Millions being delivered for the water sector, but billions are needed

By Merylyn Hedger and Sejal Patel

The recent Fiji/ Bonn COP grappled with the mobilisation of finance for country’s Nationally Determined Contributions (NDCs). These NDCs are a powerful framework for setting out national climate action priorities, with ongoing revisions, and guiding national efforts to address climate change challenges, including climate resilience of which climate-resilient infrastructure is key.

The inclusion of adaptation in the first round of (Intended) Nationally Determined Contributions, prior to the Paris COP, was a contested issue. Developed countries wanted the focus to be on mitigation. For developing countries that covered adaptation in their NDCs, water was the priority sector for action. In the UNFCCC Synthesis of NDCs, capturing the submissions of 161 parties, water emerges as the leading sector for adaptation actions (emphasized by 137 developing countries). Proposed actions and measures for the water sector in the NDC reports covered water conservation, increased supply measures, wastewater treatment and better water management efforts[1].

Key climate hazards identified by developing countries also relate to the water sector. Floods were raised by more than 80 countries and droughts by more than 70, coastal erosion in over 20 countries and saltwater intrusion in over 20 countries. Also mentioned is decreased precipitation over 40 countries, changes in precipitation timing over 40 countries and increased precipitation intensity over 30 countries [2].

This is not surprising. The impacts of climate change will be channelled primarily through the water cycle with consequences that could be large and uneven across the globe, according to the World Bank[3]. Importantly, water is also key to the world’s ability to cope with climate change. Growing populations, rising incomes and expanding cities will converge upon a world where the demand for water rises exponentially, while supply becomes more erratic and uncertain[4].

Momentum to address challenges in the water sector have been building in international development debates. For the first time in history, the international community adopted a global water goal as the Sustainable Development Goal (SDG) six on water, part of the 2030 sustainable development agenda. Since 2012, water crisis has been in the World Economic Forum’s top five global risks each year. Water scarcity or the lack of water to meet the demand of a population is a critical issue for more than 40 per cent of the world population and affects over 1.7 billion.

 

So how much climate finance is needed for the water sector?

Overall annual costs for adaptation have been variously estimated, one of the most recent estimates being the UNEP 2016 Gap Report at between $140 billion to $300 billion by 2030[5]. For the SDG on WASH (which aims to ensure water and sustainable management of water and sanitation for all, with eight target activities stretching to 2030), it has been calculated that existing annual investments need to increase threefold to $114 billion and it is unlikely, apparently, that the impact of climate change has been factored into these estimates[6]. Yet it is widely recognised that all planned new investments must allow for resilience in the face of climate change; and, existing infrastructure need to be made resilient to the impacts.

It is estimated that as much as 63% of the capital spending is required in Sub-Saharan Africa, Southern Asia and Southeast Asia where rapid urbanisation and population growth are major trends. One study has estimated that extending basic WASH services to the unserved (SDG 6.1 and 6.2) will cost $ 28-4 billion per year between 2015-2030 and that capital costs amount to about three times current investment levels[7]. A different approach to costs has been applied by the World Bank which is the costs of the impacts on economic growth. These have been identified as much as 6% of GDP by 2050 as a result of water-related losses in agriculture, health, income and property[8]. More recent work on water insecurity has estimated that global economic losses from inadequate water supply and sanitation are $260 billion per year and the global economic cost of water insecurity to existing irrigators is $94 billion per year[9].

Accurate figures on the costs of addressing the impacts of climate change on the water sector are not available, due to uncertainty about the impacts, what technologies will be used, where and when and all the consequent interaction of interventions implications in the system[10]. The situation is further complicated by what has been described as the adaptation or development deficit, which likely overlaps with SDG Six[11]. Basically, with gaps in existing services and provision, there is a deficit which needs to be addressed before climate change is factored in. There have been issues in the GCF Board about what is a climate change project/ and what is a development project- the long-running additionality issue[12].

 

How much climate finance is being delivered for the water sector?

It is a challenge to determine. There are various data sets which reflect different sources and purposes: private/public; global/developing countries/LICs; water supply/ multi- focused; climate change focused/all ODA. The 2017 CPI Global Landscape Report has strong caveats about the lack of full knowledge about domestic government expenditure on climate finance and private investments in adaptation. It examines water and waste management as a sector within public finance and does not differentiate between developed and developing countries. Within this framing mitigation dominates over adaptation 83% compared to 17% in 2015-16 and within that water and waste water management gets over 50% (some $11 billion of $21 billion). Looking at OECD DAC data, water fares well in adaptation spend with around one –third in 2015, some $3.7 billion of climate-marked spending, but this would cover both the principal and significant categories (climate change as a focus of development assistance rather than as another benefit).

