small sums of money allocated across a large number of and energy efficiency has risen from less than 10 percent projects may achieve limited impacts, but they are also to more than 30 percent, worth more than $3.1 billion in likely to result in gross inefficiencies. The efficient combi- 2009. This increase has mirrored both leverage from the nation of resources can maximize both leverage from GEF, providing over $1.7 billion to low-carbon projects public and private sources and impact on low-carbon from inception to the present, and from carbon finance, development. Combined financing can not only exploit providing over $400 million to low-carbon projects from the synergies among different financial instruments--each 2001 to 2009. This trend also reflects the increasing aware- addressing a slightly different set of needs, risks, or barri- ness of climate change as a factor shaping world ers--but also reduce transaction costs. development. TABLE 1 ThREE MAJOR FINANCING INSTRUMENTS TO SUPPORT LOW-CARBON GROWTh Attribute GEF CTF CPF Objective To transform the market development To provide scaled-up financing to To target long-term emission reduc- paths of eligible countries into trajec- contribute to demonstration, tions; scale up low-carbon interven- tories with lower greenhouse gas deployment, and transfer of low- tions; and support strategic, (GhG) emissions in the energy, carbon technologies with a signifi- transformational interventions in key industry, transport, and land-use sec- cant potential for long-term GhG sectors tors emission savings Overall approach Removing barriers for sustainable Scaling up low-carbon develop- Increasing the scope and scale of ver- market development and growth ment through support to invest- ifiable GhG offsets and generation of through pilots and demonstration; ments in 17 countries on a pilot carbon revenues by reducing GhG includes reduction of risks and sup- basis emissions through output-based port to innovation approach Determination of funding Initial resource allocation through Financing gap necessary to make Payment made upon certification of requirements resource allocation framework; incre- project viable emission reductions at pre-negotiated mental costs of each project, includ- or prevailing market rates ing costs of barrier removal Financial tools Grants and limited non-grant instru- Loans and risk mitigation instru- Emission reduction purchase agree- ments ments at concessional (IDA) rates; ments, typically with payment on limited grants available delivery; pricing based on market prices for emission reductions Scale of financing $350 million per year over four years $4.4 billion over 4 years (2009­ CDM primary transactions in 2009 of GEF 5 (2010­14); cumulatively, 12), or $1.1 billion per year totaled $2.7 billion; cumulatively, $26 $2.7 billion since inception billion since 2002 Typical project size From $5 million to $50 million GEF Between $50­ 200 million conces- CPF aims to scale up the size of the grant allocation per project, linked to sional loan, linked to larger client transactions significantly, typically at larger Bank project (average size = project utilizing Bank loan resourc- least 1 million emission reductions $8 million) es Leverage on underlying 1: 6.3 1: 8.3 Up to 1: 9, depending on sector finance 3 As the largest GEF partner on climate change, the WBG has had extensive experience in blending GEF resources BOx 1 WhAT IS SyNERGy? with its regular instruments to steer the transformation of larger projects toward more climate-friendly outcomes. Resources from the GEF, the CTF, and the CPF can be This experience now helps inform programming by new used in a complementary way in the same country, the funds like CTF, as well as shape new approaches linking same program, and even the same project to improve the carbon finance more closely to development finance. financial and economic attractiveness of low-carbon devel- Given the relative scarcity of both development and opment activities. But using them in a complementary fash- ion is easier than using them to create synergies. climate finance and the multitude of urgent needs in Complementarity requires only that the resources not be developing countries, innovation must provide the basis for used in a manner contradictory to, duplicative of, or incon- more effective utilization of the limited resources available. sistent with one other; synergy requires that the resources interact in such a way that the whole becomes greater than Because of initial uncertainty regarding the legitimacy of the sum of the parts. Synergy refers to the creation of a combining carbon finance resources with GEF, only larger process or a change in scope and/or scale resulting in recently have resources from these two financing instru- further gains in low-carbon development beyond those ments been mixed in the same project or program. By the whose costs were directly paid for by project resources. In time the CTF was established, participants realized that other words, demonstrating complementarity requires that combining resources from these different funds could 2 + 2 not be less than 4; demonstrating synergy requires increase both impact and efficiency as all financing instru- that 2 + 2 exceeds 4. ments were seeking to reduce GHG concentrations in the atmosphere, consistent