Financing to address climate change

Veerle VandeweerdUnited Nations Development Programme

26 May 2008

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Outline of the presentation

1. The challenge of addressing climate change: brief review of some of the findings of the HDR 2007;

2. Ongoing UNDP GEF and CDM projects; UNAFF3. BAU is not an option;4. The need for a new development paradigm.

The challenge of addressing climate change.

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The challenge of addressing climate change

- The world has less than a decade to avoid dangerous climate change that could bring unprecedented human development reversals.- Climate change is a threat to humanity as a whole. But it is the poor, a constituency with no responsibility for the ecological debt we are running up, who face the most immediate and most severe human costs.- The Human Development Report 2007/2008 calls for a ‘twin track’ approach that combines stringent mitigation to limit 21st Century warming to less than 2 degree centigrade, with strengthened international cooperation on adaptation.

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The challenge of addressing climate change

Four distinctive characteristics:

• It is cumulative• The effects are irreversible • Large time lags – today’s emissions are tomorrow’s problems• It is global

The sustainable emissions pathway is as follows

•The world – cuts of 50 percent by 2050 with a peak by 2020•Developed countries – cuts of 80 percent by 2050•Developing countries – cuts of 20 percent by 2050

with respect to 1990

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Examples

The UK (population 60 million) emits more CO2 than Egypt, Nigeria, Pakistan and Vietnam (total population 472 million)

The state of Texas (population 23 million) has a deeper footprint than the whole sub-Saharan Africa (720 million people)

The 19 million people living in New York have a deeper footprint than the 766 million people living in the 50 least developed countries

The distribution of current emissions points to an inverse relationship between climate change vulnerability and responsibility

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Impact on the poor

If every person living in the developing world would have the same carbon footprint than an average person in the US or Canada, we would need the equivalent to nine planets to absorb the CO2

•1 in 19 people are affected in developing countries

•The corresponding number is 1 in 1,500 in OECD countries

Climate related risks force people into downward spirals of disadvantage that undermine future opportunities.

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Development tipping points

5 Human development tipping points:

Reduced agricultural productivity

Heightened water insecurity

Increased exposure to extreme weather events

Collapse of ecosystems

Increased health risks

Inaction on climate change will have serious development implications and will affect mostly the poorest.

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Impacts

- Glacial melting posses threats to more than 40 percent of the world’s population. - In the arid cost of Peru, 80 percent of fresh water originates from glacial melt. -The flow of the Indus, could decline as much as 70 percent.

- Possible consequences of one meter rise in sea level - In Lower Egypt, 6 million people displaced and 4,500 kms2 of farmland flooded

– In Vietnam, 22 million people displaced– In Bangladesh, 18 percent of land area could be inundated affecting

11 percent of the population – In the Maldives, more than 80 percent of land area is less than 1

meter above sea level

Ongoing UNDP GEF and CDM projects.

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UNDP’s Environment & Energy Group: Project Portfolio to date

General Environmental Projects

• > 1000 medium to large scale projects• 6,000 small-scale projects• Fund mobilization of nearly $1bn/year

Climate Change Projects

0.0

0.2

0.4

0.6

0.8

1.0

2003 2004 2005 2006

$ bn

Asia & Pacific$853m

Latin America & Caribbean$386m

Arab States$268m

Africa$331m

Europe & CIS$200m

Global $129m

• Cumulative fund mobilization of $2.1bn

• Project technologies include Renewables, Conservation & Efficiency, Transport and Low GHG Technologies

Fund Mobilization

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Removal of barriers to energy efficiency & energy conservation

Removal of barriers to renewable energy (on & off-grid) Promotion of environmentally sustainable transport Integrated adaptation and mitigation

To develop and transform markets for energy & mobility

in developing countries & economies-in- transition so

that, over the long term, they will grow & operate

efficiently toward a less carbon-intensive path

Mission

Approach

Mitigation

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Geographical imbalance in the CDM

Location of CDM Projects

• 4 countries (China, India, Brazil and South Korea) account for 70% of CDM projects and 80% of CERs through to 2012

• Sub-Saharan Africa accounts for 2% of registered projects and 5% of CERs through to 2012

• 88 non-Annex 1 countries have yet to benefit from any registered CDM project activity – including 47 countries that possess DNAs

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Objective of UNDP’s Carbon Strategy

MD

G I

mp

act

of

Car

bo

n P

roje

cts

Geographical & Sectoral Diversity of Carbon Projects

CurrentCDM

Market

Objective for UNDP’s Carbon

Strategy

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Improve access to carbon finance to a broader range of developing countries and project types through creating effective carbon markets in low income countries