 

Chart 1: Water related approved spending by fund 2006 – 2017 (Data source: CFU)

 

Focusing on the provision of dedicated multilateral climate funds for the water sector, Climate Funds Update (CFU) provides the potential to unpack spending by project type and source. Looking at this data in aggregate, between 2006-2017 a total of $1599 million was allocated to 187 water projects, of which 153 were focused on adaptation. Two-thirds went through UNFCCC funds, and the rest through a variety of funds such as the German International Fund (IKI) and DFID’s ICF, but principally the PPCR- one of the World Bank’s Climate Investment Funds – see chart 1. Chart 2 illustrated a peak in 2013 with a significant trend decrease to 2016. However, in 2017, the GCF provided a significant funding boost, and a recharged Adaptation Fund (AF) also came back on stream. Significantly, projects funded by the GCF were substantially larger, average $39 million, compared to $8 million from the AF.

 

Chart 2: Water related projects approved over time 2006 – 2017 (Data source: CFU)

 

The CFU data also enable another critical issue to be explored – the sectoral spread of water projects – chart 3. Water lies at the nexus of food security, poverty reduction, economic growth, energy production and human health[13]. Whilst by far the most was allocated to adaptation –and the great majority of those focused on water and sanitation, funds such as the BioCarbon Fund had water projects relating to REDD. A small number of projects covered energy generation, energy efficiency and energy supply, principally for agriculture. Overall the sectors covered in the analysis are: agriculture; coastal management; disaster risk reduction; fishing; food security; forestry; general environmental protection; land-based mitigation; multisector projects; rural development; transport and storage; water and sanitation; and water management.

 

Chart 3: Approvals of water related project approvals by sector 2006 – 2017 (Data source: CFU)

 

Currently, there are a number of different approaches for classifying water projects, depending on how far water management extends into river basins, ecosystems, and coastal protection and what the focus is. In the Green Climate Fund (GCF) classification water security falls within the results area “Increased resilience and health and well-being, and food and water security” (HRWS). An examination of all the GCF approved projects suggests that around half can be seen as relating to water, but only a small percentage relate to core water management issues for people. The PPCR seems to closely link water to agriculture including sustainable water and land management practices. When links to mitigation are included the position is the more complex.

 

So where next?

It would seem that the needs for spending on water to address development deficits in SDG 6 and to cope with climate change are way below what is being delivered. It has been said that “water is to adaptation what energy is to mitigation[14]. So, it is self-evident that there will be wide ramifications and inter-connections with the whole climate change adaptation agenda but it is not yet clear that the resulting challenges for tracking, and transparency are recognised.

In order to track progress, in another sector, data on energy is categorised and disaggregated in a clear way for data collection and tracking, see for example the Global Tracking Framework on Sustainable Energy. The first SE4All Global Tracking Framework identified indicators that track progress toward the SE4All objectives of universal access to modern energy, doubling the rate of energy efficiency improvements and doubling the share of renewable energy consumption in the global energy mix[15]. The OECD classification of water sector spending for bilateral assistance and the targets for Goal 6 on Water in the SDGs do provide a basic reference frame. The challenge however, is to identify the additional climate change element on which all can agree, and against which then climate finance can be tracked in the water sector. Unless this happens, there is likely to be an ongoing confused picture of what is being provided for what and whether it is making an impact.

More attention must be paid to monitoring spending on water actions as a first step to tracking progress, if the billions needed for implementing the NDCs are to be delivered and used effectively.


[1] UN Climate Partnerships for the Global South and the UNFCCC 2016 Catalysing the implementation of NDCs in the context of the 2030 Agenda through South-South Cooperation

[2] UNFCCC 2016. Aggregate effect of the intended nationally determined contributions: an update. Synthesis report by the secretariat. FCCC/CP/2016/2. Available at: http://unfccc.int/resource/docs/2016/cop22/eng/02.pdf

[3] World Bank 2016 High and Dry: climate change, water and the economy. Water Global Practice World Bank Washington

[4] ibid

[5]  These issues have been fully analysed in the UNEP 2016 Adaptation Finance Gap Report chapter 2 pages 13-14

[6] Hutton G and Varuhrese, M 2016 The costs of Meeting the 2030 Sustainable Development targets of drinking water and Sanitation and Hygiene. Water and Sanitation program, World Bank Group Washington, DC

[7] Hutton Gand M. Varughese 2016

[8] World Bank 2016 High and Dry: Climate Change, Water and the Economy Executive Summary World Bank Washington

[9] OECD 2017 Background Paper Roundtable on Financing Water OECD-WWC-Netherlands Round Table

[10] These issues have been fully analysed in the UNEP 2016 Adaptation Finance Gap Report chapter 2 pages 13-14

[11] Ian Burton 2004 the Adaptation Deficit

 

[13] World Bank 2016 High and Dry: climate change, water and the economy. Water Global Practice World Bank Washington

[14] ibid

[15] http://gtf.esmap.org/downloads

Better data can help international forest finance flow

In this blog Marigold Norman of the Overseas Development Institute discusses what improved capacities for producing reliable data on forest cover mean for access to international REDD+ finance.

http://www.odi.org/comment/9879-better-data-can-help-international-forest-finance-flow

International REDD+ architecture

International REDD+ architecture

Getting it together: institutional arrangements for coordination and stakeholder engagement in climate finance

Vyoma Jha, Centre for Policy Research (CPR)

Countries around the world are establishing arrangements to direct public finance and international investment towards climate change mitigation or adaptation. CPR and ODI have been working with researchers in Colombia, India, Indonesia, the United Kingdom and Zambia to understand how these work. While the economic circumstances, and the policy framework for action on climate change are diverse these countries have one thing in common: they all have multiple institutions involved in directing finance into climate-compatible solutions.