with the goals of the United Nations Framework Convention on Climate Change. These unique niches must be kept in mind when combin- Therefore, the CTF and the other programs under the ing resources into a project or program. On the one hand, Climate Investment Funds (CIF) have welcomed the combining the resources can increase overall program opportunity to blend or mix resources with GEF and effectiveness. On the other, rather than blending together carbon finance in the same project or program. So long as the resources in the sense of co-mingling, the projects may the funds from each source are used in a manner consistent have to be designed as co-financing operations. with the terms of that financial instrument, they can be woven together into projects and programs, so the impact is greater than might be expected solely on individual The GEF was established to provide piloting and support contributions. The GEF, the CTF, and carbon finance for innovation; it is risk-prone with respect to new tech- naturally complement one another. If carefully crafted, nologies. GEF support is most appropriately used early in projects that combine these sources can create synergies, the market transformation process. CTF was established increasing their impact beyond what might be expected to take low-carbon technologies to scale by providing simply on the basis of adding together the resources being concessional financing to countries' low-carbon develop- used (see Box 1). ment projects. The CTF is designed to help innovation saturate the market quickly, bringing the market to matu- rity sooner. The CPF or carbon finance revenues provide an added payment for the carbon assets produced through a low-carbon development project (in the form of emission ThE ROLES OF DIFFERENT reductions). It improves the profitability of investments FINANCIAL INSTRUMENTS that are hovering on the border of viability. When used together, these three sources of funding can help accelerate A low-carbon development path frequently requires addi- the pace and increase the penetration of climate-friendly tional financial support to become financially and econom- technologies in the market. Table 2 summarizes how these ically attractive. Climate financing instruments help to instruments can be used to meet needs in low-carbon make these mitigation activities feasible by improving their development. economic and financial attractiveness. Each dedicated financial instrument serves a unique role in the stimulation In the context of a single project, the different financial of demand for low-carbon technologies and practices. instruments will each play a slightly different role in 4 later years. The later years can then be TABLE 2 RESOURCES AND INSTRUMENTS TO discounted back to cover the initial, up-front OVERCOME BARRIERS TO LOW-CARBON costs with money left over, resulting in a DEVELOPMENT positive net present value. This profile is Barriers Resources and instruments presented in its simplest form in Figure 1. Low awareness, capacity, and In this case, it would represent a baseline, experience with low-carbon opportu- Building an appropriate enabling environ- conventional energy project. nities and with access to climate ment finance resources and instruments Misaligned, weak, or absent regu- · GEF Figure 2 illustrates the profile of a baseline lation and incentives, such as the · Trust funds, such as the Energy Sector absence of an adequate, long-term, Management Assistance Program project that has been redesigned to be a low- (ESMAP) and predictable price for carbon; sub- · Bilateral donor funds carbon project, such as is the case when a sidies that create adverse incentives; or the lack of a regulatory framework · Development policy operations fossil-fuel-based generation project is for renewable energy expansion replaced by a renewable energy project. The Chronic lack of long-term funding, Providing investment finance and leverag- cost structure of the project will change with such as the high cost of capital or ing further resources low liquidity in domestic financial higher up-front costs (reflecting the capital- markets · GEF intensive nature of renewable energy) and a · CTF · Carbon finance (revenue enhancement) different benefit structure. When the · IBRD or IDA resources from the climate finance instru- ments are brought to bear, GEF resources High (perceived) risks, such as Providing guarantees or risk coverage are provided as a grant at the beginning of strategic, country, commodity price, technology, or operation risk · GEF (risks associated with operation and the project and are considered a benefit to financing of new technologies) the project. In conceptual terms, they are · CTF (partial risk guarantees focus on tech- nological uptake) considered a reflection of the willingness of · Multilateral Investment Guarantee Agency the rest of the world to pay for global envi- (country risk) · WBG guarantees and structured finance ronmental benefits. The CTF covers some of the financing costs improving a project's profitability. Figure 1 presents the that show up in the bottom half of the cash-flow profile for a typical baseline development proj- graphs as a cost. They are concessional loan resources, but ect. The negative cash flows in the first years of the project because of their more favorable