Maximize the carbon development dividend through promoting a carbon portfolio that strikes a balance between cost-effective projects and high development impact projects

Develop capacity of programme countries to combine/sequence different funding sources to achieve specific national targets

Mission: To access and leverage carbon finance for

sustainable development and contribute to the MDGs

Carbon Finance: Mission

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Three-pronged approach for promoting access to carbon finance

Step 1:

Remove barriers to direct investments in

climate-friends technologies

• Establishment of efficient host-country procedures for review and approval

• training for staff and decision-makers

• knowledge management

• South-South cooperation

• Public awareness raising

Step 2:

Establish efficient host-country procedures for CDM & JI review and

approval• policy dialogue with regulatory authorities on complementary instruments

• identify priority sectors, key stakeholders & prospective projects

• extended baseline analysis

• analysis of key barriers for targeted sectors

• initial stakeholder consultation

• sector-specific strategies

• industry-specific workshops

Step 3:

Provide project management services to

individual project developers

Develop projects via the MDG Carbon

Facility

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• Innovative governance and financing source (not dependent on voluntary contributions)

• Being operationalized in 2008 – challenge to put a system in place on how to « use the funds »

• The Adaptation Fund could receive USD 80‑300 million per year for the period 2008–2012.

• Assuming a share of proceeds for adaptation of 2 per cent continues to apply post 2012, the level of funding could be:• USD 100–500 million per year for a low demand;• USD 1–5 billion per year for a high demand.

• Continuation depends on CDM continuation and future demand

• Open to other sources of funds

Adaptation Fund

BAU is not an option.

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• Financing is one of the building blocks of the Bali Road Map; need for innovative approaches that can be negotiated and put in place by 2009.

• Negotiations regarding financing have evolved to a broad range of issues including the need to develop a financial regime that addresses climate change, economic growth and sustainable development.

• Governments want to be in the “driving seat”, while acknowledging strong need for input from other players, such as the private sector.

• Developing countries have stressed strongly the importance of the effectiveness of new mechanisms to address their development needs.

The good news

2020

A main challenge

• Large amounts of money needed; different estimates from 3% to 0.3% of global GDP (or 20% by 2050).

• Considerable I&F flows will be needed to address climate change:

Mitigation measures needed to return global GHG emissions to current levels in 2030, require additional I&F flows between USD 200-210 billion in 2030 and a shift of about USD 158 billion to cleaner technologies.

Adaptation additional I&F flows needed for in 2030 amount to several tens of billions of USD.

ODA (2006): 100 billion.

The longer we will wait the more it will cost.

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• Most of the investments in mitigation measures are domestic and relate to technologies

• Important to focus on the role of private-sector investments as they constitute the largest share of global investment flows (86%)

• ODA is important in Africa, the LDCs and countries and sectors relying strongly on public financing

• Potential of the financial mechanism of the Convention is limited if it continues to rely on current levels and voluntary contributions = USD 990 million for the period 2006-2010

• Carbon market is already playing an important role in shifting investment flows but has limitations.

Sources of investment and financial flows: Mitigation

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Sources of investment and financial flows: Adaptation

• Private sources of funding can be expected to cover a portion of the adaptation costs in several sectors. In particular in the AFF and Infrastructure sector where investment in privately own physical assets would be needed.

• However, public resources are expected to play a predominant role in all adaptation sectors and in particular in the coastal zone and water sector.

• Measures will be needed to encourage/support private sector adaptation and additional sources of funding dedicated to adaptation will be needed.

• Adaptation = good development policy

The need for a new development paradigm.

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Main challenges

• Development patterns need to be changed now, because investment decisions taken today will affect greenhouse gas emissions of the future.

• To promote increased resilience to climate change impacts and a lower-GHG emission economy fall across a variety of sectors, such as energy, agriculture, health, water resources, infrastructure, etc.

• Creating climate change safe future will require:

Shifts in investment patterns,

Scaling up funding,

Optimizing the allocation of existing funds.

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• National policies can play key role in driving many of the needed shifts and increases.

• Currently available sources could cover a substantial part of the additional investment and financial flows needed. However, additional external funding will be needed particularly for sectors in developing countries that depend on government I&F flows.

• Optimal combination of mechanisms, such as the carbon markets, the financial mechanism of the Convention, ODA, national polices and new sources of finance is needed.

• The entities that make the investment decisions are different in each sector, and the policy and/or financial incentives needed will vary.