In this context, a crucial question for international institutions seeking to support countries to achieve to climate-compatible development is: how do we engage diverse national stakeholders, and foster better coordination among them? This is a key question for National Designated Authorities that are entrusted with facilitating national engagement with the new Green Climate Fund (GCF). The GCF for its part has the potential to take more sophisticated and effective approaches to engaging with national counterparts. Our research suggests that there is no single, perfect institutional arrangement to mobilise and deliver climate finance. Any efforts to strengthen coordination around climate finance must contend with messy domestic landscapes, and diverse actors.

Emergence of arrangements for ‘docking’ or ‘mainstreaming’ climate finance

In most countries (developed and developing alike), climate change has primarily been the purview of Ministries of Environment. Ministries of Finance are increasingly engaged on this agenda as well. Both have a vital role to play. Beyond the arrangements within the government, a vast range of institutions outside of government play an important role in implementing efforts to respond to climate change: the private sector, civil society organizations. In some cases these arrangements have been created to ‘dock’ international or external climate finance in the national system. In others, they aim to ‘mainstream’ climate considerations into core policy and associated investment decisions and financial frameworks. Finding a way to bring these arrangements together is a key challenge for international institutions, including the Green Climate Fund.

Scale of available finance: an incentive for better coordination

Changes in structure do not necessarily change behaviour: it is the incentives for coordination that matter. The scale of available finance around which an arrangement is structured can be a significant factor in determining whether it supports “mainstreaming” or “docking”. For example, in many cases inter-agency bodies have been created to make decisions around programming relatively small volumes of finance from the Global Environment Facility; but their traction and influence with mainstream investment actors (such as Ministries of Finance, development banks, and the private sector) has been modest. On the other hand, while Ministries of Finance have engaged around the more substantial sums of finance available through the World Bank’s Climate Investment Funds, coordination with other ministries, civil society and other stakeholders has not been a given: it has taken dedicated time, resources, and support.

A new template for broad-based action

Operational coordination may be complex even when driven or mandated at the highest level of government. Therefore, how coordination is led, matters as much as who leads it. Working arrangements that create space for ministries with responsibility for economic and financial decision-making to partner with Ministries with requisite expertise and mandate to address climate change and environmental issues are needed. These institutional arrangements on climate finance must also create opportunities for diverse stakeholders to input into climate change and finance-related decision making.

Strengthening domestic engagement with international finance

Access to international finance may be structured to help empower lead agencies to convene key domestic actors. But taking such action takes time, resources, and dedicated capacity. A sound understanding of the domestic institutional landscape is imperative to avoid further marginalisation of the climate financing processes from domestic climate policy processes and mainstream investment in relevant sectors. Flexibility is essential. Improved coordination may benefit from:

  • The availability of adequate funding (whether from domestic or international sources) that creates sufficient incentives for key actors to come together and engage over a reasonable time period
  • Proactive leadership of the anchor ministry in efforts to bring ministries of environment, finance, local government and national financial institutions together
  • A robust analysis of stakeholders in the national climate response, their interests and the strengths and weaknesses of existing working arrangements, taking account of relative mandates and resourcing

Accountability to both domestic and international stakeholders for active engagement with the range of relevant stakeholders.

The synthesis paper: ‘Getting it together: institutional arrangements for coordination and stakeholder engagement in climate finance’ can be found here.

The coordination of climate finance in India

Vyoma Jha, Centre for Policy Research

The Indian government recently announced the enhancement of solar energy targets under the National Solar Mission to 100 GW by 2019 as compared to the initial aim of 22 GW by 2022, targeting nearly US$100 billion in renewable energy investments over the next five years. It also established a National Adaptation Fund with an initial funding of Rs.100 crore (approximately US$16 million) as budgetary support towards climate change. While this flurry of activity indicates a commitment on part of the government towards low-carbon and climate resilient development, it also establishes a strong case for identifying the existing and future sources of climate finance to support such activities.

Increasing role of ‘climate’ in mainstream policy and investment decisions

Well-defined policies in the solar energy and energy efficiency markets, triggered by national climate policy, have spurred climate related finance through a variety of domestic and international, both public and private, sources. Most significantly, there has been an emergence of major public and private sector banks and development finance institutions in supporting climate mitigation or adaptation related efforts, lending itself to a ‘mainstreaming’ of the climate agenda within national financial actors. However, there still remains a need to engage these diverse sub-national and financial actors in national agenda setting around accessing international funds.

With no formal coordinating mechanism around climate finance in India, multiple processes for financing thrive within the country that can be broadly categorized into two distinct arrangements – one, mobilizing funding labelled climate finance, and two, mainstreaming public finance that has climate benefits. Our latest study on ‘The coordination of climate finance in India’ suggests the national climate finance landscape is highly fragmented with a wealth of stakeholders at the national and sub-national level, in both the public and private sectors playing important roles. The government needs to recognise these roles and engage these stakeholders, in order to develop a clearer sense of opportunities and priorities using both domestic and international finance.