financing characteristics, are compensated by the higher positive cash flows in the they reduce the debt burden of costs associated with the FIGURE 1 CASh-FLOW PROFILE FOR A BASELINE DEVELOPMENT PROJECT (+) C a s h F l Year o w (-) 5 FIGURE 2 CASh-FLOW PROFILE FOR A LOW-CARBON DEVELOPMENT PROJECT USING CLIMATE FINANCE INSTRUMENTS (+) CPF C GEF a s h F l Year o w CTF (-) project. In fact, they can be co-mingled with IBRD or upward pressure to shift the curve forward in time. The IDA resources to reduce the overall financing costs of the goal of combining these resources is to create synergistic project. During project implementation, the revenue pressure that results not only in increasing the pace of provided by carbon finance--CPF in this instance--serves adoption of the new technology or practice, but also in as an additional benefit or performance reward to the proj- bending or shifting the curve to a higher level at an earlier ect. The carbon offsets are sold to the market and provide point in time. This bending or shifting of the curve is part an additional revenue stream to the project, improving its of the process of market transformation--taking the overall financial and economic rate of return. market to a new, higher equilibrium level than it would have been in the absence of the support from the climate Combining resources from the climate finance instruments finance instruments. can thus make otherwise unattractive low-carbon projects attractive. Moving up from the individual project level to the market level, the effect is somewhat different. As low- carbon development projects typically represent a new FIGURE 3 USING CLIMATE FINANCE technology, it is possible to use an adoption of innovation RESOURCES TO TRANSFORM A curve to discuss the likely impacts. Figure 3 begins with a MARKET dotted learning curve representing the adoption of the low-carbon innovation in a particular market. Normally, ADOPTION OF INNOVATION that curve will pass through an early-entry phase where the Market take-off -- Phase II technology is used only by early adopters. From there, it CPF Percent saturation moves to a market takeoff phase where it begins to reach its full potential, which it finally reaches in the market CTF saturation or maturity phase. GEF Bringing support from the GEF, the CTF, and the CPF to Time such a market will have the effect of pushing the curve from the bottom. The extra resources from these instru- Early-entry -- Phase I Market saturation or maturity -- Phase III ments combine both to accelerate the movement up the technology curve in each instance, but also to exert an 6 MATChING INSTRUMENTS TO demonstrating the strategic value of climate finance in leveraging, directing, and shaping the much larger value of NEEDS -- CASE STUDIES development finance into support for low-carbon develop- ment. As CTF is relatively new and there are only a hand- Table 3 presents the basic information about six projects ful of cases of GEF and carbon finance being combined, that have utilized more than one of these financial instru- there is a limited set of project case studies to demonstrate ments to support low-carbon growth. The financing for the possibilities of combining resources from the different the projects is broken into two categories: (1) funds climate financing instruments. Of these six projects, the provided from dedicated climate financing instruments, three that are listed in bold face are discussed in more and (2) funds that can be considered development financ- detail below.2 ing. For each project, the percentage of the total financing that comes from climate finance is calculated in compari- son to that provided from development finance. As a frac- tion of the total, climate finance ranges from as little as 4 2 The other three projects are also discussed in: World Bank. 2010. Beyond the Sum of Its Parts: Combining Financial Instruments to Support Low percent to as much as 24 percent of the total, Carbon Development. Washington, DC: World Bank. TABLE 3 CLIMATE ChANGE MITIGATION FINANCING CASE STUDIES Project Status Sector Dedicated climate finance used Development finance used GEF CTF CF IBRD/ IDA Other China Renewable Energy 2005­present On-grid renew- $40m $15m or $173m Scale-up Project (CRESP) able energy about generation 1 mtCO2e Total project financing comprised of climate 24% 76% vs. development finance China Energy Efficiency 1998­present Industrial energy $14m $12 m or $200m $371m Program efficiency 750 ktCO2e Total project financing comprised of climate 4% 96% vs. development finance Morocco Municipal Solid Board Urban solid $30m or 100m** Waste approved-- waste mgt 2 mtCO2e* March 2009 Total project financing comprised of climate 19% 81% vs. development finance India Chiller Energy Efficiency Board Energy efficient $6.3m $5.8m or MLF $1m Project approved-- appliance & CFC 485 ktCO2e IDBI/private June 2009 phaseout $70m Total project financing comprised of climate 15% 85% vs. development finance Mexico: Efficient Lighting Under final Energy efficient $7.1m $50m TBD $320m NAFIN $123m+ and Appliance Project preparation lighting and GoM $22m+ (ELAP) domestic Consumers appliances $180m Total project financing comprised of climate 8% 32% vs. development finance Mexico Urban Transport Board Sustainable Mexico City $200m ~$50m or $200m $868m Transformation