Action needed at different levels

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A focus on developing countries needs

• Most importantly priorities should be identified by developing countries themselves in accordance to their specific national conditions and needs.

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Options under discussion

• How to scale up and best allocate ODA and what is the potential for the Convention Funds under the financial mechanism, given their small share?

• What is the possible role of, and what are the possible incentives to, promote national and international policies and regulations that can stimulate shifts in investment and finance?

• What are the possible innovative mechanisms to leverage additional funding and how should these new mechanisms be governed and used?

• How can we use new and additional resources to redirect investments towards carbon neutrality and development benefits?

• Need to consider investments and finance to address climate change as linked to overall investment and finance for development.

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• Limited share of global I&F flows – but important role

• Important processes to keep in mind:

The Review of Financial Mechanism

The fifth replenishment of the GEF

New funds and initiatives being developed and initiated in IFIs and MDBs – how to link them to UNFCCC and development?

Various ongoing discussions about “integrating Climate Change in development cooperation”

Convention Funds and ODA

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Carbon Markets – CDM: The potential

• CDM already shows a significant potential to leverage domestic and international investments

• The supply of Kyoto units could be abundant compared to the level of compliance demand for the period 2008–2012

• Under a low estimate of compliance demand by Annex I Parties in 2030 (market of USD 5–25 billion per year), the current flow of CDM projects would provide sufficient supply

• Under a high estimate of compliance demand (market of USD 100 billion per year), a large fraction of the potential emission reductions, from all existing and new categories of projects/mechanisms would be needed to for the supply

• Policy certainty is important for investors. A longer-term international agreement on climate change broadens the range of mitigation measures that are attractive investments

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Carbon Markets – CDM: the challenge

• Innovative governance and financing

• Countries and sector risks are "structural" problems that need to be addressed through complementary development assistance and appropriate national policies (enabling environment for investments)

• Some activities may, even with a high carbon price, need additional incentives

• The experience with the ongoing CDM shows that risks are being taken in a large part by domestic capital

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Carbon Markets - CDM

• Expansion of carbon markets demand depends on negotiations on targets

• Many proposals for expansion of supply in carbon markets and CDM:

CO2 capture and storage, Tradable credits for Deforestation in developing countries (REDD); Tradable credits for sustainable development policies and measures (SD-

PAMs); Sectoral CDM; Policy CDM Other options for REDD, SD-PAMs and sectoral targets propose financial

or other incentives, rather than tradable credits.

Proposals need discussion and analysis of feasibility

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Innovative means for finance

• Application of a levy similar to the 2 per cent share of proceeds from the CDM to international transfers of ERUs, AAUs and RMUs. (issues for consideration under KP Art 9 review).

• Auction of allowances for international aviation and marine emissions (issues linked to negotiations under “bunker fuels” and to other forums (such as ICAO and IMO)).

• “Carbon taxes” applied nationally and maybe globally: proposal put forward by Switzerland.

• International air travel levy: similar to programme by France of 5 per cent on first and business class tickets to raise funds for fighting HIV/Aids and other pandemics.

• Funds to invest foreign exchange reserves: Voluntary allocation of up to 5 per cent of foreign exchange reserves to a fund

Sources/ measures Potential application and expansion

Mitigation Adaptation LULUCF Technology Etc.

Convention Financial Mechanism

- GEF trust fund

- SCCF

- LDCF

Bilateral funding (4.3)

Insurance

Kyoto Protocol

Emissions trading

CDM

JI

Adaptation Fund

New sources?

Policies

“Outside” Convention

Development funding / ODA

Foreign direct investments

Domestic private investments

Domestic public investments

Trade

Etc.

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Development and climate change

• Addressing climate change brings the need for a new development paradigm.

• The need to financing for nationally appropriate climate change mitigation and adaptation actions should be viewed as an essential part of the global fight against poverty and for achieving development goals.

• Grappling with the diversity of international funding sources and investment opportunities poses a heavy burden on developing countries that are seeking to enhance national development through international financing.

• The different eligibility rules and procedures could lead to stand-alone investments, not integrated into the overall development frameworks and national efforts to achieve the MDGs.

• The UN is (or should be) ideally positioned to assist developing countries to access, integrate and sequence this international financing and find innovative solutions.

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Climate change: a challenge but also an opportunity

Climate change is not only an environmental issue but mainly a development issue;

Given the magnitude of investments needed and the many players and sectors involved, if we take a rational approach, we can use the climate change challenge to redirect development towards sustainability;

The choice is ours!