Making good use of international ‘climate finance’

Key findings from India’s past experiences accessing international climate funds suggest that while Ministry of Environment and Forests (MoEF) is the obvious choice for making decisions on climate-related activities requiring funding, the Ministry of Finance (MoF) is better suited at negotiating large sums of international funding as it is the nodal department for receiving financial assistance from multilateral and bilateral funds. In the context of the Green Climate Fund (GCF), where India continues to play an important role in its operationalization, it is imperative that the two ministries work closely if finance accessed through the GCF is to make its way into domestic efforts on climate in a meaningful way.

One idea that has attracted a lot of interest is the creation of a new National Climate Fund, which could channel international funding. However, India already has a lot of climate funds – for instance, the coal cess-driven National Clean Energy Fund that has done little to scale up investment in clean energy though it is now getting to work; the National Adaptation Fund created during the last national budget – and Indian stakeholders will need to develop a strategy for how best to make use of the available funds to channel new and additional funding through international funds.

Ways forward on coordination around climate finance in India

A concerted strategy needs to emerge around how India could effectively link existing channels of national and international climate finance. One useful immediate step could be for the Climate Change Finance Unit and MoEF to initiate a process of engagement and interaction with other line ministries, state government, banks and businesses to consider options for maximising strategies and optimising the use of international finance from the GCF. This could help the National Designated Authority of the GCF to develop and maintain a steady roster of projects or programmes that would require new or supplemental funding.

The central objective of any national coordination mechanisms around climate finance should be to encourage the incubation of fundable ideas from relevant actors, particularly beyond the core governmental set up, about how to take meaningful domestic actions on climate change. For India, engagement with the GCF presents an opportunity to take much needed steps to better integrate international funding with emerging national development objectives in the context of a climate response.

The local-global link in adaptation financing

Alice Caravani attended the recent Community Based Adaptation Conference (CBA8) in Kathmandu, Nepal, organised by IIED. In this opinion piece for ODI she reflects on experiences with adaptation financing in Nepal, and steps that can be taken to better align the priorities and decisions of international donors with the needs of those on the ground.

http://www.odi.org.uk/opinion/8375-local-global-link-adaptation-financing

More than meetings: the way forward on climate finance

Smita Nakhooda, ODI

At the COP 19 in Warsaw, Christiana Figueres sent governments back home with a command: “Governments, and especially developed nations, must go back to do their homework so they can put their plans on the table ahead of the Paris conference”. What exactly does it mean? On finance, it means that developed countries must walk the walk and help developing countries respond to climate change.

Hopes were high at the beginning of 2013 for a “Finance COP”: that when parties to the UN Framework Convention on Climate Change met in Warsaw at the end of this year, they would be able to make new progress on this sticky issue.  With the new year almost upon us, what has happened so far and what is the way forward?

A quick look backwards

Developed countries have always had obligations to provide finance to help developing countries respond to climate change, because developing countries have done less to cause climate change and still confront pressing poverty reduction challenges. In 2010 developed countries agreed to mobilise US$100 billion per year in new and additional finance from public and private sources to support developing countries to respond to climate change. As a demonstration of good faith, they would deliver US$30 billion in Fast Start Finance (FSF) between 2010 and 2012, with a focus on scaling up support for adaptation to help vulnerable developing countries, particularly small island developing states and African nations, deal with the impacts of climate change. Developed countries managed to meet – and indeed to even exceed– these commitments.

Last year’s UNFCCC meetings in Doha did not give countries much clarity on the medium term outlook for finance. A year-long technical work programme on long term finance grappled with the difficult underlying issues, such as the need for developing countries to introduce domestic policy processes to mobilise new sources of finance , as well as the policy, regulatory and institutional conditions that need to be addressed to enable greater private investment in the solutions to climate change.  It highlighted the need for a political dialogue on how to respond to finance needs. The Doha Gateway extended this work program, and also agreed to convene a High Level Ministerial Dialogue on Climate Finance. It also confirmed the need to make rapid progress in operationalising the Green Climate Fund.

So what do we have to show for the “Finance COP”?

Several countries did come forward with new pledges of finance at Warsaw. The leadership of European countries on this agenda, despite their significant economic and financial challenges at home, is noteworthy. A number of these countries, particularly Germany, committed US$104 million to the Adaptation Fund of the Kyoto Protocol, allowing it to meet its rather modest 2013 fundraising target of US$100 million. The UK has been a particularly significant actor: it has created a dedicated mechanism to deliver finance through its International Climate Fund, and has recently increased the amount of finance it will make available from £2.9 billion by 2015 to £3.87 billion by 2016. Together with the US and Norway, it committed US$280million for a new World Bank managed program to promote sustainable forest landscapes, in an effort to attract private investment to activities that reduce emissions from unsustainable land use practices. Japan committed US$16 billion in finance for developed countries in the context of announcing that it would not be able to meet its original GHG emission reduction targets. But this finance, similar to the funding it committed during the FSF period, is expected to be largely delivered as concessional and non-concessional loans. Much of it will help support Japanese companies to do business in climate-relevant sectors. However, while one of its objectives could have been to position climate change as a centrally important issue for Ministries of Finance, the Ministerial was dominated by Ministries of Environment.