Program approved-- transport $5.8m about Fonadin+ (UTTP) October 2009 + 3 mtCO2e $732m Private $8m from Sector + $225m STAQ to 4 from cities cities Total project financing comprised of climate 12% 88% vs. development finance Notes: * Value of CERs to be determined in the market. ** Value of euro = $1.3 7 ChIN A R ENE WA B L E E NE RGy 12.2 GW of installed capacity in 2008, has the fourth larg- SCALE-UP PROJECT (CRESP) -- est wind market in the world.3 CREATING A MARKET FOR REN EWABL E E NE RGy ME x I CO E F F I CI E NT L I G hT I NG A N D CRESP was approved in 2005, building on the lessons of a A P P L I A NCE S P RO J E CT (E L A P ) -- failed component of its antecedent, the China Renewable S UP P O RT I NG NAT I O NA L E NE RGy Energy Development Program (REDP), initiated in 2001. E F F I CI E NCy G O A L S The failed component of the REDP provided resources to support the establishment of demonstration wind farms, The Mexico ELAP project is designed to use resources but these wind farms never reached financial closure. In from multiple climate financing instruments to reduce the analyzing the situation, the task team found that the failure electricity consumption of the household sector. In 2008, was due to the lack of agreement on sharing the incremen- Mexico's residential sector accounted for 25.8 percent of tal costs of the investments between the national and total electricity use, with a typical household consuming regional grids, as they far exceeded whatever grant the equivalent of about 8,735 kWh per year of energy resources could be mustered. None of the actors were will- (4,157 kWh per year of electricity and 4,578 kWh per year ing to pay the extra cost per kWh required to make the of gas). Most household energy consumption is attribut- wind investments sustainable. able to the use of domestic equipment such as stoves, heat- ers, refrigerators, and air conditioners. Combined consumption for cooking, heating, refrigeration, and air In response, the World Bank helped the Chinese govern- conditioning accounts for about 70 percent of total resi- ment obtain resources from both the GEF and the Asia dential energy consumption. Air conditioning, home Sustainable and Alternative Energy Program (ASTAE) to appliances, and electronics are expected to be the main evaluate international experiences and best practices with growth areas of residential electricity demand in Mexico. respect to renewable energy-mandated market policies. Currently, these three energy end-uses--along with light- This resulted in the development of China's Renewable ing--account for roughly equal shares of residential elec- Energy Law, which established a feed-in tariff. The tech- tricity consumption. Electricity consumption in the nical assistance also laid the foundation for an IBRD lighting sector as a whole grew on average by 3.9 percent Specific Investment Loan (SIL) for $173 million. The loan per year between 1997 and 2007. It is projected to provided support for co-financing two 100 MW wind continue at 3.3 percent annually through 2030, with the farms, a 25 MW biomass power plant, and a bundled residential sector portion projected to grow the most package of small hydro projects. The GEF grant and Bank rapidly. In response to the important role of the residential loan were seen not only as investment support, but also as sector in Mexico's electricity consumption, the government a way to bring to bear international best practices in has initiated energy efficiency programs that target power private sector renewable power development. consumption in the residential sector by increasing the efficiency of household lighting and appliances. For one of the wind investments (Inner Mongolia) targeted as part of CRESP, the Chinese government speci- In direct response to the government's initiative, ELAP is fied that the wholesale power tariff should not exceed 5 designed to promote more efficient use of energy and to cent per kWh, a price that made wind uncompetitive. At mitigate climate change by increasing the use of energy- this point, the Bank's carbon financing helped improve the efficient technologies in the residential sector. The project project's financial viability by committing to purchase 1.6 has three components. The first component focuses on million emission reductions from the project, raising the replacing incandescent light bulbs with more efficient financial internal rate of return from 7.2 percent to 8.8 compact fluorescent lamps (CFLs), providing support percent, a point where the project became attractive. particularly to Mexico's low-income households. It will Therefore, by integrating GEF and ASTAE grants, IBRD make use of $70 million of IBRD loan resources to lending, and carbon finance payments, CRESP has had an effective transformational impact on renewable energy development in China. China is now considered the 3 REN21. 2009. Renewables: Global Status Report 2009 Update. Paris: second fastest growing wind market in the world and, with REN21 Secretariat. 8 purchase and supply 45 million CFLs to 11 million low- income households over three years. Project activities will also ensure that safe disposal mechanisms are created and utilized for the mercury contained in the CFL lighting devices. The second component will create incentives to encourage the replacement of older, inefficient refrigerators and air conditioners. This component supports two types of incentives--vouchers and credits for consumers--for the replacement (including collection and scrapping) of approximately 1.7 million old and inefficient refrigerators and air-conditioning units over a four-year period. Resources from the IBRD loan will finance the vouchers to enable low-income consumers to afford the new appli- ances. NAFIN (a national financial bank) will make use of its own resources and a $50 million soft loan from CTF to provide credit to low-income consumers. The government will provide $20 million in grant resources and GEF will provide $5 million in grants to guarantee against the default of the low-income consumers. The third component of the project will provide technical assistance to enhance the capacity of the Secretaría de Energía (SENER) to promote energy efficiency activities consistent with its new responsibilities under the Energy Efficiency Law, and will strengthen the ability of all imple- menting agencies to carry out the project. The govern- ment is contributing $2 million and GEF $2.12 million to this component. Carbon finance will be brought into the project through programs of activities (PoAs) linked to the CFL, air-conditioner, and refrigerator incentive programs. Some resources might also flow to the project from volun- tary carbon markets linked to the phasing out of CFC's found in refrigerators and air conditioners that are more than 10 years old. The ELAP project utilizes resources from an IBRD loan, the GEF, the CTF, the NAFIN, Mexican consumers, and the Mexican government. In addition, there is an expecta- tion that future carbon finance revenues will be available to the government to help repay some of their up-front investments. The total value of the project comes to over $700 million. It is expected to transform the Mexican elec- trical appliance market toward a more efficient future path. Expected GHG emissions are in the range of 7 million tCO2e for the direct emissions alone during the lifetime of the project. The indirect emissions--which will result if the entire market is saturated--will come to over 85 million tCO2e over the 20-year lifetime of the appliances 9 being used. Such an ambitious program is possible only The project has been built around earlier and existing because the Mexican government has made a strong GEF support to the transport sector in Mexico. One commitment to improve energy efficiency as a way to earlier GEF-supported project--Climate Measures in the reduce GHG emissions. While it is too early to be Transport Sector of Mexico City--helped develop the declared a success, it has been designed in an exemplary Insurgentes bus corridor, as well as testing various types of manner to help the Mexican government respond to cleaner buses, such as hybrids and electric buses. This national needs and global concerns by creatively weaving early support not only helped provide a basic demonstra- together financing from a number of financial instruments. tion of the importance of bus rapid transit systems, but it also stimulated the development of a CDM methodology on bus rapid transit systems. This current project seeks to M ExIC O URB A N TRA NS P ORT transfer these lessons and experiences beyond Mexico City TRAN SFORMATION P ROGRA M to other urban areas. (UTTP) -- REPLICATING LESS O N S FROM MExICO CITy 'S SUCCE S S The program is ambitious in its design and scope, and if successful, will truly have a transformative impact on the The Mexico UTTP is designed to transform urban trans- urban transport sector in Mexico. It builds around a $200 port in cities to a lower carbon growth path. Achieving this million IBRD SIL and an additional $200 million CTF objective will significantly reduce the carbon footprint of concessional loan. These resources will be channeled the transport sector as well as reduce air pollution. UTTP through the Banco Nacional de Obras (BANOBRAS), aims to bring together the agendas of modernizing local which will serve as a financial intermediary in the project. urban transport, reducing national poverty, while respond- BANOBRAS will then provide loans to the participating ing to the Mexican government's voluntary pledge to municipalities. This will be combined with up to $900 reduce GHG emissions. million from the National Trust for Infrastructure (FONADIN). The private sector and the municipalities themselves are expected to make contributions of up to Demand for transport in Mexican cities is leading to $300 million and $150million, respectively. An estimate of increasing motorization with growth rates of around 10 the potential for carbon revenue payments is only approxi- percent per year. In many cities, private cars today account mate, but using just the existing BRT methodology, could for 80 percent of total motor vehicles, while they represent add up to an additional $50 million. Urban areas that approximately 30 percent of daily passenger trips. This complete and propose Integrated Transport Plans will be growing motorization has led to demand for more roads, eligible for the funding. Four of the eligible cities-- including ring roads and multi-lane highways, which has Ciudad Juarez, Puebla, Leon, and Monterrey--are also led to diversion of public funding for private