The negotiated language on long term finance takes a small step forward by setting an implicit “floor” for public climate finance commitments by “Urg[ing] developed country Parties to maintain continuity of mobilization of public climate finance at increasing levels from the fast-start finance period”. It calls for a “substantial share” of public finance to support adaptation activities. And it “recognise[s]” the commitment to mobilise US$100 billion from public and private sources by 2020 “in the context of meaningful action and transparency”.

The outlook for 2014: a lot of homework to be done (and it will have to be done in capitals)

But it does not offer much more than that, despite repeated calls from developing countries on pathways to scaling up, and the proposal of a mid-term target of $70 billion per year. It does, however, “request” developed countries to prepare biennial submissions on how they will increase support, and to provide any available information on pathways. The Standing Committee on Finance will prepare its first biennial assessment of climate finance flows. Such an effort has the potential to offer some needed clarity on what should “count” as climate finance, and to offer a better sense of the current finance for adaptation and mitigation activities, including from the private sector.

In addition, the COP called for a rapid progress in finalising the operationalization of the Green Climate Fund. The fund has the potential to fill important gaps in the current climate finance architecture, supporting institutions in developing countries to incorporate climate change into their investment and development planning processes, and helping them to harness and direct private investment into low carbon and climate resilient options. The “historic opportunity” that the GCF presents was stressed by World Bank President Jim Yong Kim at its launch in Song Do earlier this year.

Finally, parties “decided” to convene a biennial high level Ministerial Dialogue on Climate Finance, informed by the new spree of technical meetings on climate finance that are poised to get underway, starting at COP 20 in Lima. The Climate Summit that the UN Secretary General will be convening in September 2014 may be an important stepping stone in the lead up to COP 20, if governments and actors including business and civil society are able to pledge ambitious action.

But it will take a lot of work, at home in capitals, for next year’s busy calendar of international technical meetings and high level political summits, to yield meaningful results. For Figueres’s wishes to come true, this will require us to convince policy makers and their constituents in developed countries that finance to help developing countries respond to climate change can make a real difference, and can be used effectively to deliver meaningful global benefits.

Who’s ready for climate finance?

Richard Calland (Africa Climate Finance Hub) and Smita Nakhooda (ODI)

Is it a bird or is it a plane? The question of what ‘readiness’ for climate finance involves has attracted a great deal of attention and debate, particularly since the Green Climate Fund is supposed to channel $100 billion a year by 2020 for climate action and policy in developing countries.

Despite various efforts from a number of international bodies such as the UNDP, there is little consensus about the matter. Is it a process or an event? This is a yes or no question: you are either ready or you are not. Either way, how on earth do you measure it (or should you even try to do so)?

There have been inevitable levels of ambivalence from potential recipient countries. They welcome the idea of finance that will put them in a better position to use the funds, given the complexity of accessing climate finance, but they are also wary of more red-tape that will absorb time and effort, and end up looking like ‘conditionality’. If you’re not ‘ready’, you may not be ‘certified’ fit for receiving climate finance.

In an effort both to better understand what climate finance readiness funding might usefully entail and, more importantly, what the needs of potential recipient countries might be, researchers from ODI and the Africa Climate Finance Hub spent a year talking to people in three Southern African countries – Namibia, Tanzania and Zambia. We began this work in partnership with GIZ and with support from the German government.

Because every place has unique socio-economic, political and institutional conditions, our starting premise was that any assessment of country readiness should take the ‘3 Rs’ into account:

  • be RELATIVE to a country’s socioeconomic and geopolitical characteristics;
  • be RESPONSIVE to the country’s particular needs, priorities, and challenges – and therefore flexible;
  • be REASONABLE, factoring in key national issues and constraints, and thus identifying the practical steps that can be taken.

All three countries are seasoned recipients of official development assistance (known as ODA), and acutely attuned to the power-play that can quickly subsume conversations about who gets what, when and how. As one finance ministry official put it: ‘we will invest in getting ready for climate finance, but only if we can see that the investment will be worthwhile’. The subtext is: will readiness finance really benefit potential recipients?

From our fieldwork, we gained a number of insights into how readiness finance might cohere with the other efforts that countries are making to address the challenge of climate change.

We considered in-country processes and institutions responsible and necessary for planning for climate change and programming associated finance. We also stressed the importance of what we term ‘aptitude’ – by which we mean more than just the exhausted notion of ‘capacity’, but rather ‘mindset’ and the institutional convictions that are required to really grapple with the tough politics of climate action and its associated political economy. Finally we looked at systems to access and spend climate finance – the sourcing as well as the receipt of climate finance and whether funds are being spent well, in order to achieve intended climate related objectives.