transportation participating in an ongoing GEF-supported regionwide enhancement. Although there is variation among cities, transport project called the Sustainable Transport and Air the government is not in a position to respond adequately Quality (STAQ) Project, which will assist them in the to the demand from all cities. The transport policy and preparation of their plans. framework is inadequate, the institutions responsible for public transit are weak, and there is a shortage of capable professional staff to adequately manage transport corridors. The project focuses on urban areas across the country, and OVERCOMING BARRIERS TO is designed around three components: (1) increasing the COMBINING RESOURCES human and institutional capacity to prepare and carry out sustainable transport investment policies and projects; (2) developing integrated transit systems, including mass tran- RE S O URCE A ND E L I G I B I L I T y sit corridors and public transport enhancement; and (3) L I MI TAT I O NS stimulating the market for low-carbon buses in these urban areas, as well as scrapping older, inefficient buses. Blending or combining resources from the various climate- Altogether, the program is an ambitious effort to transform change financing instruments serves as an important strat- the urban transport sector across Mexico. egy to concentrate limited resources where they can have 10 the greatest impact. Because of the limitations of climate development agencies. Gaining approval for a new meth- financing resources, it is not a strategy that is relevant to odology alone frequently requires two years. In addition, every project or that is available to every country. Not only complex and fast-changing rules, capacity bottlenecks, and is the total quantity of resources insufficient to support regulatory inefficiencies result in year-long delays and low-carbon growth alternatives demonstrating incremental instability, with financial implications for projects. It now costs, additional costs, or financing gaps but also, not all takes almost two years for a CDM project to be registered. countries have access to those resources. As the CTF is a Delays and uncertainties lead to higher transaction costs, pilot program, only 17 countries are expected to partici- losses in CER volumes, and lower market values, poten- pate. During GEF 5, only 37 out of the total eligible 143 tially eroding the interest of project sponsors for carbon countries will have resource allocations exceeding $5 finance mechanisms over the long term. Despite these million; the remaining 107 countries are allocated between potential delays, a seasoned task manager can manage the $2­5 million for the replenishment period. For the carbon approval cycles in parallel to minimize the overall review market, nearly 80 percent of the issuances to date have and processing time. been based in China, largely because that is where the larg- est share of global emissions takes place. Projects in other countries have received approval by the CDM Executive A L I G NI NG I NS T RUME NT S Board, but the sheer volume of emission reductions slants CDM support toward a few large-emitting countries. What can be done to ease these frustrations and reduce Blending resources from multiple funding will simply not the delays? Basically, the key to reducing these procedural be an option in many countries, as the limited resource delays lies in reform and familiarity. To date, the CTF availability is reflected in reduced country eligibility for approval cycle has run smoothly, but it will no doubt be support. evaluated for simplification before the end of its lifetime. Both the CDM governance procedures and the GEF pipe- line procedures require reform. During the GEF-5 replen- FRAGM ENTE D GOV E RNA NCE ishment process, a proposal was made to reduce the number of approval steps from two to one. If approved by Apart from resource limitations, the main obstacle to the Council, this would have a very positive impact on the combining resources are the different processes and proce- Bank's participation in the GEF by enabling the Bank's dures required for approval under different financing Board to sign off on comments provided to GEF projects instruments. Because each financing instrument has its by the GEF Council. In addition, the negotiation of the own separate decision-making body, approval procedures CDM for the post-2012 period will address the issues of differ for each one. World Bank projects are approved by pipeline procedural reform and approval simplification. the Bank's Board of Executive Directors. Of the three Clearly, some way must be found to reduce the bottlenecks instruments featured here, CTF's procedures come the in the CDM review and approval process. closest to mimicking the Bank's own approval procedures, with the CTF Trust Fund Committee only reviewing proj- ects once prior to the Multilateral Development Banks' RA I S I NG AWA RE NE S S (MDBs) Board for final approval. To date, this procedure has worked very efficiently. For GEF, a project requesting The other key to procedural simplification lies in increas- GEF resources must be reviewed and approved by the ing the familiarity of staff members with each instrument's GEF Council twice: once at the concept stage, and once rationale and operations. The ability to combine resources