Countries are struggling to align action that is focused directly at climate change with broader national strategies for economic development. The threat posed by climate change may appear less direct, and is certainly more nuanced, but is no less dangerous for long-term prosperity. Readiness support could help countries make better links between “climate” strategies and their development finance plans. For example, readiness support could help governments improve the quality of the data that they need to understand the nature and trajectory of stresses and changes in key economic sectors and the risks these pose for proposed investments.

We found, as many others have, that countries struggle to co-ordinate efforts across departments and agencies. Institutions to support the realisation of climate policies and strategies are emerging, and usually include some formal space for the representation of the various ministries and stakeholders who will need to be involved in implementation. For example, the proposed National Climate Change and Development Council in Zambia will draw together the ministries of environment, finance, infrastructure/public works, mines, energy and water, the Office of the Vice President with its disaster management unit and, most likely, the Zambian Meteorological department, while also engaging civil society and private sector representatives. Similarly the process for developing the Namibian Climate Policy and Strategy has involved consultation with other units of government through a National Climate Change Committee.

But in practice, coordination between activities and within planning processes has been challenging, often lacking sufficient mandate, capacity or incentives. Our studies found that there may be implicit or explicit competition for access to funding, and enhanced political profile. Readiness finance might be used to enable more effective coordination, but there is a need to better understand these underlying dynamics so that support can be well targeted.

While developing countries are taking important steps to integrate climate change into their economic development strategies, in many countries further work is required to enhance alignment between emergent climate response strategies, and existing investment and finance priorities.

A step forward could be to agree that readiness for climate finance is neither a plane nor a bird. But investments in climate finance readiness efforts can support enabling activities within countries that allow climate finance to be used to realise a ‘paradigm-shift’ towards climate compatible development strategies.

REDD+ finance: where next?

Marigold Norman, Forest Trends and Charlene Watson, ODI

In bringing together the views of a number of initiatives tracking REDD+ finance, this series has highlighted why there isn’t a single aggregate figure for global REDD+ finance flowing. Despite this, we are increasingly able to assess where finance is coming from, how it flows through different channels and funds to recipient countries and eventually to REDD+ projects and activities on the ground. But knowledge remains incomplete and we are still faced with challenges and gaps that make it difficult to make comprehensive and conclusive remarks about the state of REDD+ finance.

Continued concerted efforts are needed to change this and we identify three steps that can pave a way forward to a better understanding of REDD+ finance:

1. Develop capacity and expertise for in-country REDD+ finance tracking to improve reporting and effective REDD+ finance spend.

Monitoring REDD+ finance allows us to evaluate REDD+ and REDD+ spend. Funding gaps become more obvious as a more comprehensive picture emerges; as it is possible to see which regions in-country and REDD+ activities are underfunded and where money can be more strategically spent. It is also important to link expenditures to actual impacts to evaluate successes and failures and help determine how REDD+ finance can be effectively scaled up in the medium to long-term.

Few countries have centralised systems for tracking climate finance that arrives through a number of channels and instruments. REDD+ finance is no exception. Supporting the appropriate institutions for REDD+ finance tracking could include determining the right combination of civil society, academic and governmental institutions for this role as well as stronger collaborations with in-country REDD+ Focal Points to consolidate and report national data to the REDD+ Partnership’s Voluntary REDD+ Database (VRD). Forest Trends’ REDDX initiative, for example, has started to do this by working with local civil society partner organizations and REDD+ Focal Points to promote longer term in-country tacking capacity and more comprehensive data reported back to the REDD+ Partnership’s VRD.

2. Establish broader discourse and develop a protocol through which private finance for REDD+ can be better understood and tracked.

It is increasingly clear that we must involve a variety of private sector actors in discussions on REDD+ finance if we are to develop a better idea of how to attract private sector capital at scale, while also more effectively tracking private sector finance. Improvements can be made through aligning with wider existing climate finance tracking efforts which have made more progress than in the REDD+ space.

3. Take proactive steps towards understanding needs to track REDD+ finance under a globally integrated REDD+ mechanism, as well as understanding how REDD+ fits within emerging climate finance funds such as the Green Climate Fund.

The long term success of REDD+ (in terms of policy and leveraging additional finance) will depend on more standardized approaches to monitoring, reporting and evaluation which link expenditure to actual impact. Looking towards a potential United Nations Framework Convention on Climate Change (UNFCCC) REDD+ mechanism, the potential inclusion of REDD+ in the Nationally Appropriate Mitigation Action (NAMA) Registry, or a possible REDD+ window under the Green Climate Fund, there will be a clear need for a common reporting framework for REDD+ finance. Taking proactive steps and encouraging contributor and recipient countries to track what actually happened with REDD+ finance helps measure impacts and evaluate successes in a comparable way, and is likely to facilitate these future possibilities for REDD+ activities.

The road ahead

No REDD+ finance tracking institution or initiative is, or claims to be, comprehensive on its own. This series has been a first attempt to bring together a community of practice tracking aspects of REDD+ finance. It is critical that we continue to expand this community to learn from one another and work together to more effectively track and record the global state of REDD+ finance.

In addition to improving the way that REDD+ finance is monitored and tracked, more emphasis should be placed on sharing experiences and lessons with wider efforts to track climate finance and development aid.  Gaining clarity over where money is going, through whom and how fast, is a first step to ensuring that the money does what it should, where it should. If donors and recipients of climate finance design transparent, comparable and accessible financial accounting systems, we will be able to more effectively track and monitor for accountability at a global or national level, by government or civil society.

This series of blogs on REDD+ finance intends to create a forum for debate and exchange of ideas. It should not be understood to reflect the views of Forest Trends, REDDX, ODI or Climate Funds Update.

REDD+ Finance: Private Lessons For The Public Sphere

Molly Peters-Stanley, Ecosystem Marketplace

Kenya’s Kasigau Corridor Project that Reduces Deforestation and forest Degradation (“REDD”) protects 200,000 hectares of endangered forest between the Tsavo East and Tsavo West National Parks. The Surui Forest Carbon Project protects 32,000 hectares of endangered forest in the Brazilian Amazon. Cambodia’s Oddar Meanchey REDD+ Project protects 64,000 hectares of endangered forest in the northwest province of the same name. The world’s largest REDD project – the Mai Ndombe REDD+ Project in the Democratic Republic of the Congo – will protect almost 250,000 hectares and dispatch with approximately 175 million tonnes of carbon over its lifetime.

Beyond the fact that each of these endeavors harness carbon markets to reduce greenhouse gas emissions by saving endangered rainforest, each of them has been spearheaded by private initiatives working closely with national, state, and local governments, which means each has managed to identify risk mitigation tools – that appeal to both the private and public sectors.

Each, therefore, is ripe with lessons for anyone looking to develop REDD interventions that will make the leap from “project” to “program” – i.e. from private and local, to public and jurisdictional. Admittedly, there are still gaps in information on finance and activities at the project level, but, Ecosystem Marketplace has been tracking private sector projects since 2005, reporting forest carbon data on the Forest Carbon Portal and in Ecosystem Marketplace’s annual State of the Forest Carbon Markets reports designed to explore these lessons and results.

Through focusing tracking on the project level we have found that the private sector was more likely to support projects that reported at least one revenue stream other than carbon offset sales, like sustainably commodity (including Fairtrade-certified) sales revenue or donor government contributions. The presence of additional non-carbon revenues suggests to private sector actors that the project is more likely to be financially viable in the case that carbon markets are not a long-lived source of project financing. Our more recent findings illustrate that private dollars are also “mobile” – with businesses preferring to catalyze new activities in new locations, which is not inherently conducive to large-scale, long-term REDD activities.

Based on these findings, is the profit motive alone too capricious to support and expand REDD efforts? Should the burden of forest conservation instead rest solely with forests’ traditional public sector custodians? In reality and as reported last week by UNEP FI, seasoned stakeholders conclude that both public and private actors must be at the table if the world is to support existing forestry and land use carbon projects (total of $2.2 – $5.4 billion over an unspecified timeframe, according to Ecosystem Marketplace’s 2012 survey data; cut deforestation in half between 2015 and 2020 ($75 – $300 billion according to Resources for the Future estimates); or protect the world’s hectares that are currently under threat ($1 trillion, based on 55.5 million hectares that will be lost between 2010 and 2020, as estimated by WWF, multiplied by average price per hectare paid for REDD offsets in 2011 [$20/ha] based on Ecosystem Marketplace data). Regardless of your metric of choice, the price tag is too high to ignore anyone with insights into how a significant source of finance can be incentivized to act.

To this end, private project developers that have honed their business models to become market “survivors” provide proof of concept for the idea of internationally-financed conservation forestry. They have an inherent understanding of why the private sector steps in – or backs out of – forest finance, learned over now-decades of direct experience with private sector stakeholders. They also boast first-hand experience with national and regional government approval processes and gaps in capacity – often including a deep understanding of the extent of local governments’ capacity for enforcement.

Many actors already understand the value of lessons gleaned from these private pilot actions, which is why the Verified Carbon Standard and the American Carbon Registry are working with national governments on Jurisdictional Nested REDD (JNR) that ensure existing projects can be absorbed into national accounting programs. It’s why the Norwegian government is even helping to pilot nested programs around the world.

And it’s why Forest Trends’ Ecosystem Marketplace and REDD Expenditures Tracking initiatives are tracking payments – both public and private, top-down and bottom-up – to uncover “sweet spots” where emerging government REDD programs have successfully engaged the private sector as investor, implementer, or (in an ideal world) both. Private lessons for the public sphere to increase private investment, therefore, include (but are not limited to):

  • Due consideration and recognition of private actors’ early action via public support of credited project-level activities. Indications that governments will support early action REDD projects (via “buyer of last resort” credit purchase guarantees or other purchase programs) would help de-risk new investment or projects in need of re-financing, and could be implemented to reward those already exploring REDD implementation on the ground, in tandem with the development of up-scaled REDD approaches. Such approaches have successfully been taken in other sectors in some countries, as explored in this report.
  • Enacting policies that favor “zero-deforestation” or low carbon products/commodities by recognizing products sourced from verified REDD projects, activities or areas.
  • Engaging with private actors to explore “carbon-linked” funding mechanisms, like REDD/carbon revenue bonds, developing new types of public-private contract structures to deliver low cost REDD emissions reductions. Such efforts would leverage the early experience of project developers managing relationships with donor governments supporting emerging jurisdictional nested REDD programs.