at the appraisal stage prior to being finally approved by the from the climate change financing instruments requires MDB's Board. Experience has shown that these extra steps in-depth expertise in both development and climate can require anywhere from one month to six months in finance. To manage such a process in addition to a Bank additional preparatory time beyond what would be lending operation, the task team will have to undertake required for a Bank loan. Because CDM is governed by an multiple processes in parallel. In addition, effective combi- entirely separate decision-making body, the CDM nation requires a good understanding of both the chal- Executive Board, its decision-making process is entirely lenges in the target markets and the relative strengths of governed outside the framework of the MDBs, and there- each instrument. Training and information dissemination fore bears little resemblance to that of the MDBs or other regarding the operation of each instrument, the nature of 11 complementarity and synergy in the use of these funds, and the additional impact that can be achieved will help team members cope with the additional complexity and reduce the stress level. CREATIN G COMMITME NT Staff members will be willing to undertake the additional work involved in combining resources from different climate financing instruments only if the Bank manage- ment encourages it through the incentive structure. Many opportunities for combining resources from mitigation funding resources are not undertaken because the task manager perceives no reward or value for the extra work that will be required. In this context, it is up to senior management to provide consistent incentives, including budgetary resources, to encourage dedicated team members to prepare and implement these blended projects, which will have greater impact on reducing the rate of GHG emissions growth. One prerequisite for successful combination frequently goes unmentioned: the commitment, vision, and capacity to identify climate-friendly development plans that are compatible with growth needs of developing countries. This last intangible element--the willingness to innovate, learn by doing, and build capacity for scaling up--will play an increasingly important role in shifting from conven- tional least-cost approaches to more sustainable and demanding low-carbon, climate-friendly development. Staffing and personnel will require sophisticated skills, creative ingenuity, and budgetary and moral support to pursue these options more frequently and successfully. But if development institutions are to become agents for change for low-carbon growth in the developing world, all opportunities to stimulate low-carbon growth must be taken. TOWARD A LOW-CARBON FUTURE FOR DEVELOPING COUNTRIES Combining resources and maximizing synergies among multiple climate and development financing instruments will remain critical to achieving impact and responding to the challenges posed by climate change. If effectively 12 combined, the total effect of such resources from a blended capacity, promote policy reforms, and undertake investment project will exceed the impact of the same resources used programs targeting the reduction of emissions from defor- separately in different projects. Combining resources estation and degradation, the conservation of forest carbon reduces transactions costs, musters a larger package of stocks, sustainable management of forests, and enhance- resources to address the same issue, and leverages a greater ment of forest carbon stocks (REDD-Plus) through the quantity of both human and financial capital toward Forest Carbon Partnership Facility (FCPF), the CIF implementation. To facilitate combination, reforms should Forest Investment Program (FIP), and through GEF's Sustainable Forest Management (SFM). In a similar be actively pursued to simplify and align processes and manner, the support of the program to Scale-Up procedures, making them more user-friendly to teams Renewable Energy Program (SREP) will be built into preparing projects. In addition, capacity building is needed larger renewable energy programs complementing support to provide more complete information about the climate of the GEF, IBRD, IDA, and carbon finance. Finally, resources available, their complementarity, and how they innovative solutions will increasingly be needed to address can be woven together into seamless, low-carbon develop- the issue of risk in low-carbon project design and finance. ment programs. Risk-mitigation instruments are key to increasing private investors' and lenders' confidence as they mitigate Looking ahead, the WBG expects to increasingly utilize (perceived) risks; future efforts will focus on combining complementarities among multiple instruments to build resources to structure improved responses to these risks. D E V E L O P M E N T · C L I M A T E · A N D F I N A N C E Authors: Richard hosier, Senior Environmental Specialist; Nataliya Kulichenko, Senior Energy Specialist; Aditi Maheshwari, Carbon Finance Specialist; Natsuko Toba, Senior Economist; and xiaodong Wang, Senior Energy Specialist Images: Shutterstock LLC The World Bank Group Tel: 202-473-1000 1818 h Street, NW Fax: 202-477-6391 Washington, D.C. 20433 USA Internet: www.worldbank.org/climatechange help desk: climatehelp@worldbank.org