Unless policymakers are willing to incorporate more lessons from the companies that are already buying REDD project offsets or from the developers who are creating them, they run the risk of re-creating the Kyoto Protocol’s sub-optimal treatment of forest carbon offsets. The world needs a mechanism that incorporates tested methods that work. And that requires more funding for pilot projects and more efforts to harvest existing projects for insights that can be broadcasted from the boardroom to Bonn.

This series of blogs on REDD+ finance intends to create a forum for debate and exchange of ideas, this blog reflects the opinions of Molly Peters-Stanley of Ecosystem Marketplace, and should not be understood to reflect the views of ODI or Climate Funds Update.

REDD+ Finance: What do we know about the private sector contribution?

Iain Henderson & Jacinto Coello, UNEP FI

There is broad consensus that private finance and investment are needed for REDD+ to meet its climate change mitigation potential in the medium to long-term. Those who are familiar with REDD+ will have heard countless variations of an equation that currently does not balance.  Annual REDD+ additional investment needs are estimated to be in the order of tens of billions of dollars, yet the current sums available – which are largely public funds- are a fraction of this number. The hope and expectation is that private sector capital will conveniently fill the gap, et voila! The burden placed upon private capital to balance the books has also been creeping higher over the past few years. REDD+ is not only more complex and expensive than first thought five years ago but public sector finances have also been decimated by successive financial crises in every corner of the globe.

The anticipated flows of private sector finance have yet to materialize. REDD+ finance remains dominated by public sector flows focused on the capacity building and enabling conditions that are the foundation stone of REDD+ and which are vital to catalyze private sector capital. For private sector capital to flow at scale, these public sector funds must be used strategically to improve the financial attractiveness of REDD+ for the private sector. Private sector investment is driven by expectations of future returns and these are currently too low and opaque given the risks and uncertainties compared to other potential investment opportunities.

Despite this broad consensus on the need for private finance and investment in REDD+, very little is known about current flows of private sector finance into REDD+, and what little is known shows that current amounts being channeled are close to insignificant. Difficulties in estimating and tracking volumes of private sector capital flowing into REDD+ arise from a variety of reasons.

There is no standardized definition describing what REDD+ finance or investment constitutes. Should investment into activities that contribute to REDD+, but aren’t directly linked to REDD+ verified emission reductions (VERs) count? Examples might include ‘climate-smart’ agricultural related to drivers of deforestation, green bonds where proceeds are used for ‘forest-friendly’ activities or corporates investing in medium or long-term supply chain security.

Different types of finance are often considered as equal. However, grants, short-term loans, equity investments, ‘in-kind’ payments and carbon off-take agreements all differ in how, why and when they are used. Aggregating these numbers can also potentially confuse and inflate the volume of private sector capital flows through double or triple counting and it also hampers attempts to identify financial bottlenecks at different points in the lifecycle of an activity.

It is also important that we use greater precision when describing sources of finance. ‘Institutional investors’ such as pension funds are one of the largest sources of private sector capital. As the ‘big beasts’ of the private sector financial world- they are sometimes referred to as one of the great hopes for the REDD+ related financial ills we currently face. They can allocate the ‘patient capital’ that REDD+ needs and have trillions of dollars under management. However, in order to unlock this huge pool of potential investment, we must first acknowledge the fact that most pension funds can’t currently allocate to anything resembling a ‘REDD+ investment’. The majority of pension fund capital is invested in liquid, listed securities yet many of the investment opportunities in the REDD+ space are through unlisted private equity or debt vehicles that a large amount of pension funds can’t allocate capital to at the required scale. Unlike publicly listed companies, private companies also have fewer legal obligations to report their finances which further compounds efforts to track financial flows.

Tracking private sector finance into REDD+ will be a daunting task until some of the above issues are addressed. Currently, however, more efforts should be placed in better understanding the role that private climate finance can play in contributing to REDD+ through some of the following activities:

  • Engage with and involve the private sector in a constructive discussion on REDD+ to understand what the enabling conditions are that would attract private sector capital at scale. This can be done during the development of national REDD+ strategies.
  • Develop clear definitions and parameters for what constitutes REDD+ private sector finance and investment.
  • Appreciate that the finance landscape is extremely varied and different types and sources of capital have different uses at different times. This is a key step in connecting the vast pools of private sector capital with the activities that need funding.

UNEP FI is supporting efforts to engage the private sector in general and the private financial sector in particular in REDD+ at both the national and international level.  The ultimate aim of this engagement is to reshape the way forest assets are currently exploited and help the transition towards more sustainable land-use patterns.

This series of blogs on REDD+ finance intends to create a forum for debate and exchange of ideas, this blog reflects the opinions of Iain Henderson & Jacinto Coello of UNEP FI, and should not be understood to reflect the views of ODI, Forest Trends, REDDX or Climate Funds Update.